<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1999
REGISTRATION NO. 333-71633
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 4812 73-1110531
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
--------------------------
13439 NORTH BROADWAY EXTENSION BRUCE R. KNOOIHUIZEN
SUITE 200 13439 NORTH BROADWAY EXTENSION
SUITE 200
OKLAHOMA CITY, OKLAHOMA 73114 OKLAHOMA CITY, OKLAHOMA 73114
(405) 391-8500 (405) 391-8500
(Address, including Zip Code, and (Name, address, including Zip
telephone Code, and telephone number,
number, including area code, of including area code, of
registrant's principal agent for service)
executive offices)
--------------------------
COPIES TO:
THEODORE M. ELAM, ESQ.
MCAFEE & TAFT A PROFESSIONAL CORPORATION
TENTH FLOOR, TWO LEADERSHIP SQUARE
211 NORTH ROBINSON
OKLAHOMA CITY, OKLAHOMA 73102
(405) 235-9621
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement under the earlier effective registration statement for
the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
12 1/4% Senior Exchangeable Preferred
Stock, par value $1.00.............. 67,148 shares $1,000 $67,148,000 $18,668(1)
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(f)(2).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8, MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PRELIMINARY PROSPECTUS
OFFER TO EXCHANGE
OUTSTANDING 12 1/4%
SENIOR EXCHANGEABLE PREFERRED STOCK
([ ] SHARES
OUTSTANDING)
FOR
12 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK
OF
DOBSON COMMUNICATIONS CORPORATION
TERMS OF EXCHANGE OFFER
- Expires 5:00 p.m., New York City time, , 1999, unless extended
- Not subject to any condition other than that the Exchange Offer not
violate applicable law or any applicable interpretation of the Staff of
the Securities and Exchange Commission
- All outstanding shares that are validly tendered and not validly withdrawn
will be exchanged
- Tenders of outstanding shares may be withdrawn any time prior to 5:00 p.m.
on the
business day prior to expiration of the Exchange Offer
- The exchange of shares will not be a taxable exchange for the U.S. federal
income tax purposes
- We will not receive any proceeds from the Exchange Offer
- The terms of the shares to be issued are substantially identical to the
outstanding shares, except for certain transfer restrictions and
registration rights relating to the outstanding notes
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED BY INVESTORS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
TABLE OF CONTENTS
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PAGE
-----
<S> <C>
Summary.................................................................................................... 1
Where You Can Find More Information........................................................................ 21
Risk Factors............................................................................................... 22
The Exchange Offer......................................................................................... 34
Selected Consolidated Financial and Other Data............................................................. 44
Pro Forma Condensed Consolidated Financial Data............................................................ 50
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 57
Business................................................................................................... 75
Management................................................................................................. 99
Principal Shareholders..................................................................................... 108
Description of the Preferred Stock......................................................................... 109
Description of the Exchange Debentures..................................................................... 135
Description of Certain Indebtedness........................................................................ 162
Description of Capital Stock............................................................................... 170
Federal Income Tax Considerations to U.S. Holders.......................................................... 178
Plan of Distribution....................................................................................... 188
Legal Matters.............................................................................................. 189
Experts.................................................................................................... 189
Certain Terms.............................................................................................. 191
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
No person is authorized in connection with the offering made hereby to give
any information or to make any representation not contained in this prospectus
or the accompanying Letter of Transmittal and, if given or made, such
information or representation not contained herein must not be relied upon as
having been authorized by us.
------------------------
The exchange offer is not being made to, nor will we accept surrenders for
exchange from, holders of our outstanding shares of 12 1/4% Senior Exchangeable
Preferred Stock in any jurisdiction in which this exchange offer or the
acceptance thereof would not be in compliance with the securities or Blue Sky
laws of such jurisdiction. Neither the delivery of this prospectus nor the
accompanying Letter of Transmittal, nor any exchange made hereunder shall under
any circumstances imply that the information herein is correct as of any date
subsequent to the date hereof.
------------------------
ii
<PAGE>
SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS
PROSPECTUS TO "DOBSON", THE "COMPANY", "OUR COMPANY" AND "WE" AS USED IN THIS
PROSPECTUS REFER TO DOBSON COMMUNICATIONS CORPORATION AND ITS PREDECESSORS AND
SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE IT IS MORE CLEAR THAT SUCH TERMS
MEANS ONLY THE PARENT COMPANY. ALL REFERENCES TO "SYGNET" ARE TO SYGNET
WIRELESS, INC. AND ITS WHOLLY OWNED SUBSIDIARY, SYGNET COMMUNICATIONS, INC.
REFERENCE TO A FISCAL YEAR END RELATE TO A YEAR ENDING ON DECEMBER 31. YOU
SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH IN "RISK FACTORS" IN
EVALUATING THE COMPANY, ITS BUSINESS AND AN INVESTMENT IN THE PREFERRED STOCK.
CERTAIN CAPITALIZED TERMS USED IN THIS PROSPECTUS ARE DEFINED IN "CERTAIN
TERMS."
THE EXCHANGE OFFER
We completed on December 23, 1998 the private offering of $50.0 million of
12 1/4% Senior Exchangeable Preferred Stock. We entered into a registration
rights agreement with the initial purchaser in the private offering in which we
agreed, among other things, to deliver to you this Prospectus and to complete
the Exchange Offer within 180 days of the issuance of the 12 1/4% Senior
Exchangeable Preferred Stock. You are entitled to exchange in the Exchange Offer
your outstanding shares of 12 1/4% Senior Exchangeable Preferred Stock for
registered shares of 12 1/4% Senior Preferred Stock with substantially identical
terms. If the Exchange Offer is not completed by June 21, 1999, then the
dividend rate on the 12 1/4% Senior Exchangeable Preferred Stock will be
increased to 12 3/4% per year. You should read the discussion under the heading
"Summary Description of the Preferred Stock" and "Description of the Preferred
Stock" for further information regarding the registered 12 1/4% Senior
Exchangeable Preferred Stock.
We believe that the shares of 12 1/4% Senior Exchangeable Preferred Stock
issued in the Exchange Offer may be resold by you without compliance with the
registration and prospectus delivery provisions of the Securities Act, subject
to certain conditions. You should read the discussion under the headings
"Summary of the Terms of Exchange Offer" and "The Exchange Offer" for further
information regarding the Exchange Offer and resale of the shares of 12 1/4%
Senior Exchangeable Preferred Stock.
THE COMPANY
We are a leading provider of rural and suburban cellular telephone services.
Since we began providing our cellular service in 1990 in Oklahoma and the Texas
Panhandle, we have rapidly expanded our cellular operations with an acquisition
strategy targeting rural and suburban areas which have a significant number of
potential customers with substantial needs for cellular communications. At
September 30, 1998, our cellular systems covered a population of 2.8 million in
Arizona, California, Kansas, Maryland, Missouri, Oklahoma, Pennsylvania and
Texas. On December 23, 1998, we acquired Sygnet for $337.5 million in cash.
Sygnet and its subsidiary own and operate cellular telephone systems covering a
population of 2.4 million in northeastern Ohio, western Pennsylvania and western
New York. For the nine months ended September 30, 1998, after giving pro forma
effect to our April 1, 1998 acquisition of California 4 RSA and to the Sygnet
acquisition as if each acquisition had occurred on January 1, 1997, we would
have had revenue of $176.5 million, an operating loss of $13.7 million and
Adjusted EBITDA of $75.9 million.
We believe that our mix of rural and suburban cellular systems generally
provides strong growth opportunities due to lower penetration rates, higher
subscriber growth rates and a higher proportion of roaming revenue compared to
cellular systems located in larger MSAs. We focus on systems that are adjacent
to major metropolitan areas and include a high concentration of expressway
corridors that tend to have a significant amount of roaming activity. We believe
these areas are not as fully developed as large MSAs, which were licensed
earlier by the FCC, and have the potential for increased cellular usage and
superior financial performance. We have entered into roaming agreements with
operators of cellular
1
<PAGE>
systems in neighboring MSAs and other MSAs that allow customers to roam at
competitive prices that, in certain instances, are comparable to our home area
rates.
We are organized to establish and maintain a strong and visible local
presence while achieving economies of scale and synergies through regional and
centralized functions. We have developed organizational, marketing and
operational programs designed to increase the number and retention of
subscribers, promote superior customer service, control subscriber acquisition
costs and enhance operating cash flow. We intend to apply these programs to the
properties we acquire. In addition to our acquisition of Sygnet, we recently
closed into escrow our acquisitions of the FCC licenses for, and certain assets
related to, Texas 10 RSA for $55.0 million in cash and Ohio 2 RSA for $39.3
million in cash. Recently, we entered into an agreement for the purchase of the
FCC licenses for, and certain assets related to, Maryland 1 RSA for $9.1 million
in cash, subject to adjustment.
The following table sets forth certain data with respect to our existing
cellular systems and the systems which have been or will be acquired in our
acquisitions of Sygnet, Texas 10 RSA, Ohio 2 RSA and Maryland 1 RSA
(collectively, the "Recent and Pending Acquisitions"):
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET DATE
PROPERTIES POPS OWNERSHIP NET POPS SUBSCRIBERS(1) PENETRATION(2) ACQUIRED/EXPECTED
- ------------------------------------ ---------- ------------- ---------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CENTRAL REGION(3)
Oklahoma 5 and 7................... 148,500 64.4% 95,634 17,266 11.6% 1989
Texas Panhandle................... 88,500 61.0 53,985 14,328 16.2 1989
Northwest Oklahoma................ 105,100 100.0 105,100 6,938 6.6 1991
Kansas/Missouri................... 246,500 100.0 246,500 7,881 3.2 1996
Texas 16.......................... 334,000 100.0 334,000 5,761 1.7 1998
---------- ---------- -------------
Total........................... 922,600 835,219 52,174
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EASTERN REGION(4)
East Maryland...................... 453,700 100.0 453,700 33,942 7.5 1997
West Maryland..................... 441,000 100.0 441,000 28,248 6.4 1997
---------- ---------- -------------
Total........................... 894,700 894,700 62,190
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WESTERN REGION
Arizona 5.......................... 202,100 75.0 151,575 10,081 5.0 1997
California 7...................... 149,300 100.0 149,300 3,280 2.2 1998
California 4...................... 377,300 100.0 377,300 17,888 4.7 1998
Santa Cruz........................ 245,600 86.9 213,426 17,407 7.1 1998
---------- ---------- -------------
Total........................... 974,300 891,601 48,656
---------- ---------- -------------
Total--All Regions.................. 2,791,600 2,621,520 163,020
---------- ---------- -------------
RECENT AND PENDING ACQUISITIONS
Ohio 2(5)......................... 262,100 100.0 262,100 14,000(6) 5.3(6) September 1998
Texas 10(5)....................... 317,900 100.0 317,900 3,000(6) 0.9(6) December 1998
Sygnet(7)......................... 2,374,000 100.0 2,374,000 166,886(6) 7.0(6) December 1998
Maryland 1........................ 29,800 100.0 29,800 400(6) 1.3(6) March 1999
---------- ---------- -------------
Total--Acquisitions................. 2,983,800 2,983,800 184,286
---------- ---------- -------------
Total--All Properties............... 5,775,400 5,605,320 347,306
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
- ------------------------------
(1) As of September 30, 1998.
(2) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license or authorizations held by us or our
subsidiaries.
(3) The Central Region consists of Oklahoma 5 RSA and Oklahoma 7 RSA, Texas 2
RSA, Enid, Oklahoma MSA, Oklahoma 2 RSA, Texas 16 RSA, Kansas 5 RSA,
Missouri 1 RSA, Missouri 4 RSA and Missouri 5 RSA. Our FCC licenses for
Oklahoma 5 RSA and Oklahoma 7 RSA do not include Kingfisher and Blaine
Counties, approximately one-half of Dewey County (total Pops
2
<PAGE>
estimated by us to be 3,000 for the area in Dewey County not covered by our
FCC license), Harmon and Greer Counties. We also own a 5% interest in a
partnership which owns the cellular system in Oklahoma 3 RSA which has total
Pops of 205,600. Information regarding Oklahoma 3 RSA is excluded because we
do not manage the system. Our license for Missouri 5 RSA covers only the
Linn County portion of the RSA.
(4) East Maryland consists of Maryland 2 RSA. West Maryland includes Cumberland,
Maryland MSA, Hagerstown, Maryland MSA, Maryland 3 RSA and Pennsylvania 10
West RSA. The FCC license for the Pennsylvania 10 West RSA covers only
Bedford County. Information for this RSA relates only to the area covered by
our FCC licenses. Upon the closing of the Maryland 1 Acquisition, Maryland 1
will become part of our West Maryland market area.
(5) We completed the acquisitions of the FCC licenses for Ohio 2 RSA on
September 2, 1998 and Texas 10 RSA on December 2, 1998. We are negotiating
with AirTouch in Ohio 2 RSA and with AT&T Wireless in Texas 10 RSA for the
purchase of subscribers and the lease of certain equipment necessary to
operate systems in each area. The purchase price for each of Ohio 2 RSA and
Texas 10 RSA is being held in escrow pending resolution of claims made
against the titles to the FCC licenses of our respective sellers. See "Risk
Factors--Recent Acquisitions."
(6) Based upon information provided by the sellers of the subscribers.
(7) Consists of the Youngstown, Ohio MSA, Sharon, Pennsylvania MSA, Ohio 11 RSA,
Erie, Pennsylvania MSA, New York 3 RSA, Pennsylvania 1 RSA, Pennsylvania 2
RSA, Pennsylvania 6 RSA and Pennsylvania 7 RSA. Sygnet had previously
operated Pennsylvania 2 RSA under an interim operating authority which was
terminated on June 3, 1997 when the FCC awarded a permanent license to
Pinellas Communications. On June 8, 1998, Sygnet entered into an agreement
to purchase Pennsylvania 2 RSA for $6.0 million in cash (the "Pennsylvania 2
Acquisition"). Since then, Sygnet has been operating Pennsylvania 2 RSA
under a management and lease agreement with the present owner of
Pennsylvania 2, which will continue in effect until the FCC's grant of the
license to the present owner is no longer subject to reconsideration or
judicial review.
BUSINESS STRATEGY
Our business strategy is to focus on the development and acquisition of
rural and suburban cellular systems. The principal elements of our strategy
include:
- integrating the operations of systems we acquire with our existing
cellular operations to achieve economies of scale.
- continuing to maintain and expand strategic relationships with operators
of cellular systems in major MSAs near our systems, including roaming
agreements which allow our subscribers to use the system in the
neighboring MSA at favorable rates.
- to distinguish ourself as the local market's leading cellular services
provider, stressing our service quality, local sales offices and
commitment to the community.
- attracting subscribers who are likely to generate high monthly revenue and
low churn rates.
- maintaining high levels of customer satisfaction through a variety of
techniques, including maintaining 24-hour customer service.
- increasing capacity and upgrading our systems to attract additional
subscribers, enhancing the use of its systems by existing subscribers,
increasing roaming activity and further enhancing the overall efficiency
of the network.
- continually evaluating opportunities to acquire additional rural and
suburban cellular systems.
OPERATIONS EXPECTED TO BE DISCONTINUED
Our wholly owned subsidiary, Logix Communications Enterprises, Inc.
("Logix,"), provides integrated local, long distance, data and other
telecommunications services to small and medium-sized business customers
throughout the Southwest United States. Logix operates long-haul fiber optic
facilities in Oklahoma, Texas and Colorado and incumbent local exchange services
in Oklahoma. Logix recently began offering switch-based integrated carrier
provider services in Oklahoma City, Tulsa and Amarillo. In
3
<PAGE>
addition, since our acquisition of American Telco, Inc. and its affiliate,
American Telco Network Services, Inc. on June 15, 1998, Logix has offered these
services in Houston, Austin, Dallas, Fort Worth and San Antonio.
We have designated Logix an unrestricted subsidiary with respect to the
12 1/4% Senior Exchangeable Preferred Stock. As an unrestricted subsidiary,
Logix is not subject to certain covenant restrictions which apply to the rest of
our operations. We intend to distribute the stock of Logix to certain of our
shareholders, subject to receipt of a favorable tax ruling from the Internal
Revenue Service. Holders of our 12 1/4% Senior Exchangeable Preferred Stock will
not participate in our distribution of Logix stock. Logix is accounted for as a
discontinued operation in our consolidated financial statements.
SYGNET ACQUISITION AND FINANCING PLAN
On December 23, 1998, our subsidiary, Dobson/Sygnet Communications Company,
acquired Sygnet for $337.5 million in cash. In order to finance the Sygnet
acquisition, we consummated the following transactions:
- we issued and sold $50.0 million of 12 1/4% Senior Exchangeable Preferred
Stock;
- we received gross proceeds of $115.0 million from the issuance of
preferred stock ranking junior to the 12 1/4% Senior Exchangeable
Preferred Stock (the "Equity Investments");
- we made an equity contribution to Dobson/Sygnet Communications Company of
$145.0 million;
- our subsidiary, Dobson/Sygnet Operating Company, obtained $430.0 million
of financing pursuant to senior secured credit facilities (the "New Credit
Facilities") from NationsBank, N.A., consisting of a $50.0 million
reducing revolving credit facility and $380.0 million of term loans;
- Dobson/Sygnet Communications Company sold $200.0 million aggregate
principal amount of 12 1/4% Senior Notes due 2008 (the "Dobson/Sygnet
Notes"), of which $67.7 million was used to purchase a portfolio of U.S.
government securities (the "Pledged Securities") that are pledged as
security for the first six scheduled interest payments on the
Dobson/Sygnet Notes;
- Dobson/Sygnet Communications Company repaid a $25.0 million loan from us
used to make the deposit for the Sygnet Acquisition;
- all indebtedness outstanding under Sygnet's existing bank facility (the
"Sygnet Bank Facility") was repaid;
- Sygnet repurchased (the "Sygnet Note Repurchase") all of its outstanding
11 1/2% Senior Notes due 2006 (the "Sygnet Notes") pursuant to Sygnet's
offer to purchase the Sygnet Notes;
- we repurchased certain shares of our outstanding common and preferred
stock with a portion of the net proceeds of the Equity Investments and
borrowings under one of our existing bank facilities; and
- our subsidiary, Dobson Tower Company, purchased substantially all of the
cellular towers owned by Sygnet for $25.0 million in cash using funds
provided to Dobson Tower Company under a separate bank facility and from
the sale of preferred stock to our affiliate, and leased the cellular
towers back to Sygnet under operating leases (the "Tower Sale Leaseback").
4
<PAGE>
The following table illustrates the sources and uses of funds for the Sygnet
acquisition (in millions):
<TABLE>
<CAPTION>
SOURCES OF FUNDS USES OF FUNDS
- -------------------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C>
Sale of Preferred Stock...................... $ 50.0 Amount paid in the Sygnet
Equity Investments........................... 115.0 acquisition.................................. $ 337.5
Dobson/Sygnet Notes.......................... 200.0 Repayment of the Sygnet Bank Facility........ 198.8
New Credit Facilities........................ 407.0 Sygnet Note Repurchase....................... 136.1
Tower Sale Leaseback......................... 25.0 Purchase of Pledged Securities............... 67.7
Borrowings under existing credit Purchase of Class C Preferred Stock.......... 1.9
facilities................................. 15.0
Repurchase of Class A Common Stock........... 31.1
Fees and expenses............................ 38.9
--------- ---------
Total Sources of Funds................. $ 812.0 Total Uses of Funds.......................... $ 812.0
--------- ---------
--------- ---------
</TABLE>
5
<PAGE>
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to 67,148 outstanding
shares of our 12 1/4% Senior Exchangeable Preferred Stock including 64,646
shares initially issued on December 23, 1998 together with additional shares of
our 12 1/4% Senior Exchangeable Preferred Stock issued in the payment of
dividends thereon (the "Old Shares"), for an equal number of shares of our
12 1/4% Senior Exchangeable Preferred Stock ("New Shares," and, together with
Old Shares the "Preferred Stock"). The form and terms of the New Shares are
identical in all material respects to the form and terms of the outstanding Old
Shares except that the New Shares have been registered under the Securities Act
of 1933, as amended (the "Securities Act") and therefore are not entitled to the
benefits of the registration rights granted under the Registration Rights
Agreement, executed as part of the offering of the outstanding Old Shares, dated
December 23, 1998 between the Company and NationsBanc Montgomery Securities LLC,
the Initial Purchaser in the private offering.
<TABLE>
<S> <C>
Registration Rights Agreement..... You are entitled to exchange your Old Shares for
registered New Shares with substantially identical
terms. The Exchange Offer is intended to satisfy these
rights. After the Exchange Offer is complete, you will
no longer be entitled to any exchange or registration
rights with respect to your Shares.
The Exchange Offer................ We are offering to exchange one New Share for each Old
Share. All outstanding Old Shares that are validly
tendered and not validly withdrawn will be exchanged. In
order to be accepted, an outstanding Old Share must be
properly tendered and accepted. After consummation of
the Exchange Offer, holders of Old Shares which are not
exchanged will continue to be subject to the existing
restrictions upon the transfer of Old Shares and we will
have no further obligation to such holders to provide
for the registration of the Old Shares under the
Securities Act.
Resale of New Shares.............. Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties,
including "Exxon Holdings Corporation" (available May
13, 1998) and "Morgan Stanley & Co. Incorporated"
(available June 5, 1991), we believe that you may offer
the New Shares for resale, resell the New Shares and
otherwise transfer the New Shares without compliance
with the registration and prospectus delivery provisions
of the Securities Act, provided that:
- you acquire the New Shares in the Exchange Offer
in the ordinary course of business;
- you have no arrangement or understanding with any
person to participate in the distribution of the
New Shares that you obtain in the Exchange Offer;
- you are not a broker-dealer who purchased such
outstanding Shares directly from us for resale
pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933; and
- you are not an "affiliate".
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, , 1999, unless we decide to extend
the expiration date.
Accrued Dividends on the New
Shares and the Outstanding Old
Shares.......................... Dividends on the New Shares will accrue from January 15,
1999.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
If we accept your Old Shares you will not receive any
payment in respect of dividends on such outstanding Old
Shares accrued from January 15, 1999 to the date of the
issuance of the New Shares. Consequently, holders who
exchange their outstanding Old Shares for New Shares
will receive the same dividend payment on April 15, 1999
(the first dividend payment date with respect to the
outstanding Old Shares and the New Shares to be issued
in the Exchange Offer) that they would have received had
they not accepted the Exchange Offer.
Termination of the Exchange
Offer........................... We may terminate the Exchange Offer at any time prior to
the expiration date if we determine that our ability to
proceed with the Exchange Offer could be materially
impaired due to any legal or governmental action, new
law, statute, rule or regulation or any interpretation
of the staff of the Commission of any existing law,
statute, rule or regulation. We do not expect any of the
foregoing conditions to occur, although there can be no
assurance that such conditions will not occur. Holders
of outstanding notes will have certain rights against
our Company under the registration rights agreement
executed as part of the offering of the outstanding
notes should we fail to consummate the Exchange Offer.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain conditions,
which may be waived by the Company. See "The Exchange
Offer-- Conditions of the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum number of Old
Shares being tendered.
Procedures for Tendering
Old Shares...................... If you are a holder of Old Shares and you wish to tender
your Old Shares for exchange pursuant to the Exchange
Offer, you must transmit to United States Trust Company
of New York, as exchange agent, on or prior to the
Expiration Date:
either
- a properly completed and duly executed Letter of
Transmittal, which accompanies this Prospectus, or
a facsimile of the Letter of Transmittal,
including all other documents required by the
Letter of Transmittal, to the Exchange Agent at
the address set forth on the cover page of the
Letter of Transmittal; or
- a computer-generated message transmitted by means
of the Depository Trust Company's Automated Tender
Offer Program system and received by the Exchange
Agent and forming a part of a confirmation of book
entry transfer in which you acknowledge and agree
to be bound by the terms of the Letter of
Transmittal;
and, either
- a timely confirmation of book-entry transfer of
your outstanding Old Shares into the exchange
Agent's account at The Depository Trust Company
pursuant to the procedure for book-entry transfers
described in this Prospectus under the heading
"The Exchange Offer--
</TABLE>
7
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<TABLE>
<S> <C>
Terms of the Exchange Offer--Procedures for
Tendering Old Shares" must be received by the
Exchange Agent on or prior to the Expiration Date;
or
- the documents necessary for compliance with the
guaranteed delivery procedures described below.
By executing the Letter of Transmittal, each holder will
represent to us that, among other things:
- the New Shares to be issued in the Exchange Offer
are being obtained in the ordinary course of your
business,
- you have no arrangement or understanding with any
person to participate in the distribution of such
New Shares, and
- you are not an "affiliate" of Dobson
Communications Corporation, as defined in Rule 405
under the Securities Act, or, if you are an
affiliate, you will comply with the registration
and prospectus delivery requirements of the
Securities Act to the extent applicable.
If you hold your Old Shares through the Depositary Trust
Company and wish to participate in the Exchange Offer,
you may do so through the Depositary Trust Company's
Automated Tender Offer Program. By participating in the
Exchange Offer, you will agree to be bound by the Letter
of Transmittal as though you had executed our Letter of
Transmittal.
Special Procedures for Beneficial
Owners.......................... If you are the beneficial owner of Old Shares and your
name does not appear on a security position listing of
the Depository Trust Company as the holder of such Old
Shares or if you are a beneficial owner of Old Shares
that are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and you
wish to tender such Old Shares or registered Old Shares
in the Exchange Offer, you should contact the person in
whose name your Old Shares are registered promptly and
instruct that person to tender on your behalf. If such
beneficial holder wished to tender on his own behalf
such beneficial holder must, prior to completing and
executing the Letter of Transmittal and delivering its
outstanding Old Shares either make appropriate
arrangements to register ownership of the outstanding
Old Shares in such holder's name or obtain a properly
completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Guaranteed Delivery Procedures.... If you wish to tender your Old Shares and time will not
permit your required documents to reach the Exchange
Agent by the Expiration Date, or the procedure for
book-entry transfer cannot be completed on time or
certificates for registered Old Shares cannot be
delivered on time, you may tender your Old Shares
pursuant to the procedures described in this Prospectus
under the heading "The Exchange Offer--Terms of the
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights................. You may withdraw the tender of your Old Shares at any
time prior to 5:00 p.m., New York City time, on
, 1999, unless your notes were previously
accepted for exchange.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Acceptance of Outstanding Old
Shares and Delivery of New
Shares.......................... Subject to certain conditions (as summarized above in
"Termination of the Exchange Offer" and described more
fully under "The Exchange Offer--Conditions of the
Exchange Offer"), we will accept for exchange any and
all outstanding Old Shares notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Shares
issued pursuant to the Exchange Offer will be delivered
promptly to you following the Expiration Date.
Certain U.S. Federal Income Tax
Consequences.................... The exchange of the Old Shares will generally not be a
taxable exchange for United States federal income tax
purposes. We believe you will not recognize any taxable
gain or loss or any income as a result of such exchange.
Use of Proceeds................... We will not receive any proceeds from the issuance of
New Shares pursuant to the Exchange Offer. We will pay
all expenses incident to the Exchange Offer.
Exchange Agent.................... United States Trust Company of New York is serving as
exchange agent in connection with the Exchange Offer.
The Exchange Agent can be reached at Corporate Trust
Administration, 114 West 47th Street, New York, NY
10036-1532. For more information with respect to the
Exchange Offer, the telephone number for the Exchange
Agent is (212) 852-1000 and the facsimile number for the
Exchange Agent is (212) 852-1625.
</TABLE>
9
<PAGE>
SUMMARY DESCRIPTION OF THE NEW SHARES
<TABLE>
<S> <C>
Securities Offered................ Shares of our 12 1/4% Senior Exchangeable Preferred
Stock.
Dividends......................... Dividends on the Preferred Stock are payable in cash or,
on or before January 15, 2003, at our option, in
additional shares of Preferred Stock, on each January
15, April 15, July 15 and October 15, beginning January
15, 1999. For federal income tax purposes, we do not
expect these distributions with respect to the Preferred
Stock to qualify as dividends. Instead, we expect these
distributions to be treated as a return of capital until
we have earnings and profits as determined under
applicable federal income tax principles. See "Federal
Income Tax Considerations to U.S. Holders--Purchase,
Ownership and Disposition of the Preferred
Stock--Distributions on the Preferred Stock."
Liquidation Preference............ $1,000 per share, plus accrued dividends.
Voting............................ Holders of the Preferred Stock will have no voting
rights except as provided by law and as provided in the
certificate of designation for the Preferred Stock (the
"Certificate of Designation"). If we fail to pay
dividends for any four quarters, whether or not
consecutive, or upon certain other events (including our
failure to comply with covenants and to pay the
mandatory redemption price when due), then the number of
directors that make up our Board of Directors will be
increased to permit the holders of the majority of the
then outstanding shares of Preferred Stock, voting
separately as a class, to elect two directors.
Mandatory Redemption.............. We must redeem the Preferred Stock on January 15, 2008
(subject to the legal availability of funds) at a
redemption price equal to the liquidation preference,
plus accrued dividends to the redemption date.
Optional Redemption............... We may redeem any of the Preferred Stock beginning
January 15, 2003 at the redemption prices set forth in
this Prospectus.
Public Equity Offering Optional
Redemption...................... Before January 15, 2001, we may redeem up to 35% of the
aggregate liquidation preference amount of the Preferred
Stock at a redemption price equal to 112.250% of its
liquidation preference amount, plus unpaid dividends,
with net proceeds from a public offering of our common
stock if at least 65% of the aggregate liquidation
preference amount of Preferred Stock originally issued
remains outstanding.
Ranking........................... The Preferred Stock ranks:
- equally with our Senior Preferred Stock;
- senior to all classes of our common stock, our
Class A Preferred Stock, Class D Preferred Stock,
Class E Preferred Stock, Class F Preferred Stock,
Class G Preferred Stock, and Class H Preferred
Stock (each as defined herein), and to all of our
other capital stock;
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
- equally with any of our capital stock the terms of
which expressly provide that it will rank equally
with the Preferred Stock; and
- junior to all of our capital stock the terms of
which expressly provide that such stock will rank
senior to the Preferred Stock. As of the date of
this Prospectus, all outstanding of our capital
stock, other than outstanding Senior Preferred
Stock, would rank junior to the Preferred Stock.
At September 30, 1998, the Company had $185.5
million liquidation preference of Senior Preferred
Stock outstanding.
Optional Exchange Feature......... We may exchange the Preferred Stock in whole but not in
part into Exchange Debentures, if the conditions
described in the Certificate of Designation are
satisfied.
Certain Covenants................. The Certificate of Designation contains certain
covenants that restrict our ability and the ability of
certain of our subsidiaries to:
- incur additional indebtedness and issue certain
capital stock,
- create liens,
- pay dividends on or make distributions in respect
of capital stock,
- redeem or repurchase our capital stock,
- make investments or certain other restricted
payments,
- sell assets,
- create restrictions on the ability of our
restricted subsidiaries to make certain payments,
- issue or sell stock of restricted subsidiaries,
- enter into transactions with our stockholders or
affiliates,
- incur senior subordinated indebtedness, or
- effect a consolidation or merger.
However, these covenants are subject to a number of
important qualifications and exceptions, which are
described elsewhere in this Prospectus under the heading
"Description of the Preferred Stock--Covenants."
We have designated our subsidiaries, Logix,
Dobson/Sygnet Communications Company and Sygnet as
unrestricted subsidiaries. As a result, Logix,
Dobson/Sygnet Communications Company and Sygnet are not
subject to the covenants contained in the Certificate of
Designation.
Change of Control................. Upon certain change of control events, we must make an
offer to purchase the Preferred Stock at a purchase
price equal to 101% of the liquidation preference of the
Preferred Stock, plus unpaid dividends. See "Description
of the Preferred Stock."
THE EXCHANGE DEBENTURES
Securities Description............ 12 1/4% Senior Subordinated Debentures due 2008 in an
aggregate principal amount equal to the aggregate
liquidation
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
preference of, and accrued dividends on, the Preferred
Stock outstanding on the Exchange Date (as defined under
"Description of the Exchange Debentures").
Maturity.......................... January 15, 2008.
Interest Payment Dates............ January 15 and July 15 of each year, beginning with the
first of such dates to occur after the Exchange Date.
Before January 15, 2003, we may pay interest on the
Exchange Debentures by issuing additional Exchange
Debentures.
Optional Redemption............... We may redeem any of the Exchange Debentures beginning
January 15, 2003 at the redemption prices set forth in
this Prospectus.
Before January 15, 2001, we may redeem Exchange
Debentures having a principal amount of up to 35% of the
principal amount of the Exchange Debentures, at a
redemption price equal to 112.250% of the principal
amount of the Exchange Debentures, plus accrued
interest, with the proceeds of one or more sales of its
common stock. We may make such redemption only if such
redemption occurs within 180 days after completion of
such sale and after any such redemption at least 65% of
the aggregate principal amount of Exchange Debentures
originally issued remains outstanding.
Any optional redemption of Exchange Debentures must be
pro rata with the optional redemption of the Senior
Exchange Debentures that may be issued with respect to
the Senior Preferred Stock.
Ranking........................... The Exchange Debentures will be senior subordinated
indebtedness, ranking junior to all of our existing and
future Senior Indebtedness (as defined under
"Description of the Exchange Debentures") and senior to
all of our subordinated indebtedness. The Exchange
Debentures will rank equally with any Senior Exchange
Debentures that may be issued. At September 30, 1998,
assuming the Sygnet acquisition and its related
financing had been completed at that time, we would have
had $1,054.9 million of consolidated indebtedness
outstanding, and our subsidiaries would have had $894.9
million of indebtedness outstanding, all of which would
have been effectively senior to the Exchange Debentures.
Certain Covenants................. The indenture under which the Exchange Debentures would
be issued will contain certain covenants that restrict
our ability and the ability of certain of our
subsidiaries to:
- incur additional indebtedness,
- create liens,
- pay dividends on or make distributions in respect
of capital stock,
- redeem or repurchase our capital stock,
- make investments or certain other restricted
payments,
- sell assets,
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
- create restrictions on the ability of our
restricted subsidiaries to make certain payments,
- issue or sell stock of restricted subsidiaries,
- enter into transactions with stockholders or
affiliates,
- incur senior subordinated indebtedness or
- effect a consolidation or merger.
However, these covenants are subject to a number of
important qualifications and exceptions, which are
described elsewhere in this Prospectus under the heading
"Description of the Exchange Debentures--Covenants."
We have designated our subsidiaries, Logix,
Dobson/Sygnet Communications Company and Sygnet as
unrestricted subsidiaries. As a result, Logix,
Dobson/Sygnet Communications Company and Sygnet are not
subject to the covenants contained in the Exchange
Debenture indenture.
Registration Requirements......... The Exchange Debentures may not be issued unless such
issuance is registered under the Securities Act or is
exempt from registration.
Change of Control................. Upon certain change of control events, we must make an
offer to purchase the Exchange Debentures at a purchase
price equal to 101% of the principal amount of the
Exchange Debentures, plus accrued interest. See
"Description of Exchange Debentures."
</TABLE>
RISK FACTORS
You should consider carefully the information set forth under the caption
"Risk Factors" beginning on page 22 and all the other information set forth in
this Prospectus before deciding whether to participate in the Exchange Offer.
USE OF PROCEEDS
We will not receive any proceeds from the issuance of our New Shares
pursuant to this Prospectus.
13
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary unaudited pro forma consolidated financial data were
derived from the pro forma condensed consolidated financial statements included
elsewhere in this Prospectus. The pro forma statement of operations data for the
year ended December 31, 1997 give effect to the consummation of the West
Maryland Acquisition and the Arizona 5 Acquisition and related financing and the
1998 Transactions (as such terms are defined under "Certain Terms"), including
the Sygnet acquisition and its related financing, as if they occurred on January
1, 1997. The pro forma statement of operations data for the nine months ended
September 30, 1998 give effect to the 1998 Transactions, including the Sygnet
acquisition and its related financing, as if they occurred on January 1, 1997.
The pro forma balance sheet data give effect to the Sygnet acquisition and its
related financing as if they occurred on September 30, 1998. The summary
unaudited pro forma consolidated financial data are based on currently available
information and certain assumptions that management believes are reasonable. The
pro forma financial information does not purport to represent what our results
of operations would have been if the Sygnet acquisition, the Sygnet Financing
and the other Transactions had been completed on the dates indicated, nor does
it purport to indicate the future financial position or results of our future
operations. The pro forma consolidated financial data should be read in
conjunction with "Use of Proceeds," "Selected Consolidated Financial and Other
Data," "Pro Forma Condensed Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Service revenue....................................................... $ 105,475 $ 99,044
Roaming revenue....................................................... 66,463 73,005
Equipment sales....................................................... 6,566 2,994
Other revenue......................................................... 2,528 1,422
----------------- ----------
Total operating revenue............................................... 181,032 176,465
----------------- ----------
Operating costs and expenses:
Cost of services...................................................... 33,688 31,814
Cost of equipment..................................................... 14,863 13,390
Marketing and selling................................................. 24,804 26,094
General and administrative............................................ 31,129 29,264
Depreciation and amortization......................................... 106,933 89,617
----------------- ----------
Total operating expenses.............................................. 211,417 190,179
----------------- ----------
Operating loss.......................................................... (30,385) (13,714)
Interest expense........................................................ (88,092) (72,549)
Other income (expense), net............................................. 2,933 3,061
----------------- ----------
Loss before minority interests and taxes................................ (115,544) (83,202)
Minority interests in income of subsidiaries (1)........................ (1,531) (1,963)
Income tax benefit...................................................... 44,490 32,362
----------------- ----------
Loss from continuing operations before extraordinary items.............. (72,585) (52,803)
Extraordinary items (2)................................................. (1,350) (2,055)
Net loss from continuing operations..................................... (73,925) (54,858)
Dividends on preferred stock............................................ (54,924) (44,105)
----------------- ----------
Loss from continuing operations applicable to common stockholders....... $(128,859) $ (98,963)
----------------- ----------
----------------- ----------
OTHER FINANCIAL DATA:
Adjusted EBITDA (3)(4).................................................. $ 76,548 $ 75,903
Ratio of earnings to combined fixed charges and preferred stock
dividends (5)......................................................... -- --
Capital expenditures, excluding cost of acquisitions.................... 50,436 35,492
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OTHER DATA:
Cellular subscribers (at period end).................................... 221,507 329,906
Cellular penetration (at period end) (6)................................ 4.3% 6.4%
Cellular churn (7)...................................................... 1.6% 1.6%
Average monthly revenue per cellular subscriber (8)..................... $ 39 $ 36
Marketing and selling costs per gross additional cellular subscriber
(9)................................................................... 307 350
Cellular cell sites (at period end)..................................... 298 391
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Net fixed assets....................................................................... $ 127,662
Total assets........................................................................... 1,654,974
Total debt............................................................................. 1,054,911
Mandatorily redeemable preferred stock................................................. 375,513
Stockholders' equity (deficit)......................................................... (128,162)
</TABLE>
- ------------------------------
(1) Reflects minority interests in partnerships in which we own the majority
interests.
(2) Extraordinary items reflect gain or (loss) related to early extinguishment
of debt.
(3) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and changes in accounting
principles. Adjusted EBITDA is provided because it is a measure commonly
used in the telecommunications industry to determine a company's ability to
incur or service debt. Adjusted EBITDA is not derived pursuant to generally
accepted accounting principles and should not be construed as an alternative
to net income, as a measure of performance, or to cash flows, as a measure
of liquidity. The calculation of Adjusted EBITDA does not include our
commitments for capital expenditures or payments of debts and should not be
deemed to represent funds available to us.
(4) Includes Adjusted EBITDA attributable to minority interests in subsidiaries
in which we own a majority interest. The portion of Adjusted EBITDA
attributable to minority interests was $2.9 million for the year ended
December 31, 1997 and $3.7 million for the nine months ended September 30,
1998.
(5) On a pro forma basis, our earnings would have been insufficient to cover
combined fixed charges and preferred stock dividends by $172.0 million for
the year ended December 31, 1997 and by $129.3 million for the nine months
ended September 30, 1998. "Earnings" is defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense under
operating leases representative of interest. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rent expense under operating leases representative of interest.
(6) Determined by dividing our total ending cellular subscribers for the period
by the estimated total Pops covered by applicable FCC cellular licenses or
authorizations held by us.
(7) Churn means the number of cellular subscriber cancellations per period as a
percentage of the weighted average total cellular subscribers during such
period. Churn is stated as the average monthly churn rate for the period.
(8) Excludes roaming revenue and equipment revenue.
(9) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during each period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales.
15
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth certain historical financial data for Sygnet
and for us. The summary historical financial data for us as of and for each of
the three years ended December 31, 1997 were derived from our audited
consolidated financial statements. Our summary historical financial data as of
and for the nine months ended September 30, 1997 and 1998 were derived from our
unaudited consolidated financial statements which, in the opinion of management,
have been prepared on the same basis as our audited consolidated financial
statements and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of our results of operations and
financial position for such periods and as of such dates. The summary historical
financial data for Sygnet as of and for each of the three years ended December
31, 1997 were derived from Sygnet's audited consolidated financial statements.
The summary historical financial data for Sygnet as of and for the nine months
ended September 30, 1997 and 1998 were derived from Sygnet's unaudited
consolidated financial statements which, based on information available to us
from Sygnet, in the opinion of our management, have been prepared on the same
basis as Sygnet's audited consolidated financial statements and include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of Sygnet's results of operations and financial position for
such periods and as of such dates. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of results that may be
expected for the full year. The historical consolidated data should be read in
conjunction with "Use of Proceeds," "Selected Consolidated Financial and Other
Data," "Pro Forma Condensed Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of Sygnet and us, and the related notes thereto,
included elsewhere in this Prospectus.
16
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996(1) 1997(2) 1997(3) 1998(4)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Service revenue................................................ $ 13,949 $ 17,593 $ 38,410 $ 26,487 $ 47,769
Roaming revenue................................................ 4,370 7,852 26,262 17,782 45,916
Equipment sales revenue........................................ 671 662 1,455 741 2,503
Other revenue.................................................. 693 832 587 703 158
--------- --------- --------- --------- ---------
Total operating revenue........................................ 19,683 26,939 66,714 45,713 96,346
--------- --------- --------- --------- ---------
Operating expenses:
Cost of service................................................ 4,654 6,119 16,431 10,932 22,603
Cost of equipment.............................................. 2,013 2,571 4,046 2,834 5,166
Marketing and selling.......................................... 3,103 4,462 10,669 6,913 14,856
General and administrative..................................... 3,035 3,902 11,555 8,137 16,219
Depreciation and amortization.................................. 2,529 5,241 16,798 11,943 29,714
--------- --------- --------- --------- ---------
Total operating expenses....................................... 15,334 22,295 59,499 40,759 88,558
--------- --------- --------- --------- ---------
Operating income................................................. 4,349 4,644 7,215 4,954 7,788
Interest expense................................................. (1,854) (4,284) (27,640) (17,646) (25,039)
Other income (expense), net...................................... (210) (1,503) 2,777 1,854 3,304
Minority interests in income of subsidiaries (5)................. (1,334) (675) (1,693) (1,315) (1,963)
Income tax (provision) benefit................................... (347) 593 3,625 499 4,864
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary items............................................ 604 (1,225) (15,716) (11,654) (11,046)
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations....................... 500 331 332 1,652 (17,185)
Extraordinary items (6).......................................... -- (527) (1,350) (2,186) (2,644)
--------- --------- --------- --------- ---------
Net income (loss)................................................ 1,104 (1,421) (16,734) (12,188) (30,875)
Dividends on preferred stock..................................... (591) (849) (2,603) (727) (16,749)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders.............. $ 513 $ (2,270) $ (19,337) $ (12,915) $ (47,624)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
Adjusted EBITDA (7)(8)........................................... $ 6,878 $ 9,885 $ 24,013 $ 16,897 $ 37,502
Ratio of earnings to combined fixed charges and
preferred stock dividends (9).................................. 1.35x -- -- -- --
Capital expenditures, excluding cost of acquisitions............. $ 3,925 $ 17,438 $ 23,216 $ 13,781 $ 41,528
OTHER DATA:
Cellular subscribers (at period end)............................. 26,614 33,955 100,093 85,185 163,020
Cellular penetration (at period end) (10)........................ 8.0% 5.8% 6.1% 5.8% 5.8%
Cellular churn (11).............................................. 1.5% 1.8% 1.9% 2.2% 1.9%
Average monthly revenue per cellular subscriber (12)............. $ 50 $ 48 $ 41 $ 41 $ 40
Marketing and selling costs per gross additional
cellular subscriber (13)....................................... $ 451 $ 540 $ 398 $ 407 $ 399
Cellular cell sites (at period end).............................. 46 67 135 117 210
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Net fixed assets.......................................................................... $ 76,360
Total assets.............................................................................. 701,041
Total debt................................................................................ 448,056
Mandatorily redeemable preferred stock.................................................... 197,136
Stockholders' deficit..................................................................... (84,296)
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
17
<PAGE>
(1) Includes the operations of our Kansas/Missouri properties from March 19,
1996, the date we acquired them.
(2) Includes the operations of West Maryland, East Maryland and Arizona 5 from
the dates they were acquired by the Company. West Maryland was acquired on
February 28, 1997, East Maryland on March 3, 1997 and Arizona 5 on October
1, 1997.
(3) Includes the operations of West Maryland and East Maryland from the dates
we acquired them.
(4) Includes the operations of Texas 16, California 4, Santa Cruz and
California 7 from the dates we acquired them. Texas 16 was acquired on
January 26, 1998; California 4 on April 1, 1998, Santa Cruz on June 16,
1998; and California 7 on July 29, 1998.
(5) Reflects minority interests in partnerships in which we own the majority
interests.
(6) Extraordinary items reflect gain or (loss) related to early extinguishment
of debt.
(7) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and changes in accounting
principles. Adjusted EBITDA is provided because it is a measure commonly
used in the telecommunications industry to determine a company's ability to
incur or service debt. Adjusted EBITDA is not derived pursuant to generally
accepted accounting principles and should not be construed as an
alternative to net income, as a measure of performance, or to cash flows,
as a measure of liquidity. The calculation of Adjusted EBITDA does not
include our commitments for capital expenditures or payments of debts and
should not be deemed to represent funds available to us.
(8) Includes Adjusted EBITDA attributable to minority interests in subsidiaries
in which we own a majority interest. The portion of Adjusted EBITDA
attributable to minority interests was $2.0 million, $2.3 million, $2.9
million, $2.0 million and $3.7 million for the years ended December 31,
1995, 1996 and 1997 and for the nine months ended September 30, 1997 and
1998, respectively.
(9) Our earnings were insufficient to cover combined fixed charges and
preferred stock dividends by $2.3 million for the year ended December 31,
1996, by $21.6 million for the year ended December 31, 1997, by $11.2
million for the nine months ended September 30, 1997 and by $49.8 million
for the nine months ended September 30, 1998. "Earnings" is defined as
earnings before extraordinary items and accounting changes, interest
expense, amortization of deferred financing costs, taxes and the portion of
rent expense under operating leases representative of interest. Fixed
charges consist of interest expense, amortization of deferred financing
costs and a portion of rent expense under operating leases representative
of interest.
(10) Determined by dividing our total ending cellular subscribers for the
period by the estimated total Pops covered by applicable FCC cellular
licenses.
(11) Churn means the number of cellular subscriber cancellations per period as
a percentage of the weighted average total cellular subscribers during
such period. Churn is stated as the average monthly churn rate for the
period.
(12) Excludes roaming and equipment revenue.
(13) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during each period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales.
18
<PAGE>
SYGNET WIRELESS, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1995(1) 1996(2) 1997 1997 1998
--------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Subscriber revenue............................................. $ 17,191 $ 31,085 $ 52,639 $ 38,531 $ 46,738
Roaming revenue................................................ 4,176 9,687 26,993 19,868 24,753
Equipment sales................................................ 1,529 2,417 4,323 3,051 4,253
Other revenue.................................................. 1,681 1,607 1,679 1,308 1,190
--------- ----------- ----------- ----------- -----------
Total revenue.................................................. 24,577 44,796 85,634 62,758 76,934
--------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of services............................................... 3,366 5,509 10,048 7,175 9,005
Cost of equipment sales........................................ 4,164 5,816 9,663 6,806 7,790
General and administrative..................................... 5,564 9,852 16,976 11,667 14,665
Selling and marketing.......................................... 3,082 6,080 10,841 7,466 9,057
Depreciation and amortization.................................. 3,487 10,038 28,719 21,143 21,343
--------- ----------- ----------- ----------- -----------
Total costs and expenses....................................... 19,663 37,295 76,247 54,257 61,860
--------- ----------- ----------- ----------- -----------
Operating income................................................. 4,914 7,501 9,387 8,501 15,074
Interest expense................................................. (2,660) (11,174) (29,902) (22,558) (21,613)
Other income (expense), net...................................... (304) (195) (101) 6 (340)
--------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item.......................... 1,950 (3,868) (20,616) (14,051) (6,879)
Extraordinary loss on extinguishment of debt..................... -- (1,420) -- -- --
--------- ----------- ----------- ----------- -----------
Net income (loss)................................................ $ 1,950 $ (5,288) $ (20,616) $ (14,051) $ (6,879)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
OTHER FINANCIAL DATA:
Adjusted EBITDA (3)............................................ $ 8,401 $ 17,539 $ 38,106 $ 29,644 $ 36,417
Ratio of earnings to combined fixed charges and preferred stock
dividends (4)................................................ 1.67x -- -- -- --
Capital expenditures, excluding cost of acquisitions........... $ 9,056 $ 10,050 $ 25,576 $ 16,979 $ 11,469
OTHER DATA:
Cellular subscribers (at period end)........................... 44,665 106,574 142,934 130,146 166,886
Cellular penetration (at period end) (5)....................... 4.4% 4.5% 6.0% 5.5% 7.0%
Cellular churn (6)............................................. 1.4% 1.3% 1.3% 1.3% 1.5%
Average monthly revenue per cellular subscriber (7)............ $ 46 $ 42 $ 36 $ 36 $ 34
Marketing and selling costs per gross additional cellular
subscriber (8)............................................... $ 370 $ 321 $ 291 $ 306 $ 287
Cellular cell sites (at period end)............................ 41 114 163 152 181
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Property and equipment, net............................................................... $ 52,138
Total assets.............................................................................. 333,296
Total debt................................................................................ 302,644
Stockholders' equity...................................................................... 12,339
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
19
<PAGE>
(1) Includes the operations of system acquired in the Erie Acquisition (as
defined herein) from September 29, 1995, the date of acquisition.
(2) Includes the operations of systems acquired in the Horizon Acquisition (as
defined herein) from October 9, 1996, the date of acquisition.
(3) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization expense, extraordinary items and changes in
accounting principles. Adjusted EBITDA is provided because it is a measure
commonly used in the telecommunications industry to determine a company's
ability to incur or service debt. Adjusted EBITDA is not derived according
to generally accepted accounting principles and should not be considered as
an alternative to net income, as a measure of performance, or to cash flows,
as a measure of liquidity. The calculation of Adjusted EBITDA does not
include Sygnet's commitments for capital expenditures or payments of debts
and should not be deemed to represent funds available to Sygnet.
(4) Sygnet's earnings were insufficient to cover combined fixed charges and
preferred stock dividends by $4.6 million for the year ended December 31,
1996, by $22.7 million for the year ended December 31, 1997, by $16.2
million for the nine months ended September 30, 1997 and by $6.6 million for
the nine months ended September 30, 1998. "Earnings" is defined as earnings
before extraordinary items and accounting changes, interest expense,
amortization of deferred financing costs, taxes and the portion of rent
expense under operating leases representative of interest. Fixed charges
consist of interest expense, amortization of deferred financing costs and a
portion of rent expense under operating leases representative of interest.
(5) Determined by dividing Sygnet's total ending cellular subscribers for the
period by the estimated total Pops covered by applicable FCC cellular
licenses or authorizations held by Sygnet.
(6) Churn means the number of cellular subscriber cancellations per period as a
percentage of the weighted average total cellular subscribers during such
period. Churn is stated as the average monthly churn rate for the period.
(7) Excludes roaming and equipment revenue.
(8) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during each period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales and equipment rentals.
20
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This Prospectus constitutes a part of the registration statement (the
"Registration Statement") filed by us with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"). As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto. Therefore, we
make in this Prospectus reference to the Registration Statement and to the
exhibits and schedules thereto. For further information about us and about the
securities we hereby offer, you should consult the Registration Statement and
the exhibits and schedules thereto. You should be aware that statements
contained in this Prospectus concerning the provisions of any documents filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). As a result, we file periodic
reports, proxy statements and other information with the Commission. You may
read and copy reports, proxy statements and other information we file at the
public reference facilities maintained by the Commission at the Public Reference
Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference facilities. Copies of documents we file can also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549. You may also access this information
electronically through the Commission's web page on the Internet at
http://www.sec.gov. This web site contains reports, proxy and information
statements and other information regarding registrants such as ourselves that
have filed electronically with the Commission. You may also access information
regarding us through our web page on the Internet at http://www.dobson.net.
The certificate of designation governing the outstanding shares of 12 1/4%
Senior Exchangeable Preferred Stock provides that we will furnish to the holders
of the 12 1/4% Senior Exchangeable Preferred Stock copies of the periodic
reports required to be filed with the Commission under the Exchange Act. Even if
we are not subject to the periodic reporting and informational requirements of
the Exchange Act, we will make such filings to the extent that such filings are
accepted by the Commission. We will make these filings regardless of whether we
have a class of securities registered under the Exchange Act. Furthermore, we
will provide the holders of the 12 1/4% Senior Exchangeable Preferred Stock
within 15 days after such filings with annual reports containing the information
required to be contained in Form 10-K, and quarterly reports containing the
information required to be contained in Form 10-Q promulgated by the Exchange
Act. From time to time, we will also provide such other information as is
required to be contained in Form 8-K promulgated by the Exchange Act. If the
filing of such information is not accepted by the Commission or is prohibited by
the Exchange Act, we will then provide promptly upon written request, at our
cost, copies of such reports to prospective purchasers of the 12 1/4% Senior
Exchangeable Preferred Stock.
21
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING US AND OUR BUSINESS.
WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS
At September 30, 1998, assuming that our acquisition of Sygnet and the
related financing were completed at that time, we would have had approximately
$1,054.9 million of consolidated indebtedness, all of which would rank senior to
the Preferred Stock, $375.5 million aggregate liquidation preference of
mandatorily redeemable preferred stock, a deficit in consolidated stockholders'
equity of $128.2 million and $206.6 million of availability (subsequent to which
$55.0 million was borrowed to fund our acquisition of Texas 10 RSA on December
2, 1998) under the New Credit Facilities and the Existing Credit Facilities. The
terms of the Preferred Stock also allow us to incur additional indebtedness in
the future. At December 31, 1997, assuming that the West Maryland Acquisition,
the Arizona 5 Acquisition and its related financing, and the 1998 Transactions,
including our acquisition of Sygnet and the related financing were completed at
that time, our Adjusted EBITDA minus interest expense, preferred stock dividends
and capital expenditures (excluding acquisition costs) would have been $(116.9)
million, and our earnings would have been insufficient to cover our fixed
charges and preferred stock dividends by $172.0 million. For the nine months
ended September 30, 1998, under the same assumptions, our Adjusted EBITDA minus
interest expense, preferred stock dividends and capital expenditures (excluding
acquisition costs) would have been $(76.2) million, and our earnings would have
been insufficient to cover our fixed charges and preferred stock dividends by
$129.3 million. See "Description of the Preferred Stock," "Description of the
Exchange Debentures," "Description of Certain Indebtedness" and "Description of
Capital Stock."
In addition, we have designated our subsidiaries, Logix, Dobson/Sygnet
Communications Company ("Dobson/Sygnet") and Sygnet as unrestricted subsidiaries
and they will not be subject to the covenants contained in the Certificate of
Designation. There will be no limit under the Certificate of Designation on the
amount of debt that Logix, Dobson/Sygnet and Sygnet will be able to incur, or on
their ability to create liens.
Our level of indebtedness could have important consequences, including:
- the debt service requirements could make it more difficult for us to make
cash dividend payments on the Preferred Stock or cash interest payments on
the Exchange Debentures, if issued;
- our ability to borrow additional money for working capital, capital
expenditures, debt service or dividend payment requirements or other
purposes will be limited;
- a substantial portion of our future cash flow from operations, if any,
will be required to pay principal and interest payments on its
indebtedness and will not be available for our business;
- our flexibility in planning for, or reacting to changes in, our business
and our ability to take advantage of future business opportunities may be
restricted;
- we may be more highly leveraged than certain of our competitors, which may
place us at a competitive disadvantage; and
- our high degree of leverage could make us more vulnerable in the event of
a downturn in our business.
WE EXPECT TO REQUIRE SUBSTANTIAL AMOUNTS OF CAPITAL
We have required, and will likely continue to require, substantial capital
to further develop and expand our cellular systems. We have budgeted $30.2
million for capital expenditures in 1998, of which we have expended $23.7
million as of September 30, 1998. We have budgeted $50.2 million for capital
22
<PAGE>
expenditures in 1999, approximately $40.0 million of which is for the purchase
of cell site and switching equipment. These amounts include expenditures related
to the systems that we will acquire in the Recent and Pending Acquisitions other
than acquisition costs. We have not budgeted any amounts to be expended in 1999
with respect to the buildout of our PCS systems. We may require additional
financing for future acquisitions and for buildout requirements related to our
PCS licenses.
Sources of additional capital for us may include public and private equity
and debt financings, including vendor financing. The extent of additional
financing that we will require will depend on the success of our operations. We
may not be able to obtain any additional financing on terms acceptable to us and
within the limitations contained in the Certificate of Designation, the
certificate of designation for the Senior Preferred Stock, the indenture
relating to our 11 3/4% Senior Notes due 2007 (the "Senior Notes Indenture"),
the certificates of designation for each of our other series of preferred stock,
the terms of the Existing Credit Facilities and New Credit Facilities, our other
indebtedness or any future financing arrangements. See "Description of the
Preferred Stock," "Description of the Exchange Debentures," "Description of
Certain Indebtedness" and "Description of Capital Stock."
WE MAY BE UNABLE TO MEET OUR DEBT SERVICE REQUIREMENTS AND DIVIDEND OBLIGATIONS
We have experienced and will experience a substantial increase in total
indebtedness and in debt service and dividend requirements as a result of the
Transactions, and we and our subsidiaries are, and will continue to be, subject
to significant financial restrictions and limitations. In order for us to be
able to meet debt service and dividend requirements, including obligations under
the Senior Notes, the Senior Preferred Stock, the Preferred Stock, the
Dobson/Sygnet Notes and the Credit Facilities, we must successfully implement
our strategy. Our business strategy is to focus on increasing market
penetration, integrating the operations of acquired systems and further
developing our cellular systems. We cannot assure you that we will successfully
implement our strategy or that we will be able to generate sufficient cash flow
from operating activities to meet debt service and dividend obligations, as well
as other cash requirements, including for working capital and capital
expenditures.
Furthermore, if we are unable to satisfy any of the covenants under the
Credit Facilities, including financial covenants, we will be unable to borrow
under these facilities during that time. Our inability to access such financing
could result in the delay or abandonment of some or all of our plans, which
could limit our ability to meet debt service and dividend obligations and could
have a material adverse effect on our business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The instruments governing certain of our indebtedness, including the
Credit Facilities, contain provisions making it an event of default if we or
certain of our subsidiaries fail to pay or perform certain obligations under
other indebtedness, including the Logix Notes. See "--Restrictions Imposed in
our Governing Instruments May Adversely Affect our Operations." Our ability to
borrow under the Credit Facilities will be limited by the requirement that, on a
quarterly basis beginning June 30, 2000, the amount available under the Existing
Credit Facilities will reduce until the facilities terminate in June 2006, and
beginning December 2000, the amount available under the New Credit Facilities
will reduce until the facility terminates in December 2007. The reduction in
availability may require that we make significant principal payments thereunder.
See "Description of the Preferred Stock," "Description of the Exchange
Debentures" and "Description of Certain Indebtedness."
WE MAY BE UNABLE TO REFINANCE OUR INDEBTEDNESS
We will need to refinance our indebtedness under the Credit Facilities, the
Senior Notes and the Dobson/Sygnet Notes at their respective maturities. We will
also need to refinance our mandatory redemption obligations under our preferred
stock. Our ability and that of our subsidiaries to do so will depend on, among
other things, our financial condition at the time, the restrictions in the
instruments governing the indebtedness and other factors, including market
conditions, beyond our control. The Existing Credit Facilities mature in 2006
and the New Credit Facilities mature in 2007. The Credit Facilities
23
<PAGE>
require substantial mandatory prepayments prior to such dates. Our outstanding
Senior Notes ($160.0 million principal amount) mature April 15, 2007; and the
Dobson/Sygnet Notes ($200.0 million principal amount) mature December 15, 2008.
We must redeem the Senior Preferred Stock and the Preferred Stock on January 15,
2008 at a redemption price of 100% of their liquidation preference plus unpaid
dividends. See "--We May Be Unable to Pay Cash Dividends on the Preferred
Stock." We must redeem outstanding shares of our Class D Preferred Stock and
Class E Preferred Stock at a redemption price of 100% of their liquidation
preference (an aggregate of $85.0 million) plus accrued and unpaid dividends
upon vote of the holders of a majority of the outstanding shares of each class,
after December 31, 2013, or upon our completion of an initial public offering of
our common stock. We must redeem outstanding shares of our Class F Preferred
Stock at a redemption price of 130% of the liquidation preference plus unpaid
dividends at December 31, 2013. We must redeem outstanding shares of our Class G
Preferred Stock and Class H Preferred Stock at a redemption price of 100% of
their liquidation preference (an aggregate of $25.0 million) plus unpaid
dividends, upon the vote of the holders of a majority of the outstanding shares
of each class, after December 31, 2013, or upon our completion of an initial
public offering of our common stock. See "Description of the Preferred Stock,"
"Description of the Exchange Debentures," "Description of Certain Indebtedness"
and "Description of Capital Stock."
If any of this indebtedness or preferred stock cannot be refinanced, it may
cause a default thereunder and under other of our obligations and those of our
subsidiaries. In addition, in the event the implementation of our strategy to
develop and expand our systems is delayed or we do not generate sufficient cash
flow to meet our debt service requirements or obligations with respect to our
preferred stock, we may need to seek additional financing. We cannot assure you
that we could obtain any such financing or refinancing on terms that are
acceptable to us, if at all. If we cannot obtain such financing or refinancing,
we could be forced to dispose of assets in order to make up for any shortfall.
At September 30, 1998, approximately 69.3% of our total assets consisted of
intangible assets, principally licenses granted by the FCC (80.3% on a pro forma
basis, after giving effect to the Sygnet Acquisition and the related financing).
The value of our intangible assets will depend upon a variety of factors,
including the success of our cellular business and the wireless
telecommunications industry in general. In addition, transfers of interests in
such licenses are subject to FCC approval. As a result, we cannot assure you
that our assets could be sold quickly enough, or for sufficient amounts, to
enable us to meet our obligations, including our obligations with respect to the
Senior Preferred Stock and Preferred Stock.
THE PREFERRED STOCK AND EXCHANGE DEBENTURES ARE JUNIOR SECURITIES
The Preferred Stock ranks junior to all of our present and future
indebtedness and other liabilities, equally with the Senior Preferred Stock, and
senior to all classes of our common stock and all of our other preferred stock.
In the event of our bankruptcy, liquidation or reorganization, our assets will
be available to pay obligations on the Preferred Stock only after all of our
outstanding indebtedness and other liabilities have been paid in full, and there
may not be sufficient assets remaining to pay amounts payable on the Senior
Preferred Stock and the Preferred Stock. The Preferred Stock also effectively
ranks junior to all liabilities, including indebtedness, of our subsidiaries. At
September 30, 1998, assuming that the Sygnet acquisition and the related
financing were completed at that time, we would have had approximately $1,151.7
million of consolidated indebtedness and other liabilities, excluding deferred
credits for income taxes, outstanding ranking senior to the Preferred Stock and
our subsidiaries would have had $976.7 million of liabilities, excluding
deferred credits for income taxes. See "--We Have a Significant Amount of
Indebtedness," "--We May Be Unable to Meet Our Debt Service Requirements and
Dividend Obligations" and "Description of the Preferred Stock--Ranking."
If the Preferred Stock is exchanged for Exchange Debentures, the Exchange
Debentures will rank junior to all of our Senior Indebtedness (as such term is
defined under "Description of the Exchange Debentures"), including indebtedness
under the Senior Notes and the Existing Credit Facilities. The Exchange
Debentures will also rank effectively junior to all liablities, including
indebtedness, of our
24
<PAGE>
subsidiaries. In the event of our bankruptcy, liquidation or reorganization, we
will be able to pay obligations on the Exchange Debentures only after all of our
outstanding Senior Indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts payable on the Exchange Debentures.
The Preferred Stock permits us to issue as dividends additional preferred
stock which ranks equally with the Preferred Stock. The Exchange Debentures
permit us to issue as interest additional exchange debentures which rank equally
with the Exchange Debentures. The Preferred Stock and the Exchange Debenture
also permit us and our subsidiaries to incur additional indebtedness and issue
additional preferred stock, subject to certain limitations. Such additional
indebtedness may rank senior to, equally with or junior to the Exchange
Debentures, while additional indebtedness of the subsidiaries will effectively
rank senior to the Exchange Debentures. Such additional preferred stock may rank
senior (subject to a majority vote of the Preferred Stock), equally or junior to
the Preferred Stock.
WE ARE DEPENDENT ON CASH FLOWS FROM OUR SUBSIDIARIES
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 the Senior Notes, and dividends on the Senior Preferred Stock
and Preferred Stock. The ability of our subsidiaries to distribute funds to us
are and will be restricted by the terms of existing and future indebtedness
including the Credit Facilities. See "Description of Certain Indebtedness--The
Credit Facilities."
Our subsidiaries are separate legal entities that have no obligation to pay
any amounts due with respect to the Preferred Stock and, if issued, the Exchange
Debentures or to make any funds available to us. As a result, if any of our
subsidiaries liquidate their assets, our right to any of the proceeds (and the
consequent right of the holders of the Preferred Stock and, if issued, the
Exchange Debentures to participate in the distribution or realize proceeds from
those assets) will be effectively subordinated to the claims of the creditors of
such subsidiary (including trade creditors and holders of indebtedness of such
subsidiary, including the Dobson/Sygnet Notes and the Credit Facilities). We
will not be subordinated to such creditors if we are a creditor of such
subsidiary, in which case our claims would still be effectively subordinated to
any security interest in the assets of such subsidiary senior to that held by
us.
WE MAY BE UNABLE TO PAY CASH DIVIDENDS ON THE PREFERRED STOCK
Dividends on the Preferred Stock must be paid in cash commencing January 15,
2003. Under the Senior Note Indenture, we may pay cash dividends and make other
distributions on or in respect of our capital stock, including the Senior
Preferred Stock and Preferred Stock, only if certain financial tests are met. In
addition, the Credit Facilities limit the amount of cash available for
dividends, loans and cash distributions to us from our subsidiaries. Currently,
the restrictions contained in the Senior Note Indenture and the Credit
Facilities would prohibit us from paying cash dividends and would also prohibit
us from issuing Exchange Debentures in exchange for Preferred Stock. We cannot
assure you that our existing or future financing arrangements will permit us to
pay cash dividends on the Preferred Stock beginning January 15, 2003. In the
event that any of our financing agreements limit our ability to pay cash
dividends on the Preferred Stock when required, we will need to obtain waivers
of the limitation or refinance amounts outstanding under such agreements to make
such dividend payments. We cannot assure you that we would be able to obtain
waivers or refinance amounts outstanding under such agreements. Our failure to
pay cash dividends on the Preferred Stock could result in a Voting Rights
Triggering Event (as defined under "Description of the Preferred Stock").
25
<PAGE>
RESTRICTIONS IMPOSED IN OUR GOVERNING INSTRUMENTS MAY ADVERSELY AFFECT OUR
OPERATIONS
The instruments governing our indebtedness and that of our subsidiaries, the
Certificate of Designation and the certificates of designation with respect to
the Senior Preferred Stock and the Other Preferred Stock impose significant
operating and financial restrictions on us and our subsidiaries. Such
restrictions significantly restrict, among other things, our ability and that of
our subsidiaries to incur additional indebtedness, pay dividends, repay
indebtedness prior to stated maturities, sell assets, make investments, engage
in transactions with stockholders and affiliates, issue capital stock, create
liens or engage in mergers or acquisitions. In addition, the Credit Facilities
require us to maintain certain financial ratios. These restrictions could also
limit our ability and that of our subsidiaries to obtain future financings, make
needed capital expenditures, withstand a future downturn in our business or the
economy in general, or otherwise conduct necessary corporate activities. Our
failure or that of our subsidiaries to comply with these restrictions could lead
to a default under the terms of such indebtedness even though we are able to
meet debt service and dividend obligations. In the event of a default, the
holders of such indebtedness could elect to declare all such indebtedness to be
due and payable and the holders of Preferred Stock could obtain representation
on our board of directors. We cannot assure you that we and our subsidiaries
would be able to make such payments or borrow sufficient funds from alternative
sources to make any such payment. Even if we could obtain additional financing,
we cannot assure you that we could obtain financing on terms that are acceptable
to us. In addition, indebtedness under each of the Existing Credit Facilities is
secured by liens on assets. The pledge of our assets to existing lenders could
impair our ability to obtain favorable financing. See "Description of Certain
Indebtedness" and "Description of Capital Stock."
POSSIBLE INABILITY TO REPURCHASE OF PREFERRED STOCK OR EXCHANGE DEBENTURES UPON
A CHANGE OF CONTROL
We must offer to purchase the Preferred Stock or Exchange Debentures upon
the occurrence of a Change of Control at a purchase price equal to 101% of their
liquidation preference plus accrued dividends or principal amount plus accrued
interest, as the case may be. See "Description of the Preferred Stock--Change of
Control" and "Description of the Exchange Debentures--Change of Control."
The Credit Facilities, the Senior Note indenture and the certificate of
designation for the Senior Preferred Stock will prohibit us from prepaying the
Preferred Stock or the Exchange Debentures, including required prepayments
following a Change of Control. Prior to commencing an offer to purchase, we
would be required to:
- repay in full all indebtedness and purchase all of our preferred stock and
that of our subsidiaries that would prohibit the repurchase of the
Preferred Stock or the Exchange Debentures, as the case may be, including
indebtedness under the Credit Facilities, the Senior Note Indenture and
the certificate of designation for the Senior Preferred Stock, or
- obtain any consents required to permit the repurchase.
If we are unable to repay all of such indebtedness or are unable to obtain
the necessary consents, then we will be unable to offer to purchase the
Preferred Stock or the Exchange Debentures, resulting in a Voting Rights
Triggering Event under the Preferred Stock or an event of default under our
Senior Note Indenture. We cannot assure you that we will have enough funds
available at the time of any Change of Control offer to make any debt payment
(including repurchases of Preferred Stock or the Exchange Debentures) as
described above.
The events that constitute a Change of Control under the Certificate of
Designation or our Senior Note Indenture, as the case may be, may also be events
of default under the Credit Facilities, the Senior Note Indenture and the
certificate of designation for the Senior Preferred Stock or our other
indebtedness and that of our subsidiaries. Such events may permit the lenders
under such debt to declare the debt due and payable and, if the debt is not
paid, to require that we or our subsidiaries sell assets that secure such
26
<PAGE>
debt in order to repay the lenders. Similarly, a default under the Senior
Preferred Stock could entitle the holders thereof to obtain representation on
our board of directors. In any such case, our ability to raise cash to
repurchase the Preferred Stock or the Exchange Debentures, as the case may be,
would be limited and would reduce the practical benefit of the offer to purchase
provisions to the holders of the Preferred Stock or the Exchange Debentures. See
"Description of Certain Indebtedness."
WE NEED TO INTEGRATE OUR ACQUISITIONS AND MANAGE OUR GROWTH
We are subject to risks that acquired systems (including those acquired in
the Sygnet acquisition) will not perform as expected and that the returns from
such systems will not support the indebtedness incurred or equity issued to
acquire, or the capital expenditures needed to develop, the systems. In
addition, expansion of our operations may place a significant strain on our
management, financial and other resources. Our ability to manage future growth
will depend upon our ability to monitor operations, control costs, maintain
effective quality controls and significantly expand our internal management,
technical and accounting systems, all of which will result in higher operating
expenses. Any failure to expand these areas and to implement and improve such
systems, procedures and controls efficiently at a pace consistent with the
growth of our business could have a material adverse effect on our business,
financial condition and results of operations. In addition, the integration of
acquired systems with existing operations will require us to incur considerable
expenses in advance of anticipated revenues and may cause substantial
fluctuations in our operating results. This will involve, among other things,
integration of switching, transmission, technical, sales, marketing, billing,
accounting, quality control, management, personnel, payroll, regulatory
compliance and other systems and operating hardware and software, some of which
may be incompatible with our existing systems. In addition, telecommunications
providers generally experience higher customer and employee turnover rates
during and after an acquisition. We cannot assure you that we will be able to
successfully integrate the systems acquired or any other businesses we may
acquire.
We recently closed our acquisition of the FCC license for each of Ohio 2 RSA
and Texas 10 RSA. The purchase price of each of these acquisitions is being held
in escrow pending resolution of claims made against the seller's title to the
FCC licenses. We cannot assure you that these claims will be resolved in favor
of the respective sellers. If the claims are ultimately resolved in a manner
adverse to either seller, we could lose our license for the affected RSA,
although we would receive back our purchase price held in escrow. However, if
this occurred, we would need to either dispose of any improvements we had made,
redeploy them in another system to be operated by us or abandon the assets. We
could incur costs and expenses in connection with such disposal, redeployment or
abandonment. In addition, we would lose the benefit of owning such properties
and the future cash flows therefrom. Depending upon how much we had invested in
the affected RSA, how much of that investment could be sold or salvaged and the
potential future benefit therefrom, a loss of either of these licenses could
have an adverse effect on our operations and the loss of revenues from either
such system could have an adverse effect on our financial condition.
WE MAY NEED TO BUILDOUT PCS LICENSED AREAS
In April 1997, we obtained PCS licenses for nine markets as part of the FCC
"F" Block auction. Our right to hold and use each license depends on the
buildout of the PCS system to cover at least 25% of the Pops covered by the
license by April 2002. See "Business--Cellular Operations." We have estimated
that the capital expenditures relating to such a buildout would range from $10.0
million to $30.0 million. The actual amount of the expenditures, however, will
depend in part on the PCS technology we select, the extent our buildout, costs
at the time of buildout and the extent we, at our expense, must relocate
existing incumbent microwave licensees or compensate other PCS licensees for
their relocation costs. We will need additional financing for the buildout of
its PCS system. We cannot assure you that we will be able to obtain such
financing or, if such financing is available, that it can be obtained on terms
acceptable to us and within the limitations contained in the Senior Note
Indenture, the Credit Facilities, the Certificate of Designation and the
certificates of designation for the Senior Preferred Stock and the Other
Preferred Stock. If our subsidiary which holds the PCS licenses fails to satisfy
its installment financing obligations to the FCC, the
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PCS licenses may be canceled, we would forfeit our investment in such PCS
licenses, and the FCC could sue the subsidiary for collection of any unpaid sums
due to the FCC plus forfeiture penalties. As of September 30, 1998, we had paid
$1.0 million for such PCS licenses and owed the FCC an additional $4.1 million.
We cannot assure you that our PCS system will be profitable. The extent of
potential demand for PCS in our markets cannot be estimated with any degree of
certainty. We have no experience operating PCS systems. Sygnet holds no PCS
licenses.
When the FCC first licensed cellular systems in the United States, it
specified the technical standards of systems operations to insure nationwide
compatibility between all cellular carriers. In contrast, the FCC has not
mandated the technology standard for PCS operations, leaving each licensee free
to select among several competing technologies, some of which are not compatible
with each other. We cannot assure you that the technical standards selected by
us will be the most widely used, or technologically sound. Also, because
handsets which use one PCS technology may not be operable on other systems, the
ability to offer PCS roamer service will be affected. To the extent most
competitors in the PCS industry select a competing technology that is not
compatible to the system selected by us, our PCS business may be adversely
affected. We have not yet finalized our plans with respect to the buildout of
our PCS licensed systems, nor have we selected the digital technology to be used
in such systems.
OUR BUSINESS IS SUBJECT TO INTENSE COMPETITION
The telecommunications industry is highly competitive. Many of our existing
and potential competitors have substantially greater financial, personnel,
technical, marketing and other resources than do we as well as other competitive
advantages. Currently the FCC authorizes only two cellular licensees to operate
in each license area and we compete in each of our markets with one other
cellular licensee. Competition for subscribers between cellular licensees in a
given license area is based principally upon price, the services and
enhancements offered, the technical quality of the cellular system, customer
service, system coverage and capacity. We also compete, although to a lesser
extent, with resellers, paging companies and landline telephone service
providers.
As a result of recent regulatory and legislative initiatives, our cellular
operations may face increased competition from entities which use other
communications technologies or other radio frequency spectrum such as broadband
PCS licensees and enhanced specialized mobile radio licensees. The FCC has
authorized as many as six broadband PCS licensees to provide services in each of
our markets, although not all of these licensees have begun servicing those
markets. Our operations may also face competition from other technologies
developed in the future including, but not limited to, satellite systems and
services provided over spectrum allocated to the Wireless Communications
Services and General Wireless Communications Services. While mobile services are
not currently feasible on Wireless Communications Services spectrum, and General
Wireless Communications Services spectrum has not been licensed, mobile
operations are not prohibited on such spectrum and may emerge at a future date.
We believe the likelihood of near-term competition from such services is reduced
because the areas in which we operate are less densely populated. We cannot
assure you, however, that one or more of the technologies currently used by us
in our business will not become inferior or obsolete at some time in the future.
See "Business-- Competition."
We may not be able to continue to compete successfully and new technologies
and products that are more commercially accepted than ours may be developed.
Some competitors may market other services such as long distance services, cable
television access or landline local exchange services with their wireless
offerings. There has been a cellular industry trend of declining average revenue
per minute, as competition between service providers has led to reductions in
rates for airtime and subscriptions and other charges. We expect that this trend
will continue. See "Business--Competition" for more detailed information on our
competitive environment.
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OUR BUSINESS IS AFFECTED BY FREQUENT AND SIGNIFICANT TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology, including advancements protected by intellectual property laws.
Significant changes can be seen in the increasing pace of digital upgrades in
existing analog wireless systems, evolving industry standards, the availability
of new radio frequency spectrum allocations for wireless services, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, developments in emerging
wireless transmission technologies and changes in end-user requirements and
preferences. International standards bodies and national regulators will
consider technology standards for new third-generation wireless technologies in
coming years, and we cannot assure you that its current technologies will be
compatible with such technologies. In addition, we may be required to select in
advance one technology over another. However, at the time we must make our
investment, it will be impossible to accurately predict which technology may
prove to be the most economic, efficient or capable of attracting customer
usage. There is also uncertainty as to the extent of customer demand as well as
the extent to which airtime and monthly access rates may continue to decline.
The effect of technological changes on our business cannot be predicted, and we
cannot assure you that technological developments will not have a material
adverse effect on us.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL
We are managed by a small number of management and operating personnel. The
loss of certain of these individuals could have a material adverse effect on us.
We believe that our ability to manage our planned growth successfully will
depend in large part on our continued ability to attract and retain highly
skilled and qualified personnel. See "--Risks Associated with Acquisitions;
Ability to Manage Growth" and "Management."
WE RELY ON THE USE OF THIRD-PARTY SERVICE MARKS TO MARKET OUR PRODUCTS AND
SERVICES
We use the registered service marks CELLULAR ONE-Registered Trademark- and
AIRTOUCH-TM- CELLULAR-Registered Trademark- to promote the services we offer in
certain of our license areas. Our use of the CELLULAR ONE-Registered Trademark-
service mark is governed by five-year contracts with Cellular One Group, the
owner of the service mark. These contracts begin to expire in 2001 and we have
the option to renew these contracts for two additional five-year terms. Our
contract to use the AIRTOUCH-TM- CELLULAR service mark is for an initial term of
20 years with provisions to extend the term for successive five-year periods.
See "Business--Service Marks." Under these agreements, we must meet specified
operating and service quality standards for its systems. If these agreements are
not renewed upon expiration or if we fail to meet the applicable operating or
service quality standards, our ability both to attract new subscribers and
retain existing subscribers could be impaired. Recently, AT&T Wireless, which
had been the single largest user of the CELLULAR ONE-Registered Trademark- name,
significantly reduced its use of the brand name as a primary service mark. If
for any reason beyond our control, the names CELLULAR ONE-Registered Trademark-
or AIRTOUCH-TM- CELLULAR were to suffer diminished marketing appeal, our ability
both to attract new subscribers and retain existing subscribers could be
materially impaired in the applicable markets.
OUR BUSINESS IS REGULATED AND THERE IS POTENTIAL FOR ADVERSE REGULATORY CHANGE,
WE MAY BE UNABLE TO OBTAIN REGULATORY APPROVALS
The licensing, construction, operation, acquisition and sale of wireless
systems, as well as the number of cellular and other wireless licensees
permitted in each market, are regulated by the FCC. Changes in the regulation of
wireless activities and wireless carriers or the loss of any license or licensed
area could have a material adverse effect on our operations. In addition, all
cellular and PCS licenses in the United States are subject to renewal upon
expiration of their initial ten-year term. Our cellular licenses will expire at
varying dates beginning in October 2000. We believe that each of these licenses
will be renewed based upon FCC rules establishing a presumption in favor of
licensees that have complied with their regulatory
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obligations during the initial license period. We cannot assure you, however,
that our licenses will be renewed. See "Business--Regulation."
EQUIPMENT FAILURE AND NATURAL DISASTERS MAY ADVERSELY AFFECT OUR BUSINESS
We carry business interruption, casualty and property insurance in amounts
we believe adequate to cover the financial risks associated with any major
equipment failure or natural disaster. However, a major equipment failure or a
natural disaster affecting our central switching offices, our microwave links or
certain of our cell sites could have a material adverse effect on our
operations.
OUR RELIANCE ON ONE BILLING VENDOR MAY AFFECT THE TIMING OF OUR RECEIPT OF FUNDS
We rely primarily on one vendor to produce all of our customer billings. If
this billing vendor for any reason were to encounter significant problems
affecting its ability to perform its billing functions for us, our ability to
generate billings to our customers would be materially impaired, until a new
arrangement could be established.
THE CONCERN OVER RADIO FREQUENCY EMISSIONS MAY AFFECT USE OF CELLULAR TELEPHONES
Media reports have suggested that certain radio frequency emissions from
portable cellular telephones may be linked to cancer, and may interfere with
pacemakers and other medical devices. Concerns over radio frequency emissions
may have the effect of discouraging the use of cellular telephones, which could
have a material adverse effect on our business. On August 1, 1996, the FCC
released a report and order, which became effective in August 1996 as to mobile
and portable devices and in October 1997 for cellular transmitters, that updates
the guidelines and methods it uses for evaluating radio frequency emissions from
radio equipment, including cellular and PCS telephones and transmitting
facilities. We do not believe these guidelines will have a material impact on
its operations. While the FCC's rules impose more restrictive standards on radio
frequency emissions from lower power devices such as portable cellular
telephones, we believe, based on manufacturers' certifications, that all
cellular telephones currently provided by us to our customers, as well as our
transmitting facilities, comply with the FCC's standards. See
"Business--Regulation."
CONFLICTS OF INTEREST MAY EXIST WITH OUR CONTROLLING STOCKHOLDERS
Everett R. Dobson, our Chairman of the Board, President and Chief Executive
Officer, and his affiliates beneficially own approximately 80% of the combined
voting power of all classes of our outstanding voting stock on a fully diluted
basis. Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the holders of our voting
stock and the holders of the Preferred Stock and, if issued, the Exchange
Debentures. In addition, holders of voting stock may have an interest in
pursuing acquisitions, divestitures, financings or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risk to the holders of the Preferred Stock and, if
issued, the Exchange Debentures.
THERE ARE CERTAIN FEDERAL INCOME TAX CONSEQUENCES WHICH WILL AFFECT HOLDERS OF
PREFERRED STOCK AND EXCHANGE DEBENTURES
Because we may pay dividends on the Preferred Stock by distributing
additional shares of Preferred Stock, compliance with U.S. federal withholding
tax rules would be difficult with respect to investors who are not U.S. persons.
Accordingly, we consider the Preferred Stock to be an inappropriate investment
for any person who or which is not a U.S. person.
Distributions of cash or, to the extent of their fair market value,
distributions of additional shares of Preferred Stock will generally be treated
as dividends, taxable as ordinary income to the extent of our current and
accumulated earnings and profits, as determined under U.S. federal income tax
principles.
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However, we presently do not have any current or accumulated earnings and
profits as determined under U.S. federal income tax principles and it is
unlikely to have current or accumulated earnings and profits in the foreseeable
future. As a result, until such time as we have earnings and profits,
distributions of cash or additional shares of Preferred Stock on the Preferred
Stock will be treated as a nontaxable return of capital and will be applied
against and reduce the adjusted tax basis (but not below zero) in the hands of
each holder of the shares of Preferred Stock on which such distribution is made,
thus increasing the amount of any gain (or reducing the amount of any loss)
which would otherwise be realized by such holder upon the sale or other
disposition of such shares of Preferred Stock. In the case of distributions of
additional Preferred Stock, however, such basis reduction largely should be
offset from an overall standpoint by a corresponding amount of tax basis for a
holder in the additional Preferred Stock. A holder would recognize gain to the
extent that any distributions were to exceed our current or accumulated earnings
and profits and the adjusted tax basis of the holder in the Preferred Stock.
As we expect the redemption price of the Preferred Stock to exceed its issue
price by more than a de minimis amount, the difference ("redemption premium")
generally will be taxable as a constructive distribution of additional Preferred
Stock to a holder over a certain period under a constant interest rate method
similar to that described below for accruing original issue discount ("OID") on
the Exchange Debentures. However, to the extent we lack current or accumulated
earnings and profits for a taxable year to which a constructive distribution
relates, a holder should not recognize taxable income or gain as a result of the
constructive distribution. Moreover, there should be no net effect on the
holder's adjusted tax basis of the Preferred Stock as a result of the
constructive distribution if we have no current or accumulated earnings and
profits. To the extent we have current or accumulated earnings and profits for a
taxable year to which a constructive distribution relates, the distribution will
be taxable currently to the holder as a dividend even though the holder does not
receive any actual distribution and will produce a corresponding increase in the
adjusted tax basis of the Preferred Stock as to which the distribution is deemed
to have been made. See "Federal Income Tax Considerations to U.S.
Holders--Redemption Premium."
Additional shares of Preferred Stock distributed on the Preferred Stock will
also have redemption premium if the redemption price of such Preferred Stock
exceeds the fair market value of the additional shares of Preferred Stock when
distributed by more than a de minimis amount. Such redemption premium may differ
from that attributable to the shares of Preferred Stock. Therefore, any such
additional shares of the Preferred Stock distributed may not be fungible with
the shares of the Preferred Stock previously issued.
Further, if holders of Preferred Stock receive additional shares of
Preferred Stock as a distribution on the Preferred Stock, such holders would, to
the extent we have earnings and profits for U.S. federal income tax purposes, be
required to include currently in gross income for U.S. federal income tax
purposes the fair market value of such additional shares distributed, even
though such holders have not received any cash with respect to such
distribution.
Upon a redemption of Preferred Stock in exchange for Exchange Debentures,
the holder generally will have a capital gain or loss equal to the difference
between the issue price of the Exchange Debentures received and the holder's
adjusted tax basis in the Preferred Stock redeemed, except to the extent all or
a portion of the Exchange Debentures received is treated as a dividend payment.
Because we have the option through January 15, 2003 to pay interest on the
Exchange Debentures by issuing additional Exchange Debentures, any Exchange
Debentures issued prior to that date will be treated as issued with OID for U.S.
federal income tax purposes, unless under special rules for interest holidays
the amount of OID is treated as de minimis. If the Exchange Debenture has OID in
excess of the de minimis amount, holders would have to accrue all such OID into
income over the entire term of the Exchange Debentures, but would not treat the
receipt of stated interest on the Exchange Debentures as interest for U.S.
federal income tax purposes. The Exchange Debentures may also be subject to the
rules for "applicable high yield
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discount obligations," in which case the Company's deduction for OID on the
Exchange Debentures will be substantially deferred, and a portion of such
deduction may be disallowed.
For a discussion of these and other relevant tax issues, see "Federal Income
Tax Considerations to U.S. Holders."
POTENTIAL FAILURE OF COMPUTER SYSTEMS TO RECOGNIZE YEAR 2000 MAY ADVERSELY
AFFECT OUR OPERATIONS
The "Year 2000 Issue" is the result of the inability of some computer
programs to distinguish the year 1900 from the year 2000. Most computer programs
and operating systems were written using two digits to define the applicable
year rather than four digits. This means that any equipment containing computer
programs with time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. In some instances this could result in
system failures, disruption in operations and possible inaccuracies of data.
In April 1998, we established a multi-disciplined team to perform a Year
2000 impact analysis for us. 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, we have 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. By the end of 1999, all of our automated systems and
services and those of Sygnet will be Year 2000 compliant.
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 its business and
operational support applications. Those applications that have not been
outsourced to service providers have been deployed using packaged software from
outside vendors. We have also focused on evaluating software systems of pending
acquisitions. As a result, the remediation phase is not focused on a large scale
in-house effort, but on identification of third party systems and services that
are not currently Year 2000 compliant and oversight of third party compliance
efforts.
The results of the impact analysis revealed that for our information
systems, services and telecommunications infrastructure, Year 2000 compliant
versions will be included as a part of existing maintenance and/or service
agreements at no additional cost to us and should be in place and tested by the
second quarter of 1999. We estimate total costs of approximately $0.8 million to
upgrade or replace those systems that are not Year 2000 compliant and will not
be upgraded through existing maintenance or service agreements. In addition, our
contingency plan for the Year 2000 is encompassed by a disaster recovery plan
for the business which will be in place by the end of the second quarter of
1999.
We will continue to analyze systems and services that utilize date-embedded
codes that may experience operational problems when the 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 it does business to coordinate Year
2000 compliance. To further mitigate risks, we will conduct our own Year 2000
tests on mission critical systems as Year 2000 compliant versions are released
by vendors.
THERE IS NO PUBLIC MARKET FOR THE PREFERRED STOCK AND THE OLD SHARES HAVE
RESTRICTIONS ON TRANSFERABILITY
There has not been an established trading market for the Preferred Stock.
The Initial Purchaser has informed us that it does not currently intend to make
a market in the Preferred Stock. Accordingly, we cannot assure you as to the
development or liquidity of any market for the Preferred Stock. If a market for
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the Preferred Stock were to develop, the Preferred Stock could trade for less
than the initial offering price, depending upon many factors, including
prevailing interest rates, our operating results and the markets for similar
securities, and such market may cease to continue at any time.
Your Old Shares were not registered under the Securities Act or any state
securities laws and may not be offered or sold, except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws, or pursuant to an effective
registration statement. We have registered the New Shares under the Securities
Act and are obligated to use our best efforts to complete an exchange offer for
the Old Shares or register resales of the Old Shares under the Securities Act,
but we cannot assure you that a trading market for the Preferred Stock will be
liquid or will develop at all.
THERE MAY BE ADVERSE CONSEQUENCES OF A FAILURE TO EXCHANGE
Untendered outstanding Old Shares that are not exchanged for New Shares
pursuant to the Exchange Offer will remain restricted securities. Outstanding
Old Shares will continue to be subject to the following restrictions on
transfer:
- outstanding Old Shares may be resold only if registered pursuant to the
Securities Act, if an exemption from registration is available thereunder,
or if neither such registration nor such exemption is required by law,
- outstanding Old Shares shall bear a legend restricting transfer in the
absence of registration or an exemption therefrom and
- a holder of outstanding Old Shares who desires to sell or otherwise
dispose of all or any part of its outstanding Old Shares under an
exemption from registration under the Securities Act, if requested by us,
must deliver to us an opinion of independent counsel experienced in
Securities Act matters, reasonably satisfactory in form and substance to
us, that such exemption is available.
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including our strategies,
planned capital expenditures, acquisitions and related financing, 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, acquisitions activity, or our performance to differ materially
from its plans include, without limitation:
- our ability to satisfy the financial covenants of our existing and future
debt instruments and to raise additional capital;
- our ability to integrate acquired systems with our existing operations and
to successfully market our services and products to existing and new
customers;
- our ability to install equipment and expand and upgrade our systems in a
timely manner and to manage our rapid growth successfully;
- our ability to compete effectively against competitors with greater
financial, technical, marketing and other resources and respond
effectively to changes in end-user requirements and preferences;
- the inability of third party vendors to provide products and services
which are Year 2000 compliant;
- the development of other technologies and products that may gain more
commercial acceptance than ours; and
- adverse regulatory changes.
We cannot assure you that anticipated future results will be achieved. Actual
events or results may differ materially as a result of risks to which we are or
may be subject. Readers are cautioned not to place undue
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reliance on these forward-looking statements which speak only as of the date
hereof. We do not intend 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.
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
An aggregate of 64,646 Old Shares were initially sold by Dobson on December
23, 1998 to NationsBanc Montgomery Securities LLC (the "Initial Purchaser") in
reliance on Section 4(2) of the Securities Act. The Initial Purchaser offered
and sold the Old Shares only to "qualified institutional buyers" (as defined in
Rule 144A) in compliance with Rule 144A. Subsequently and through January 15,
1999, 506 additional Old Shares have been issued as the payment of dividends on
the outstanding Preferred Stock.
In connection with the sale of the Old Shares, the Company and the Initial
Purchaser entered into a Registration Rights Agreement dated as of December 23,
1998 (the "Registration Rights Agreement"), which requires the Company (i) to
cause the Old Shares to be registered under the Securities Act, or (ii) to file
with the Commission a registration statement under the Securities Act with
respect to an issue of New Shares of the Company identical in all material
respects to the Old Shares and use its best efforts to cause such registration
statement to become effective under the Securities Act and, upon the
effectiveness of that registration statement, to offer to the holders of the Old
Shares the opportunity to exchange their Old Shares for a like principal amount
of New Shares, which will be issued without a restrictive legend and which may
be reoffered and resold by the holder without restrictions or limitations under
the Securities Act. A copy of the Registration Rights Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made pursuant to the Registration Rights Agreement
to satisfy the Company's obligations thereunder. The term "holder" with respect
to the Exchange Offer means any person in whose name Old Shares are registered
on the Company's books or any other person who has obtained a properly completed
stock power from the registered holder, or any person whose Old Shares are held
of record by The Depository Trust Company ("DTC") who desires to deliver such
Old Share by book-entry transfer at DTC.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Shares issued pursuant to the Exchange Offer in exchange for the Old Shares may
be offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Shares issued pursuant to the Exchange Offer in exchange for Old Shares may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Shares are acquired in the
ordinary course of such holder's business and that such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Shares. Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in a distribution
of the New Shares or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. Each broker-dealer (other than an
affiliate of the Company) that receives New Shares for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Shares. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a
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broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed that, for a period of 180
days after the Exchange Date, it will make the Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Shares in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
By tendering in the Exchange Offer, each holder of Old Shares will represent
to the Company that, among other things, (i) the New Shares acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Shares, whether or not such person is the holder, (ii)
neither the holder of Old Shares nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Shares, (iii) if the holder is not a broker-dealer, or is a broker-dealer but
will not receive New Shares for its own account in exchange for Old Shares,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Shares, and (iv) neither the holder
nor any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if such holder is an "affiliate," that
such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Following the completion of the Exchange Offer, none of the shares of Senior
Preferred Stock will be entitled to the contingent increase in dividend rate
applicable to the Old Shares. Following the consummation of the Exchange Offer,
holders of Senior Preferred Stock will not have any further registration rights,
and the Old Shares will continue to be subject to certain restrictions on
transfer. See "--Consequences of Failure to Exchange." Accordingly, the
liquidity of the market for the Old Shares could be adversely affected. See
"Risk Factors--Consequences of the Exchange Offer on Non-Tendering Holders of
the Old Shares."
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Shares are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Shares validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue one New Share in exchange
for each Old Share accepted in the Exchange Offer. Holders may tender some or
all of their Old Shares pursuant to the Exchange Offer.
The form and terms of the New Shares will be identical in all material
respects to the form and terms of the Old Shares except that the New Shares will
be registered under the Securities Act and, therefore, certificates representing
New Shares will not bear legends restricting the transfer thereof. The New
Shares will be treated as a single class with any Old Shares that remain
outstanding. The Exchange Offer is not conditioned upon any minimum number of
Old Shares being tendered for exchange.
As of February 12, 1999, 65,152 Old Shares were outstanding. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders.
Holders of Old Shares do not have any appraisal or dissenters' rights under
the Oklahoma General Corporation Act or the Certificate of Designation in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement and
the applicable requirements of the Exchange Act, and the rules and regulations
of the Commission thereunder. Old Shares which are not tendered for exchange in
the Exchange Offer will
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remain outstanding and dividends thereon will continue to accrue, but such Old
Shares will not be entitled to any rights or benefits under the Registration
Rights Agreement.
The Company will be deemed to have accepted validly tendered Old Shares
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Shares from the Company. If any tendered
Old Shares are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, certificates
for any such unaccepted Old Shares will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Shares in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Shares
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on , 1999, unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although the Company has no current intention to extend the
Exchange Offer, the Company reserves the right to extend the Exchange Offer at
any time and from time to time by giving oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service. During any extension of the Exchange Offer, all Old Shares previously
tendered pursuant to the Exchange Offer and not withdrawn will remain subject to
the Exchange Offer. The date of the exchange of the New Shares for Old Shares
will be as soon as practicable following the Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Shares, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions of
the Exchange Offer" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in any manner determined by the Company to constitute
a material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of time, depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
In all cases, issuance of the New Shares for Old Shares that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of a properly completed and duly executed Letter
of Transmittal and all other required documents; provided, however, that the
Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Old Shares. If any tendered
Old Shares are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Shares are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Shares or substitute Old Shares evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering holder, unless
otherwise provided in the Letter of Transmittal, as promptly as practicable
after the expiration or termination of the Exchange Offer.
DIVIDENDS ON THE NEW SHARES. Holders of Old Shares that are accepted for
exchange will not receive accrued dividends thereon at the time of exchange.
However, accrued but unpaid dividends on exchanged Old Shares (rounded to the
nearest whole share) will be paid in New Shares on the first dividend payment
date following consummation of the Exchange Offer.
36
<PAGE>
PROCEDURES FOR TENDERING OLD SHARES. The tender to the Company of Old
Shares by a holder thereof pursuant to one of the procedures set forth below
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. A holder of the Old Shares may tender such Old Shares by (i)
properly completing and signing a Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Shares being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below), or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Shares are registered in the name of the signer of the
Letter of Transmittal and the New Shares to be issued in exchange therefor are
to be issued (and any untendered Old Shares are to be reissued) in the name of
the registered holder (which term, for the purposes described herein, shall
include any participant in DTC (also referred to as a book-entry facility) whose
name appears on a security listing as the owner of Old Shares), the signature of
such signer need not be guaranteed. In any other case, the tendered Old Shares
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Company and duly executed by the registered holder and the
signature on the endorsement or instrument of transfer must be guaranteed by an
eligible guarantor institution which is a member of one of the following
recognized signature guarantee programs (an "Eligible Institution"): (i) The
Securities Transfer Agents Medallion Program (STAMP), (ii) The New York Stock
Exchange Medallion Signature Program (MSF), or (iii) The Stock Exchange
Medallion Program (SEMP). If the New Shares or Old Shares not exchanged are to
be delivered to an address other than that of the registered holder appearing on
the note register for the Old Shares, the signature in the Letter of Transmittal
must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD SHARES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD SHARES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Shares. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences, that DTC establish an account
with respect to the Old Shares for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Shares by causing
DTC to transfer such Old Shares into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Shares
so tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Old Shares which are the
subject of such Book-Entry Confirmation and that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
37
<PAGE>
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Shares (or a confirmation of book-entry transfer of such
Old Shares into the Exchange Agent's account at DTC), is received by the
Exchange Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or
facsimile transmission to similar effect (as provided below) from an Eligible
Institution is received by the Exchange Agent. Issuances of New Shares in
exchange for Old Shares tendered pursuant to a Notice of Guaranteed Delivery or
letter, telegram or facsimile transmission to similar effect (as provided below)
by an Eligible Institution will be made only against submission of a duly signed
Letter of Transmittal (and any other required documents) and deposit of the
tendered Old Shares.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Shares will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Shares. None of the Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. Any Old Shares received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Shares are submitted in principal amount greater than the
principal amount of Old Shares being tendered by such tendering holder, such
unaccepted or non-exchanged Old Shares will be returned by the Exchange Agent to
the tendering holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (a) to
purchase or make offers for any Old Shares that remain outstanding subsequent to
the Expiration Date, and (b) to the extent permitted by applicable law, to
purchase Old Shares in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES. If the holder desires to accept the
Exchange Offer and time will not permit a Letter of Transmittal or Old Shares to
reach the Exchange Agent before the Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Exchange Agent has received at its office, on or prior to the
Expiration Date, a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Shares are registered and the certificate number(s) of
the Old Shares to be tendered, and stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days after
the date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, such Old Shares, in proper form for transfer (or a
confirmation of book-entry transfer of such Old Shares into the Exchange Agent's
account at DTC), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Shares being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly competed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
Exchange Agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
The party tendering Old Shares for exchange (the "Transferor") exchanges,
assigns and transfers the Old Shares to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Shares to be assigned, transferred and exchanged. The
Transferor represents and warrants that it has full power and authority to
tender, exchange, assign and
38
<PAGE>
transfer the Old Shares and to acquire New Shares issuable upon the exchange of
such tendered Old Shares, and that, when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Old Shares,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim. The Transferor also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Company to
be necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Shares or to transfer ownership of such Old Shares on the account
books maintained by DTC. All authority conferred by the Transferor will survive
the death, bankruptcy or incapacity of the Transferor and every obligation of
the Transferor shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and other
legal representatives of such Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above under the heading "--Purpose and Effect of
the Exchange Offer."
WITHDRAWAL OF TENDERS OF OLD SHARES. Except as otherwise provided herein,
tenders of Old Shares may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
To withdraw a tender of Old Shares in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Shares to be withdrawn (the "Depositor"),
(ii) identify the Old Shares to be withdrawn (including the certificate number
or numbers and principal amount of such Old Shares), (iii) contain a statement
that such holder is withdrawing its election to have such Old Shares exchanged,
(iv) be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Shares were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Shares register the
transfer of such Old Shares in the name of the person withdrawing the tender,
and (v) specify the name in which any such Old Shares are to be registered, if
different from that of the Depositor. If Old Shares have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at the book-entry transfer facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Shares so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Shares will be issued with respect thereto unless the Old Shares so withdrawn
are validly retendered. Any Old Shares which have been tendered but which are
not accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Shares may be
retendered by following one of the procedures described above under
"--Procedures for Tendering Old Shares" at any time prior to the Expiration
Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Shares for, any Old Shares, and may terminate the Exchange Offer as
provided herein before the acceptance of such Old Shares, if:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the reasonable judgment of the Company, would prohibit, restrict or
otherwise render illegal consummation of the Exchange Offer; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
39
<PAGE>
(c) there shall occur a change in the current interpretations by the
staff of the Commission which, in the Company's reasonable judgment, might
materially impair the Company's ability to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the above
conditions are not satisfied, the Company may (i) refuse to accept any Old
Shares and return all tendered Old Shares to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Shares tendered prior to the Expiration
Date, subject, however, to the right of holders to withdraw such Old Shares (see
"--Terms of the Exchange Offer--Withdrawal of Tenders of Old Shares"), or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and accept
all validly tendered Old Shares which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of time, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
P. O. Box 844 Corporate Trust Operations 111 Broadway
Cooper Station Department Lower Level
New York, NY 10276-0844 770 Broadway - 13th Floor New York, NY 10006
Attn: Corporate Trust New York, NY 10003 Attn: Corporate Trust
Services Services
(registered or certified mail
recommended)
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by Telephone:
(800) 548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Shares and
in handling or forwarding tenders for exchange.
40
<PAGE>
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and transfer agent and registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Shares pursuant to the Exchange Offer. If, however, New Shares, or
Old Shares for principal amounts not tendered or accepted for exchange, are to
be delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Shares tendered or if a transfer tax is imposed for
any reason other than the exchange of the Old Shares pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Shares that are not exchanged for New Shares pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Shares may be resold only (i) to
the Company or any subsidiary thereof, (ii) to a qualified institutional buyer
in compliance with Rule 144A, (iii) to an institutional accredited investor
that, prior to such transfer, furnishes to the Trustee a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of the Old Shares (the form of which letter can be obtained from the
Trustee) and, if such transfer is in respect of an aggregate principal amount of
Old Shares at the time of transfer of less than $100,000, an opinion of counsel
acceptable to the Company that such transfer is in compliance with the
Securities Act, (iv) outside the United States in compliance with Rule 904 under
the Securities Act, (v) pursuant to the exemption from registration provided by
Rule 144 under the Securities Act (if available), or (vi) pursuant to an
effective registration statement under the Securities Act. The liquidity of the
Old Shares could be adversely affected by the Exchange Offer. Following the
consummation of the Exchange Offer, holders of the Senior Preferred Stock will
have no further registration rights under the Registration Rights Agreement and
will not be entitled to the contingent increase in the dividend rate applicable
to the Old Shares.
FIRPTA TREATMENT
At present, the Company believes that it is not a U.S. real property holding
company within the meaning of Section 897(c)(2) of the Code, and that it does
not expect to become a U.S. real property holding company in the forseeable
future. No assurance can be given, however, that the IRS will not reach a
different conclusion or that the Company's expectation for the future will not
change. If the Company is found to be a U.S. real property holding company, then
a Non-United States Holder of Senior Preferred Stock may be subject to U.S.
federal income tax in respect of gain realized on the sale or other disposition
of the Senior Preferred Stock (including an exchange for Exchange Debentures or
a redemption) as if the gain represented income effectively connected with a
U.S. trade or business. A Non-United States Holder will not be subject to such
tax, however, if the Senior Preferred Stock is regularly traded on an
established securities market at the time of a sale or other disposition, and
the holder has not owned more than 5% of the Senior Preferred Stock at any time
during the five-year period (or shorter holding period for the Senior Preferred
Stock) ending on the sale or disposition date.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of dividends, interest, OID and premium and to the proceeds of sales of
Exchange Debentures and Senior Preferred Stock made to Non-United States
Holders, other than certain exempt recipients (such as corporations). In
addition, a backup withholding tax of 31% may apply to such payments unless the
Non-United States Holder provides appropriate certification of foreign status.
Under recently-finalized Treasury regulations, the certification
41
<PAGE>
requirements were modified in certain respects for payments made on or after
January 1, 1999. Prospective Non-United States Holders should consult their own
tax advisors regarding the application of the new Treasury regulations to an
investment in the Senior Preferred Stock and Exchange Debentures.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF SENIOR PREFERRED STOCK
AND EXCHANGE DEBENTURES IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX
SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES THAT WOULD RESULT FROM THEIR PURCHASE, OWNERSHIP AND DISPOSITION OF
THE SENIOR PREFERRED STOCK AND THE EXCHANGE DEBENTURES, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
42
<PAGE>
THE COMPANY
As a result of the Sygnet Acquisition, the Company's organization is as
follows:
[LOGO]
The Company's principal executive offices are located at Suite 200, 13439
North Broadway Extension, Oklahoma City, Oklahoma 73114, telephone (405)
391-8500.
43
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain historical consolidated financial
data of Dobson Communications Corporation as of and for each of the five years
ended December 31, 1997 and as of and for the nine months ended September 30,
1997 and 1998. The consolidated financial data as of and for each of the years
in the period 1993 to 1997 have been derived from the Company's consolidated
financial statements which have been audited by Arthur Andersen LLP. The
consolidated financial data as of and for the nine months ended September 30,
1997 and 1998 have been derived from the unaudited financial statements of the
Company which, in the opinion of management have been prepared on the same basis
as the Company's audited consolidated financial statements and include all
adjustments (which consist only of normal recurring adjustments) necessary for a
fair presentation of the information set forth therein. Operating results for
the nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the full year. Acquisitions made by the Company
during 1996, 1997 and 1998 materially affect the comparability of data from one
period to another. The data should be read in conjunction with "Use of
Proceeds," "Pro Forma Condensed Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and the related notes thereto included
elsewhere in this Prospectus.
44
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------------------- -----------
1993 1994 1995 1996(1) 1997(2) 1997(3)
--------- --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER SUBSCRIBER DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue.................................... $ 7,308 $ 10,922 $ 13,949 $ 17,593 $ 38,410 $ 26,487
Roaming revenue.................................... 1,109 3,231 4,370 7,852 26,262 17,782
Equipment sales.................................... 2,672 1,016 671 662 1,455 741
Other revenue...................................... 158 206 693 832 587 703
--------- --------- --------- ----------- --------- -----------
Total revenue...................................... 11,247 15,375 19,683 26,939 66,714 45,713
--------- --------- --------- ----------- --------- -----------
Operating expenses:
Cost of service.................................... 2,409 2,991 4,654 6,119 16,431 10,932
Cost of equipment.................................. 1,283 1,502 2,013 2,571 4,046 2,834
Marketing and selling.............................. 2,552 3,098 3,103 4,462 10,669 6,913
General and administrative......................... 2,852 3,193 3,035 3,902 11,555 8,137
Depreciation and amortization...................... 1,637 1,885 2,529 5,241 16,798 11,943
--------- --------- --------- ----------- --------- -----------
Total operating expenses........................... 10,733 12,669 15,334 22,295 59,499 40,759
--------- --------- --------- ----------- --------- -----------
Operating income..................................... 514 2,706 4,349 4,644 7,215 4,954
Interest expense..................................... (1,013) (1,195) (1,854) (4,284) (27,640) (17,646)
Other income (expense), net.......................... 198 106 (210) (1,503) 2,777 1,854
Minority interests in income of subsidiaries (5)..... (502) (1,105) (1,334) (675) (1,693) (1,315)
Income tax (provision) benefit....................... 310 (168) (347) 593 3,625 499
--------- --------- --------- ----------- --------- -----------
(Loss) income from continuing operations before
extraordinary items and cumulative effect of change
in accounting principle............................ (493) 344 604 (1,225) (15,716) (11,654)
Income (loss) from discontinued operations, net of
income taxes....................................... 1,266 (110) 500 331 332 1,652
Extraordinary items, net of income taxes (6)......... -- 228 -- (527) (1,350) (2,186)
Cumulative effect of change in accounting principle,
net of income taxes................................ (232) -- -- -- -- --
--------- --------- --------- ----------- --------- -----------
Net income (loss).................................... $ 541 $ 462 $ 1,104 $ (1,421) $ (16,734) $ (12,188)
Dividends on preferred stock......................... -- (83) (591) (849) (2,603) (727)
--------- --------- --------- ----------- --------- -----------
Net income (loss) applicable to common
stockholders....................................... $ 541 $ 379 $ 513 $ (2,270) $ (19,337) $ (12,915)
--------- --------- --------- ----------- --------- -----------
--------- --------- --------- ----------- --------- -----------
Net income (loss) applicable to common stockholders
per common share:
Before discontinued operations, extraordinary
expense and cumulative effect of change in
accounting principle............................. $ (1.05) $ .55 $ .02 $ (4.38) $ (38.72) $ (26.17)
Discontinued operations............................ 2.68 (.23) 1.06 .70 .70 3.49
Extraordinary income (expense)..................... -- .48 -- (1.12) (2.85) (4.62)
Cumulative effect of change in accounting
principle........................................ (.49) -- -- -- -- --
--------- --------- --------- ----------- --------- -----------
Net income (loss) applicable to common stockholders
per common share................................... $ 1.14 $ .80 $ 1.08 $ (4.80) $ (40.87) $ (27.30)
--------- --------- --------- ----------- --------- -----------
--------- --------- --------- ----------- --------- -----------
Cash dividends declared per common share............. $ -- $ .11 $ 1.40 $ 1.18 $ 16.13 $ 16.13
Weighted average common shares outstanding........... 473,152 473,152 473,152 473,152 473,152 473,152
--------- --------- --------- ----------- --------- -----------
--------- --------- --------- ----------- --------- -----------
OTHER FINANCIAL DATA:
Adjusted EBITDA (7)(8)............................... $ 2,151 $ 4,591 $ 6,878 $ 9,885 $ 24,013 $ 16,897
Ratio of earnings to combined fixed charges and
preferred
stock dividends (9)................................ 1.46x 1.25x 1.35x -- -- --
Capital expenditures, excluding cost of
acquisitions....................................... $ 7,353 $ 5,267 $ 3,925 $ 17,438 $ 23,216 $ 13,781
OTHER DATA:
Cellular subscribers (at period end)................. 15,283 21,481 26,614 33,955 100,093 85,185
Cellular penetration (at period end) (10)............ 4.6% 6.5% 8.0% 5.8% 6.1% 5.8%
Cellular churn (11).................................. 0.5% 0.9% 1.5% 1.8% 1.9% 2.2%
Average monthly revenue per cellular subscriber
(12)............................................... $ 53 $ 50 $ 50 $ 48 $ 41 $ 41
Marketing and selling costs per gross additional
cellular subscriber (13)........................... $ 392 $ 429 $ 451 $ 540 $ 398 $ 407
Cellular cell sites (at period end).................. 26 36 46 67 135 117
<CAPTION>
1998(4)
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue.................................... $ 47,769
Roaming revenue.................................... 45,916
Equipment sales.................................... 2,503
Other revenue...................................... 158
-----------
Total revenue...................................... 96,346
-----------
Operating expenses:
Cost of service.................................... 22,603
Cost of equipment.................................. 5,166
Marketing and selling.............................. 14,856
General and administrative......................... 16,219
Depreciation and amortization...................... 29,714
-----------
Total operating expenses........................... 88,558
-----------
Operating income..................................... 7,788
Interest expense..................................... (25,039)
Other income (expense), net.......................... 3,304
Minority interests in income of subsidiaries (5)..... (1,963)
Income tax (provision) benefit....................... 4,864
-----------
(Loss) income from continuing operations before
extraordinary items and cumulative effect of change
in accounting principle............................ (11,046)
Income (loss) from discontinued operations, net of
income taxes....................................... (17,185)
Extraordinary items, net of income taxes (6)......... (2,644)
Cumulative effect of change in accounting principle,
net of income taxes................................ --
-----------
Net income (loss).................................... $ (30,875)
Dividends on preferred stock......................... (16,749)
-----------
Net income (loss) applicable to common
stockholders....................................... $ (47,624)
-----------
-----------
Net income (loss) applicable to common stockholders
per common share:
Before discontinued operations, extraordinary
expense and cumulative effect of change in
accounting principle............................. $ (50.74)
Discontinued operations............................ (36.32)
Extraordinary income (expense)..................... (5.59)
Cumulative effect of change in accounting
principle........................................ --
-----------
Net income (loss) applicable to common stockholders
per common share................................... $ (100.65)
-----------
-----------
Cash dividends declared per common share............. --
Weighted average common shares outstanding........... 473,152
-----------
-----------
OTHER FINANCIAL DATA:
Adjusted EBITDA (7)(8)............................... $ 37,502
Ratio of earnings to combined fixed charges and
preferred
stock dividends (9)................................ --
Capital expenditures, excluding cost of
acquisitions....................................... $ 41,528
OTHER DATA:
Cellular subscribers (at period end)................. 163,020
Cellular penetration (at period end) (10)............ 5.8%
Cellular churn (11).................................. 1.9%
Average monthly revenue per cellular subscriber
(12)............................................... $ 40
Marketing and selling costs per gross additional
cellular subscriber (13)........................... $ 399
Cellular cell sites (at period end).................. 210
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
45
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,046 $ 607 $ 732 $ 981 $ 2,752 $ 5,041
Restricted cash................................. -- -- -- -- 17,561 18,508
Net fixed assets................................ 10,252 11,590 11,414 26,794 52,374 76,360
Total assets.................................... 29,592 33,111 37,711 95,376 359,645 701,041
Total debt...................................... 15,773 20,661 24,319 75,750 335,570 448,056
Mandatorily redeemable preferred stock.......... -- -- 5,913 10,000 11,623 197,136
Stockholders' equity (deficit).................. 5,536 28 (6,971) (9,802) (36,673) (84,296)
</TABLE>
- ------------------------------
(1) Includes the operations of Kansas/Missouri properties from March 19, 1996,
the date they were acquired by the Company.
(2) Includes the operations of West Maryland, East Maryland and Arizona 5 from
the dates they were acquired by the Company. West Maryland was acquired on
February 28, 1997, East Maryland on March 3, 1997 and Arizona 5 on October
1, 1997.
(3) Includes the operations of West Maryland and East Maryland from the dates
they were acquired by the Company. West Maryland was acquired on February
28, 1997 and East Maryland on March 3, 1997.
(4) Includes the operations of Texas 16, California 4 and Santa Cruz from the
dates they were acquired by the Company. Texas 16 was acquired on January
26, 1998, California 4 on April 1, 1998 and Santa Cruz on June 16, 1998.
(5) Reflects minority interests in partnerships in which the Company owns the
majority interests.
(6) Extraordinary items reflect gain or (loss) related to early extinguishment
of debt.
(7) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization, extraordinary items and changes in accounting
principles. Adjusted EBITDA is provided because it is a measure commonly
used in the telecommunications industry to determine a company's ability to
incur or service debt. Adjusted EBITDA is not derived pursuant to generally
accepted accounting principles and should not be construed as an
alternative to net income, as a measure of performance, or to cash flows,
as a measure of liquidity. The calculation of Adjusted EBITDA does not
include the Company's commitments for capital expenditures or payments of
debts and should not be deemed to represent funds available to the Company.
(8) Includes Adjusted EBITDA attributable to minority interests in subsidiaries
in which the Company owns a majority interest. The portion of Adjusted
EBITDA attributable to minority interests was $.9 million, $1.5 million,
$2.0 million, $2.3 million, $2.9 million, $2.0 million and $3.7 million for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and for the
nine months ended September 30, 1997 and 1998, respectively.
(9) Earnings were insufficient to cover combined fixed charges and preferred
stock dividends by $2.3 million for the year ended December 31, 1996, by
$21.6 million for the year ended December 31, 1997, by $11.2 million for
the nine months ended September 30, 1997 and by $49.8 million for the nine
months ended September 30, 1998. "Earnings" is defined as earnings from
continuing operations before extraordinary items and accounting changes,
interest expense, amortization of deferred financing costs, taxes and the
portion of rent expense under operating leases representative of interest.
Fixed charges consist of interest expense, amortization of deferred
financing costs and a portion of rent expense under operating leases
representative of interest.
(10) Determined by dividing the Company's total ending cellular subscribers for
the period by the estimated total Pops covered by applicable FCC cellular
licenses.
(11) Churn means the number of cellular subscriber cancellations per period as
a percentage of the weighted average total cellular subscribers during
such period. Churn is stated as the average monthly churn rate for the
period.
(12) Excludes roaming and equipment revenue.
(13) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during each period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales.
46
<PAGE>
The following table sets forth certain historical consolidated financial
data for Sygnet with respect to each of the five years in the period ended
December 31, 1997 and for the nine months ended September 30, 1997 and 1998. The
selected historical consolidated financial data as of and for each of the years
in the period 1993 to 1997 have been derived from Sygnet's audited consolidated
financial statements. The selected historical consolidated financial data as of
and for the nine months ended September 30, 1997 and 1998 have been derived from
Sygnet's unaudited consolidated financial statements. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as Sygnet's audited consolidated financial statements and
include all adjustments, which consist only of normal recurring adjustments,
necessary for a fair presentation of the information set forth therein.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the full year. The
information as set forth below should be read in conjunction with "Use of
Proceeds," "Pro Forma Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes thereto included elsewhere in this
Prospectus.
47
<PAGE>
SYGNET WIRELESS, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- --------------------
1993 1994 1995(1) 1996(2) 1997 1997 1998
--------- --------- ----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Subscriber revenue.............................. $ 8,878 $ 11,312 $ 17,191 $ 31,085 $ 52,639 $ 38,531 $ 46,738
Roamer revenue.................................. 3,107 4,145 4,176 9,687 26,993 19,868 24,753
Equipment sales................................. 1,098 1,172 1,529 2,417 4,323 3,051 4,253
Other revenue................................... 1,391 1,420 1,681 1,607 1,679 1,308 1,190
--------- --------- ----------- --------- --------- --------- ---------
Total revenue................................... 14,474 18,048 24,577 44,796 85,634 62,758 76,934
--------- --------- ----------- --------- --------- --------- ---------
Costs and expenses:
Cost of services................................ 2,515 3,452 3,366 5,509 10,048 7,175 9,005
Cost of equipment sales......................... 930 1,624 4,164 5,816 9,663 6,806 7,790
General and administrative...................... 4,412 4,467 5,564 9,852 16,976 11,667 14,665
Selling and marketing........................... 2,166 2,555 3,082 6,080 10,841 7,466 9,057
Depreciation and amortization................... 1,951 2,639 3,487 10,038 28,719 21,143 21,343
--------- --------- ----------- --------- --------- --------- ---------
Total costs and expenses........................ 11,974 14,737 19,663 37,295 76,247 54,257 61,860
--------- --------- ----------- --------- --------- --------- ---------
Operating income.................................. 2,500 3,311 4,914 7,501 9,387 8,501 15,074
Interest expense.................................. (702) (988) (2,660) (11,174) (29,902) (22,558) (21,613)
Other income (expense), net....................... (275) (601) (304) (195) (101) 6 (340)
--------- --------- ----------- --------- --------- --------- ---------
Income (loss) before extraordinary item........... 1,523 1,722 1,950 (3,868) (20,616) (14,051) (6,879)
Extraordinary loss on extinguishment of debt...... -- -- -- (1,420) -- -- --
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss)................................. $ 1,523 $ 1,722 $ 1,950 $ (5,288) $ (20,616) $ (14,051) $ (6,879)
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Dividends on preferred stock...................... -- -- -- (718) (2,122) (2,122) --
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) applicable to common
stockholders.................................... $ 1,523 $ 1,722 $ 1,950 $ (6,006) $ (22,738) $ (16,173) $ (6,879)
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) per share applicable to common
stockholders: (3)
Before extraordinary item......................... $ (.74) $ (2.93) $ (2.21) $ (.75)
Extraordinary item................................ (.23) -- -- --
--------- --------- --------- ---------
Net Income (loss)................................. (.97) $ (2.93) $ (2.21) $ (.75)
--------- --------- --------- ---------
--------- --------- --------- ---------
OTHER FINANCIAL DATA:
Adjusted EBITDA (4)............................... $ 4,451 $ 5,950 $ 8,401 $ 17,539 $ 38,106 $ 29,644 $ 36,417
Ratio of earnings to combined fixed charges and
preferred stock dividends (5)................... 3.11x 2.60x 1.67x -- -- -- --
Capital expenditures, excluding cost of
acquisitions.................................... $ 3,630 $ 5,793 $ 9,056 $ 10,050 $ 25,576 $ 16,979 $ 11,469
OTHER DATA:
Cellular subscribers (at period end).............. 18,037 24,124 44,665 106,574 142,934 130,146 166,886
Cellular penetration (at period end) (6).......... 2.5% 3.3% 4.4% 4.5% 6.0% 5.5% 7.0%
Cellular churn (7)................................ 1.3% 1.5% 1.4% 1.3% 1.3% 1.3% 1.5%
Average monthly revenue per cellular subscriber
(8)............................................. $ 50 $ 45 $ 46 $ 42 $ 36 $ 36 $ 34
Marketing and selling costs per gross additional
cellular subscriber (9)......................... $ 391 $ 393 $ 370 $ 321 $ 291 $ 306 $ 287
Cellular cell sites (at period end)............... 18 24 41 114 163 152 181
</TABLE>
(SEE FOOTNOTES ON FOLLOWING PAGE.)
48
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net..................... $ 11,127 $ 14,084 $ 21,049 $ 43,959 $ 53,007 $ 52,138
Total assets.................................... 20,553 27,418 79,618 344,178 340,986 333,296
Long-term debt.................................. 10,928 18,264 69,500 312,250 305,500 302,644
Preferred stock................................. -- -- -- 19,718 -- --
Stockholders' equity (deficit).................. 5,329 4,769 4,286 (1,982) 19,218 12,339
</TABLE>
- ------------------------------
(1) Includes the operations of the system acquired in the Erie Acquisition (as
defined herein) from September 30, 1995, the date of acquisition.
(2) Includes the operations of the systems acquired in the Horizon Acquisition
(as defined herein) from October 9, 1996, the date of acquisition.
(3) Net income (loss) per share applicable to common stockholders for the three
years ended December 31, 1995 is not provided because there is no meaningful
data for those periods.
(4) Adjusted EBITDA is provided because it is a measure commonly used in the
telecommunications industry to determine a company's ability to incur or
service debt. Adjusted EBITDA is not derived according to generally accepted
accounting principles and should not be considered as an alternative to net
income, as a measure of performance, or to cash flows, as a measure of
liquidity. The calculation of Adjusted EBITDA does not include the Company's
commitments for capital expenditures or payments of debts and should not be
deemed to represent funds available to the Company.
(5) Earnings were insufficient to cover combined fixed charges and preferred
stock dividends by $4.6 million for the year ended December 31, 1996, by
$22.7 million for the year ended December 31, 1997, by $16.2 million for the
nine months ended September 30, 1997 and by $6.6 million for the nine months
ended September 30, 1998. "Earnings" is defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense under
operating leases representative of interest. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rent expense under operating leases representative of interest.
(6) Determined by dividing Sygnet's total ending cellular subscribers for the
period by the estimated total Pops covered by applicable FCC cellular
licenses or authorizations held by Sygnet.
(7) Churn means the number of cellular subscriber cancellations per period as a
percentage of the weighted average total cellular subscribers during such
period. Churn is stated as the average monthly churn rate for the period.
(8) Excludes roaming and equipment revenue.
(9) Determined by dividing cellular marketing and selling costs by the gross
cellular subscribers added during such period. Cellular marketing and
selling costs represent selling expenses and losses incurred on equipment
sales and equipment rentals.
49
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The accompanying unaudited pro forma condensed consolidated statements of
operations of the Company for the nine months ended September 30, 1998 give
effect to the 1998 Transactions (including the Sygnet Acquisition and the Sygnet
Financing) as if they occurred on January 1, 1997. The accompanying unaudited
pro forma condensed consolidated statement of operations of the Company for the
year ended December 31, 1997 gives effect to the Transactions (including the
Sygnet Acquisition and the Sygnet Financing) as if they occurred on January 1,
1997. The accompanying unaudited pro forma condensed consolidated balance sheet
as of September 30, 1998 has been prepared to give effect to the Sygnet
Acquisition and the Sygnet Financing as if they occurred as of that date. The
1997 Acquisitions, the 1998 Acquisition and the Sygnet Acquisition have been
accounted for using the purchase method of accounting.
The unaudited pro forma condensed consolidated financial statements have
been prepared on the basis of certain assumptions that the Company believes are
reasonable, including assumptions relating to the allocation of the
consideration paid for the assets and liabilities acquired in the Sygnet
Acquisition, based on estimates of fair values using available information
provided by the management of Sygnet.
The unaudited pro forma condensed consolidated financial statements and
notes thereto are provided for informational purposes only and do not purport to
be indicative of the results that would have actually been obtained had the
Sygnet Acquisition, the Sygnet Financing and the other Transactions been
completed on the dates indicated or that may be expected to occur in the future.
The unaudited pro forma condensed consolidated financial statements and notes
thereto should be read in conjunction with "Selected Consolidated Financial and
Other Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Markets and Systems" and the historical
financial statements and notes thereto included elsewhere in this Prospectus.
50
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------
DOBSON
COMMUNICATIONS
CORPORATION CALIFORNIA 4(1) SYGNET
--------------- --------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND
PER SUBSCRIBER DATA)
<S> <C> <C> <C>
OPERATING REVENUE:
Service revenue.............................................................. $ 47,769 $ 2,399 $ 46,738
Roaming revenue.............................................................. 45,916 2,336 24,753
Equipment sales.............................................................. 2,503 274 4,253
Other........................................................................ 158 74 1,190
--------------- ------ ---------
Total operating revenue...................................................... 96,346 5,083 76,934
--------------- ------ ---------
OPERATING EXPENSES:
Cost of services............................................................. 22,603 1,451 9,005
Cost of equipment............................................................ 5,167 433 7,790
Marketing and selling........................................................ 14,856 235 9,057
General and administrative................................................... 16,219 978 14,665
Depreciation and amortization................................................ 29,714 593 21,343
--------------- ------ ---------
Total operating expenses..................................................... 88,559 3,690 61,860
--------------- ------ ---------
Operating income (loss)........................................................ 7,787 1,393 15,074
Interest expense............................................................. (25,039) (240) (21,613)
Other income (expense), net.................................................. 3,304 98 (340)
--------------- ------ ---------
(Loss) income before minority interests and income taxes....................... (13,948) 1,251 (6,879)
Minority interests in income of subsidiaries................................... (1,963) -- --
--------------- ------ ---------
(Loss) income before income taxes.............................................. (15,911) 1,251 (6,879)
Income tax benefit............................................................. 4,864 -- --
--------------- ------ ---------
(Loss) income from continuing operations....................................... (11,047) 1,251 (6,879)
--------------- ------ ---------
Dividends on preferred stock................................................... (16,749)
---------------
Net loss from continuing operations applicable to common stockholders.......... (27,796)
---------------
Weighted average shares outstanding............................................ 473,152
---------------
Net loss from continuing operations applicable to common stockholders per
share........................................................................ (58.75)
---------------
<CAPTION>
PRO FORMA
ADJUSTMENTS TOTALS
----------- ---------
<S> <C> <C>
OPERATING REVENUE:
Service revenue.............................................................. $ 2,138(2) $ 99,044
Roaming revenue.............................................................. (4,036)(2) 68,969
Equipment sales.............................................................. -- 7,030
Other........................................................................ -- 1,422
----------- ---------
Total operating revenue...................................................... (1,898) 176,465
----------- ---------
OPERATING EXPENSES:
Cost of services............................................................. (1,246)(2) 31,813
Cost of equipment............................................................ -- 13,390
Marketing and selling........................................................ 1,946(2) 26,094
General and administrative................................................... (2,598)(2) 29,264
Depreciation and amortization................................................ 37,967(3) 89,617
----------- ---------
Total operating expenses..................................................... 36,070 190,179
----------- ---------
Operating income (loss)........................................................ (37,968) (13,714)
Interest expense............................................................. (25,657) (5) (72,549)
Other income (expense), net.................................................. -- 3,061
----------- ---------
(Loss) income before minority interests and income taxes....................... (63,625) (83,202)
Minority interests in income of subsidiaries................................... -- (1,963)
----------- ---------
(Loss) income before income taxes.............................................. (63,625) (85,165)
Income tax benefit............................................................. 27,498(6) 32,362
----------- ---------
(Loss) income from continuing operations....................................... (36,127) (52,803)
----------- ---------
Dividends on preferred stock................................................... (27,356) (8) (44,105)
----------- ---------
Net loss from continuing operations applicable to common stockholders.......... (96,908)
---------
Weighted average shares outstanding............................................ 492,174
---------
Net loss from continuing operations applicable to common stockholders per
share........................................................................ (196.90)
---------
</TABLE>
See accompanying notes to the unaudited pro forma consolidated condensed
financial statements.
51
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(1) To reflect the results of operations for California 4 for the three month
period in 1998 during which the property was not owned by the Company.
(2) To reclassify certain operating revenues and expenses to conform with the
Company's historical presentation.
(3) To reflect the additional depreciation and amortization resulting from the
allocation of purchase price to property and equipment, cellular license
acquisition costs and intangible assets. Property and equipment is being
depreciated over two to ten years, cellular license acquisition costs over
15 years and intangible assets over five to ten years. The 15 year period
used for cellular license acquisition costs is based primarily on the
Company's internal analysis of the recovery period for its cellular
investments, which indicates that such costs will be recovered through
operations over a period of not more than 15 years. Other factors considered
include the competitive nature of the cellular industry, the rate of
technological change and risk of obsolescence, and the specific terms and
characteristics of the licenses. See "Risk Factors--Competition" and
"--Rapid Technological Changes."
(4) To reflect (i) the $.7 million of interest expense relating to the $28.4
million of indebtedness incurred under the DCOC Facility in connection with
the California 4 Acquisition (assuming an interest rate of 9.0% per annum)
and (ii) the elimination of $.3 million of interest expense associated with
the indebtedness of California 4 which was not assumed by the Company.
(5) To reflect (i) the elimination of $21.6 million of interest expense
associated with the Sygnet Notes and Sygnet's existing bank facility which
will be repaid by the Company as part of the Sygnet Acquisition, (ii) $18.4
million of interest expense relating to the $200.0 million of the
Dobson/Sygnet Notes, (iii) $25.0 million of interest expense relating to the
borrowings under the New Credit Facilities (assuming a weighted average rate
of 8.38%), (iv) $.1 million of interest expense relating to the unused
principal amounts of the New Credit Facilities (assuming a commitment fee of
.5%), (v) $.6 million of amortization of deferred financing costs relating
to the estimated $8.2 million of debt issuance costs incurred in connection
with the offering of the Dobson/Sygnet Notes, (vi) $1.1 million of
amortization of deferred financing costs relating to the estimated $12.6
million of debt issuance costs incurred in connection with the New Credit
Facilities, (vii) $1.1 million of interest relating to the $17.5 million of
borrowings under the Dobson Tower Facility, (viii) the elimination of $.3
million of interest related to the $25.0 million borrowed under the DOC
Facility to pay the initial deposit for the Sygnet Acquisition and (ix) $1.1
million of interest expense related to the $16.2 million of borrowings under
existing credit facilities.
(6) To reflect an adjustment to income tax expense for the effects of the 1998
Transactions, assuming a 38% effective tax rate.
(7) To reflect dividends on the Senior Preferred Stock, including, the
amortization of the issuance costs with respect thereto.
(8) To reflect dividends on the Preferred Stock, including the amortization of
the issuance costs and discount with respect thereto and to reflect the
dividends on the Class D, Class F and Class G Preferred Stock, assuming
dividend rates of 15%, 16% and 16%, respectively, and does not reflect
dividends on the preferred stock to be issued by Dobson Tower or any
amortization of discount on the Class F Preferred Stock resulting from any
value that may be attributed to the warrants granted to the purchasers of
the Class F Preferred Stock.
52
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DOBSON
COMMUNICATIONS WEST
CORPORATION MARYLAND(1) ARIZONA 5(1)
--------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND
PER SUBSCRIBER DATA)
OPERATING REVENUE:
Service revenue.................................................................... $ 38,410 $ 1,464 $ 1,907
Roaming revenue.................................................................... 26,262 908 5,261
Equipment sales.................................................................... 1,455 54 383
Other.............................................................................. 587 -- 86
--------------- ------ ------
Total operating revenue............................................................ 66,714 2,426 7,637
--------------- ------ ------
OPERATING EXPENSES:
Cost of services................................................................... 16,431 492 1,304
Cost of equipment.................................................................. 4,045 -- --
Marketing and selling.............................................................. 10,669 357 627
General and administrative......................................................... 11,555 740 965
Depreciation and amortization...................................................... 16,798 405 904
--------------- ------ ------
Total operating expenses........................................................... 59,498 1,994 3,800
--------------- ------ ------
Operating income................................................................... 7,216 432 3,837
Interest expense................................................................... (27,640) -- --
Other income (expense), net........................................................ 2,777 126 150
--------------- ------ ------
(Loss) income before minority interests and income taxes........................... (17,647) 558 3,987
Minority interests in income of subsidiaries....................................... (1,693) -- --
--------------- ------ ------
(Loss) income before income taxes.................................................. (19,340) 558 3,987
Income tax (provision) benefit..................................................... 3,625 -- --
--------------- ------ ------
(Loss) income from continuing operations........................................... (15,715) 558 3,987
--------------- ------ ------
Dividends on preferred stock....................................................... (2,603)
---------------
Net loss from continuing operations applicable to common stockholders.............. (18,318)
---------------
Weighted average shares outstanding................................................ 473,152
---------------
Net loss from continuing operations applicable to common stockholders per share.... $ (38.71)
---------------
<CAPTION>
CALIFORNIA PRO FORMA
4 SYGNET ADJUSTMENTS
----------- --------- --------------
<S> <C>
OPERATING REVENUE:
Service revenue.................................................................... $ 8,540 $ 52,639 2,515(2)
Roaming revenue.................................................................... 10,654 26,993 (3,615)(2)
Equipment sales.................................................................... 351 4,323
Other.............................................................................. 176 1,679
----------- --------- --------------
Total operating revenue............................................................ 19,721 85,634 (1,100)
----------- --------- --------------
OPERATING EXPENSES:
Cost of services................................................................... 5,914 10,048 (501)(2)
Cost of equipment.................................................................. 1,155 9,663 --
Marketing and selling.............................................................. 1,105 10,841 1,205(2)
General and administrative......................................................... 2,698 16,976 (1,805)(2)
Depreciation and amortization...................................................... 2,011 28,719 58,096(3)
----------- --------- --------------
Total operating expenses........................................................... 12,883 76,247 56,995
----------- --------- --------------
Operating income................................................................... 6,838 9,387 (58,095)
Interest expense................................................................... (831) (29,902) (29,719)(4)(5)
Other income (expense), net........................................................ (19) (101) --
----------- --------- --------------
(Loss) income before minority interests and income taxes........................... 5,988 (20,616) (87,814)
Minority interests in income of subsidiaries....................................... -- -- 162(6)
----------- --------- --------------
(Loss) income before income taxes.................................................. 5,988 (20,616) (87,652)
Income tax (provision) benefit..................................................... -- -- 40,865(7)
----------- --------- --------------
(Loss) income from continuing operations........................................... 5,988 (20,616) (46,787)
----------- --------- --------------
Dividends on preferred stock....................................................... (52,321)(8)(9)
--------------
Net loss from continuing operations applicable to common stockholders..............
Weighted average shares outstanding................................................
Net loss from continuing operations applicable to common stockholders per share....
<CAPTION>
TOTALS
---------
OPERATING REVENUE:
Service revenue.................................................................... $ 105,475
Roaming revenue.................................................................... 66,463
Equipment sales.................................................................... 6,566
Other.............................................................................. 2,528
---------
Total operating revenue............................................................ 181,032
---------
OPERATING EXPENSES:
Cost of services................................................................... 33,688
Cost of equipment.................................................................. 14,863
Marketing and selling.............................................................. 24,804
General and administrative......................................................... 31,129
Depreciation and amortization...................................................... 106,933
---------
Total operating expenses........................................................... 211,417
---------
Operating income................................................................... (30,385)
Interest expense................................................................... (88,092)
Other income (expense), net........................................................ 2,933
---------
(Loss) income before minority interests and income taxes........................... (115,544)
Minority interests in income of subsidiaries....................................... (1,531)
---------
(Loss) income before income taxes.................................................. (117,075)
Income tax (provision) benefit..................................................... 44,490
---------
(Loss) income from continuing operations........................................... (72,585)
---------
Dividends on preferred stock....................................................... (54,924)
---------
Net loss from continuing operations applicable to common stockholders.............. (127,509)
---------
Weighted average shares outstanding................................................ 492,174
---------
Net loss from continuing operations applicable to common stockholders per share.... $ (259.07)
---------
</TABLE>
See accompanying notes to the unaudited pro forma consolidated condensed
financial statements.
53
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(1) To reflect the results of operations for the West Maryland properties for
the two month period and Arizona 5 RSA for the nine month period in 1997
during which the properties were not owned by the Company.
(2) To reclassify certain operating revenues and expenses to conform with the
Company's historical presentation.
(3) To reflect the additional depreciation and amortization resulting from the
allocation of purchase price to property and equipment, cellular license
acquisition costs and intangible assets. Property and equipment is being
depreciated over two to ten years, cellular license acquisition costs over
15 years and intangible assets over five to ten years. The 15 year period
used for cellular license acquisition costs is based primarily on the
Company's internal analysis of the recovery period for its cellular
investments, which indicates that such costs will be recovered through
operations over a period of not more than 15 years. Other factors considered
include the competitive nature of the cellular industry, the rate of
technological change and risk of obsolescence, and the specific terms and
characteristics of the licenses. See "Risk Factors--Competition" and
"--Rapid Technological Changes."
(4) To reflect (i) $4.4 million of interest expense relating to the Senior Notes
and indebtedness incurred under the then existing bank facility in
connection with the 1997 Acquisitions, (ii) $.1 million of amortization of
deferred financing costs relating to the Senior Notes, (iii) $.1 million of
amortization of deferred financing costs relating to the then existing bank
facility, (iv) the elimination of $15.8 million of interest expense
(including $.4 million of amortization of deferred financing cost)
associated with the then existing bank facility which was repaid with a
portion of the proceeds from the sale of the Senior Preferred Stock and
borrowings under the DCOC Facility, (v) the elimination of $.8 million of
interest expense associated with the indebtedness of California 4 which was
not assumed by the Company, (vi) $2.6 million of interest expense relating
to the $28.4 million of incurred under the DCOC Facility in connection with
the California 4 Acquisition (assuming an interest rate of 9.0% per annum),
(vii) $5.8 million of interest expense relating to indebtedness incurred
under the DOC Facility (assuming an interest rate of 9.0% per annum) and
(viii) $.4 million of amortization of deferred financing costs relating to
the Existing Credit Facilities.
(5) To reflect (i) the elimination of $29.9 million of interest expense
associated with the Sygnet Notes and indebtedness under Sygnet's existing
bank facility which will be repaid by the Company as part of the Sygnet
Acquisition, (ii) $24.5 million of interest expense relating to the $200.0
million aggregate principal amount of the Dobson/Sygnet Notes, (iii) $33.4
million of interest expense relating to borrowings under the New Credit
Facilities (assuming a weighted average interest rate of 8.38%), (iv) $.2
million of interest expense relating to the unused principal amount of the
New Credit Facilities (assuming a commitment fee of .5%), (v) $.8 million of
amortization of deferred financing costs relating to the estimated $8.2
million of debt issuance costs incurred in connection with the offering of
the Dobson/Sygnet Notes, (vi) $1.5 million of amortization of deferred
financing costs relating to the estimated $12.6 million of debt issuance
costs incurred in connection with the New Credit Facilities, (vii) $1.4
million of interest related to the $17.5 million of borrowings under the
Dobson Tower Facility and (viii) $.8 million of interest expense related to
the $16.2 million of borrowings under existing credit facilities.
(6) To reflect the pro forma loss of the 25% equity interest in the Arizona 5
Partnership not owned by the Company.
54
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(7) To reflect an adjustment to income tax expense for the effects of the 1997
Acquisitions and the 1998 Transactions, assuming a 38% effective tax rate.
(8) To reflect dividends on the Senior Preferred Stock, including the
amortization of the issuance costs with respect thereto.
(9) To reflect dividends on the Preferred Stock, including the amortization of
the issuance costs and discount with respect thereto and to reflect the
dividends on the Class D, Class F and Class G Preferred Stock, assuming
dividend rates of 15%, 16% and 16%, respectively, and does not reflect
dividends on the preferred stock to be issued by Dobson Tower or any
amortization of discount on the Class F Preferred Stock resulting from any
value that may be attributed to the warrants granted to the purchasers of
the Class F Preferred Stock.
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
DOBSON SYGNET ADJUSTMENTS TOTALS
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Current assets, net of restricted investments........... $ 42,313 $ 16,443 $ -- $ 58,756
Restricted investments.................................. 18,508 -- 67,661(1) 86,169
Property, plant and equipment........................... 76,360 52,138 (836)(2) 127,662
Receivables--affiliate.................................. 9,168 -- -- 9,168
Cellular license acquisition cost....................... 459,732 241,062 543,265(2) 1,244,059
Deposits................................................ 67,300 -- (25,000)(2) 42,300
Intangible assets....................................... 17,686 23,653 35,647 )(3 76,986
Other assets............................................ 9,974 -- -- 9,974
---------- ---------- ----------- ------------
Total assets........................................ $ 701,041 $ 333,296 $ 620,737 $ 1,655,074
---------- ---------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................................... $ 49,925 $ 18,313 $ (2,510)(7) $ 65,728
Net liabilities from discontinued operations............ 629 -- -- 629
Long-term debt.......................................... 448,056 302,644 304,311(4) 1,054,911
Deferred credits........................................ 66,642 -- 189,264(2) 255,906
Minority interests...................................... 22,949 -- 7,500(5) 30,449
Preferred stock......................................... 197,136 -- 178,377(6) 375,513
Stockholders' equity/net assets......................... (84,296) 12,339 (56,205)(7) (128,162)
---------- ---------- ----------- ------------
Total liabilities and stockholders' equity.......... $ 701,041 $ 333,296 $ 620,737 $ 1,655,074
---------- ---------- ----------- ------------
</TABLE>
- ------------------------
(1) To reflect the estimated $67.7 in restricted cash to be held in a pledged
account to secure payment of the first six scheduled interest payments on
the Dobson/Sygnet Notes.
(2) To allocate the purchase price of the Sygnet Acquisition, including the
related deferred tax liability to the assets acquired. The purchase price
excludes the $6.0 million to be paid for the Pennsylvania 2 Acquisition.
(3) To reflect an estimated $22.8 million of offering costs incurred with the
Dobson/Sygnet Notes, the Preferred Stock and the New Credit Facilities.
(4) To reflect (i) the elimination of $302.6 million of indebtedness associated
with Sygnet that will be repaid by the Company as part of the Sygnet
Acquisition (included in this amount is $110.0 million of Sygnet Notes which
the Company estimates will be repurchased for $136.1 million using
borrowings under the New Credit Facilities), (ii) the incurrence of $398.3
million of indebtedness under the New Credit Facilities, (iii) the issuance
of $200.0 million aggregate principal amount of the Dobson/ Sygnet Notes,
(iv) the repayment of the $25.0 million borrowed to pay the deposit for the
Sygnet Acquisition, (v) the incurrence of $17.5 million of indebtedness
under the Tower Credit Facility and (vi) the incurrence of $16.2 million of
indebtedness under the Existing Credit Facilities.
(5) To reflect the $7.5 million preferred stock issued by Dobson Tower to an
affiliate of the Company.
(6) To reflect the issuance of the Preferred Stock in the Offering, an
additional $115.0 million of other preferred stock to be issued as part of
the Sygnet Financing and $25.0 million of Class G Preferred Stock and does
not reflect any amortization of discount on the Class F Preferred Stock
resulting from any value that may be attributed to the warrants granted to
the purchasers of the Class F Preferred Stock.
(7) To reflect the elimination of stockholders' equity of Sygnet, the conversion
of Class B Preferred Stock to Class A Common Stock and the stock
repurchases.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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 September 30, 1998, the Company's cellular systems
covered 2.8 million Pops in Arizona, California, Kansas, Maryland, Missouri,
Oklahoma, Pennsylvania and Texas. On December 23, 1998 the Company acquired
Sygnet for $337.5 million in cash. The Company recently entered into an
agreement to acquire the FCC license for, and certain assets related to,
Maryland 1 RSA for $9.1 million in cash, subject to adjustment.
Sygnet owns and operates cellular telephone systems serving a large cluster
of properties with approximately 2.4 million Pops and 166,886 subscribers
located in northeastern Ohio, western Pennsylvania and western New York.
Sygnet's cellular systems are located in Youngstown, Ohio and Erie,
Pennsylvania, and in primarily rural and suburban areas between the Cleveland,
Akron-Canton, Pittsburgh, Buffalo and Rochester metropolitan areas.
The following discussion and analysis is of the historical financial
condition and results of operation of the Company and Sygnet and should be read
in conjunction with the Company's and Sygnet's consolidated financial statements
and the notes thereto appearing elsewhere in this Prospectus.
ACQUISITIONS
The Company continually evaluates opportunities to acquire additional
wireless systems. The following table sets forth the cellular markets and
systems acquired and to be acquired by the Company since 1995 (ownership in
parentheses if not 100% owned by the Company):
<TABLE>
<CAPTION>
PURCHASE PRICE
(DOLLARS IN
ACQUISITION MILLIONS) DATE
- ----------------------------------------------------- ------------------- ------------------
<S> <C> <C>
Sygnet............................................... $ 337.5 December 1998
Maryland 1........................................... 9.1 Pending
Texas 10 (1)......................................... 55.0 December 1998
Ohio 2 (2)........................................... 39.3 September 1998
California 7......................................... 21.0 July 1998
Santa Cruz (86.9%)................................... 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>
- ------------------------------
(1) On December 2, 1998, the Company acquired the FCC cellular license for Texas
10 for $55.0 million in cash, subject to resolution of certain title matters
regarding the FCC license. In conjunction with its acquisition of Texas 10,
the Company is negotiating with AT&T Wireless for the purchase of
subscribers and to lease certain equipment necessary to operate Texas 10.
(2) On September 2, 1998, the Company acquired the FCC cellular license for Ohio
2 for $39.3 million in cash, subject to resolution of certain title matters
regarding the FCC license. In conjunction with its acquisition of Ohio 2,
the Company is negotiating with AirTouch for the purchase of subscribers and
to lease certain equipment necessary to operate Ohio 2.
57
<PAGE>
REVENUE
The cellular revenues of the Company and Sygnet 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.
Although the Company has experienced a decline in average revenue per
subscriber, the Company has introduced new services, such as voice mail and call
forwarding. In addition, Sygnet has introduced new pricing plans which have
increased revenue and encouraged additional usage to a limited extent.
Roaming accounted for 39.4% and 47.7% of the Company's cellular revenue and
31.5% and 32.2% of Sygnet's revenues for the year ended December 31, 1997 and
the nine months ended September 30, 1998. On a pro forma basis after giving
effect to the Sygnet Acquisition, for the year ended December 31, 1997 and for
the nine months ended September 30, 1998 roaming would have accounted for 36.7%
and 39.1%, respectively, of the Company's revenue from its cellular operations.
While the industry trend is to reduce roaming rates, the Company believes that
its roaming rates and those of Sygnet are generally lower than rates offered by
others in or near the Company's or Sygnet'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
(roamer service revenue, which includes airtime, toll charges and surcharges,
divided by roaming minutes of use) was $.70, $.75, $.70 and $.72 per minute
(excludes Arizona 5 for 1997, for which the roaming minutes of use were not
available) for the years ended December 31, 1995, 1996 and 1997 and for the nine
months ended September 30, 1998, respectively. Sygnet's roaming yield for the
same periods was $.57, $.55, $.58 and $.57, respectively.
Included in the Sygnet roaming revenue for the years ended December 31,
1995, 1996 and 1997 and for the nine months ended September 30, 1997 and
September 30, 1998, respectively, was $.1 million, $.9 million, $3.6 million,
$2.5 million and $4.0 million attributable to Sygnet customers roaming out of
their home areas but in other Sygnet markets.
The Company's overall cellular penetration rates decreased in 1996 and 1997
compared to 1995 due to the 1996 acquisition of Kansas/Missouri and the 1997
acquisitions of the Maryland properties, which operations, when acquired, had
lower overall penetration rates than the Company's existing properties. However,
penetration rates increased in the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997 as a result of acquisitions and
incremental penetration gain in existing markets. Sygnet's overall cellular
penetration rates increased in 1997 compared to 1996 and in the nine months
ended September 30, 1998 compared to the nine months ended September 30, 1997 as
a result of internal growth. 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 wireless subscribers.
58
<PAGE>
COSTS AND EXPENSES
The Company's and Sygnet'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.
Sygnet's cost of service consists primarily of costs associated with
billing, amounts paid for interconnection and call delivery and amounts paid to
third-party cellular providers for providing service to Sygnet's subscribers
when roaming, offset by the amount billed to Sygnet's subscribers.
The Company's and Sygnet's cost of equipment represents the cost associated
with telephone equipment and accessories sold to customers. In recent years, the
Company and Sygnet, as well as other cellular companies, have increased the use
of discounts on phone equipment and free phone promotions, as competition
between service providers has intensified. As a result, the Company and Sygnet
have incurred, and the Company expects to continue to incur, losses on equipment
sales, which have affected marketing and selling costs per gross additional
cellular subscriber. While the Company expects to continue these discounts and
promotions, the Company believes that the use of such promotions will lead to
increased revenue from increases in the number of cellular subscribers.
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.
Sygnet's marketing and selling costs primarily consist of advertising costs
and compensation paid to sales personnel and independent agents and retail store
operations' costs. Commissions are paid to direct sales personnel primarily for
the amount of 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.
Sygnet's general and administrative costs include all infrastructure costs
such as customer support, collections, corporate administration, costs to
maintain and operate cell sites and customer retention costs.
The size and scope of the Company's cellular operations increased
substantially as a result of acquisitions in 1996, 1997 and 1998, and will
increase further upon consummation of the Sygnet Acquisition. See "Pro Forma
Condensed Consolidated Financial Data." On a pro forma basis after giving effect
to the Sygnet Acquisition, the Texas 10 Acquisition and the Maryland 1
Acquisition, the Company would have had 347,306 subscribers at September 30,
1998. Although the Company's Adjusted EBITDA has increased as a result of
acquisitions made to date and will increase as a result of the Sygnet
Acquisition, the increased amortization and interest expense and dividends
associated with the Senior Notes, additional bank borrowings and Senior
Preferred Stock resulted in increased losses in 1997 and the first nine months
of 1998, which are expected to increase as a result of the Dobson/Sygnet Notes,
the offering of the Preferred Stock and the New Credit Facilities and continue
until the Company expands the acquired systems and increases its subscriber
base. As a result of the recent acquisitions, the comparability of the
historical results of operations have been affected for the periods discussed
and such results may not be indicative of future performance.
59
<PAGE>
DISCONTINUED OPERATIONS
The Company, through its wholly-owned subsidiary, Logix, provides integrated
local, long distance, data and other telecommunications services to small and
medium-sized business customers throughout the Southwest United States. Logix
operates long-haul fiber optic facilities in Oklahoma, Texas and Colorado. Logix
recently began offering switch-based integrated communications provider services
in Oklahoma City, Tulsa and Amarillo. In addition, since the consummation of the
American Telco Acquisition on June 15, 1998, it has offered these services in
Houston, Austin, Dallas, Fort Worth and San Antonio. The Company intends to
distribute the stock of Logix to the Company's shareholders, subject to receipt
of a favorable tax ruling. Accordingly, Logix is accounted for as a discontinued
operation in the Company's consolidated financial statements.
RESULTS OF OPERATIONS--DOBSON
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
OPERATING REVENUE. For the nine months ended September 30, 1998, total
operating revenue increased $50.6 million, or 110.8%, to $96.3 million from
$45.7 million for the comparable period in 1997. Total service, roaming and
equipment revenue represented 49.6%, 47.7% and 2.6%, respectively, of total
operating revenue during the nine months ended September 30, 1998 and 57.9%,
38.9% and 1.6%, respectively, of total operating revenue during the nine months
ended September 30, 1997.
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue...................................................... $ 26,487 $ 47,769
Roaming revenue...................................................... 17,782 45,916
Equipment sales...................................................... 741 2,503
Other revenue........................................................ 703 158
--------- ---------
Total............................................................ $ 45,713 $ 96,346
--------- ---------
--------- ---------
</TABLE>
Service revenue increased $21.3 million, or 80.3%, to $47.8 million in the
first nine months of 1998 from $26.5 million in the same period of 1997. Of the
increase, $16.4 million was attributable to the acquisitions. The remaining $4.9
million was primarily attributable to increased penetration and usage in the
Central and Eastern Regions. The Company's subscriber base increased 91.4% to
163,020 at September 30, 1998 from 85,185 at September 30, 1997. Approximately
54,417 subscribers were added since September 30, 1997 as a result of the
acquisitions of Arizona 5 and the 1998 Acquisitions. The Company's average
monthly service revenue per subscriber decreased 3.7% to $39.58 for the nine
months ended September 30, 1998 from $41.08 for the comparable period in 1997
due to the addition of new lower rate subscribers in the East Region and
competitive market pressures.
Roaming revenue increased $28.1 million, or 158.2%, to $45.9 million in the
first nine months of 1998 from $17.8 million for the comparable period of 1997.
Of the increase, $24.1 million was attributable to the 1997 and 1998
acquisitions. The remaining $4.0 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 $2.5 million in the first nine months of 1998 represented
an increase of $1.8 million, or 238%, from $0.7 million in the same period of
1997, as the Company sold more equipment during the first nine months of 1998.
60
<PAGE>
COST OF SERVICE. For the nine month period ended September 30, 1998, the
total cost of service increased $11.7 million, or 106.8%, to $22.6 million from
$10.9 million for the comparable period in 1997. Of the increase, $10.0 million
was attributable to 1997 and 1998 Acquisitions. The remaining $1.7 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 wireless service decreased slightly to 24.1% in the
first nine months of 1998 from 24.7% in the comparable period of 1997.
COST OF EQUIPMENT. For the nine month period ended September 30, 1998, cost
of equipment increased $2.4 million, or 82.3%, to $5.2 million during the first
nine months of 1998 from $2.8 million in the first nine months of 1997,
primarily from increases in the volume of equipment sold due to the growth in
subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $8.0
million, or 114.9%, to $14.9 million in the first nine months of 1998 from $6.9
million in the comparable period of 1997. As a percentage of total operating
revenue, marketing and selling costs increased to 15.4% in the first nine months
of 1998 from 15.1% in the same period of 1997. The increase was primarily due to
the higher level of subscribers added period to period. Gross subscribers added
in the first nine months of 1998 was 48,882. The number of gross subscribers
added in the first nine months of 1997 was 22,273.
GENERAL AND ADMINISTRATIVE COSTS. For the nine month period ended September
30, 1998, general and administrative costs increased $8.1 million, or 99.3%, to
$16.2 million from $8.1 million for the same period in 1997. As a percentage of
total operating revenue, general and administrative costs decreased to 16.8% in
the first nine months of 1998 from 17.8% in the comparable period of 1997. The
increase was primarily due to increased billing costs as a result of the growth
in subscribers, the 1997 and 1998 Acquisitions and increased salary costs
resulting from additional personnel. The decrease as a percentage of total
operating revenue is a result of the Company's strategy to integrate new
operations in its existing management structure and a reduction in the Company's
uncollectible rate.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine month period ended
September 30, 1998, depreciation and amortization expense increased $17.8
million, or 148.8% to $29.7 million in the first nine months of 1998 from $11.9
million in the same period of 1997. Depreciation and amortization of assets
acquired in acquisitions accounted for $17.7 million of the increase in the
first nine months of 1998 compared to the same period of 1997.
INTEREST EXPENSE. For the first nine months of 1998, interest expense
increased $7.3 million, or 41.9%, to $25.0 million from $17.7 million in the
comparable period of 1997. The increase was primarily a result of increased
borrowings in the first nine months of 1998 to finance the Company's
acquisitions.
OTHER INCOME (EXPENSE), NET. For the nine months ended September 30, 1998,
other income increased $1.4 million, or 78.1%, to $3.3 million from $1.9 million
in the first nine months of 1997. Of the increase, $1.2 million was attributable
to increased interest income in 1998. In 1998, the Company had higher investment
balances related to proceeds from the Senior Preferred Stock and escrow deposits
relating to the Ohio 2 and Sygnet Acquisitions.
EXTRAORDINARY EXPENSE. In 1997 and 1998, the Company incurred an
extraordinary pretax loss of approximately $2.3 million and $3.3 million,
respectively, as a result of writing off previously capitalized financing costs
associated with revolving credit facilities that were refinanced in February
1997 and March 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUE. For the year ended December 31, 1997, total operating
revenue increased $39.8 million, or 147.6%, to $66.7 million from $26.9 million
in 1996. Total service, roaming and equipment
61
<PAGE>
revenue represented 57.6%, 39.4% and 2.2% of total operating revenue,
respectively, in 1997 and 65.3%, 29.1% and 2.5% of total operating revenue,
respectively, in 1996.
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue...................................................... $ 17,593 $ 38,410
Roaming revenue...................................................... 7,852 26,263
Equipment sales...................................................... 662 1,455
Other revenue........................................................ 832 586
--------- ---------
Total............................................................ $ 26,939 $ 66,714
--------- ---------
--------- ---------
</TABLE>
Service revenue increased $20.8 million, or 118.3%, to $38.4 million for the
year ended December 31, 1997 from $17.6 million in 1996. Of the increase, $15.0
million was attributable to the acquisition of the Maryland and Arizona
properties in 1997 and the inclusion of the operations of the Kansas/Missouri
properties for all of 1997. The remaining increase was primarily attributable to
increased penetration and usage in the Central Region. The Company's subscriber
base increased 194.8% to 100,093 at December 31, 1997 from 33,955 at December
31, 1996. 42,608 subscribers were added as a result of the acquisition of the
East Maryland and West Maryland markets. The Company's average monthly service
revenue per subscriber decreased 15.0% to $41.05 for the year ended December 31,
1997 from $48.31 for 1996 due to the addition of new lower rate subscribers in
the Eastern Region and competitive market pressures.
Roaming revenue increased $18.4 million, or 234.4%, to $26.3 million for the
year ended December 31, 1997 from $7.9 million in 1996. Of the increase, $15.6
million was attributable to the acquisition of the Maryland and Arizona
properties in 1997 and the inclusion of the operations of the Kansas/Missouri
markets for all of 1997. The remaining increase was primarily attributable to
increased roaming minutes in the Central Region due to expanded coverage areas
in these markets and an increase in minutes of use. Equipment sales of $1.5
million in 1997 represented an increase of $0.8 million, or 119.9%, from $0.7
million in 1996, as the Company sold more equipment in 1997.
COST OF SERVICE. For the year ended December 31, 1997, the total cost of
service increased $10.3 million, or 168.5%, to $16.4 million from $6.1 million
in 1996. Of the increase, $8.4 million was attributable to the acquisition of
the Maryland and Arizona properties in 1997 and the inclusion of the operations
of the Kansas/Missouri markets for all of 1997. The remaining increase was
primarily attributable to increased subscribers and minutes of use in the
Central Region and expanded use of rerating agreements with providers adjacent
to the Company's markets. As a percentage of service and roaming revenue, cost
of service increased to 25.4% in 1997 from 24.0% in 1996. This is primarily due
to the expanded use of rerating agreements noted above, as well as additional
facility lease costs in East Maryland.
COST OF EQUIPMENT. For the year ended December 31, 1997, the total cost of
equipment increased $1.4 million, or 57.3% to $4.0 million from $2.6 million in
1996, primarily from increases in the volume of equipment sold due to the growth
in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $6.2
million, or 139.1%, to $10.7 million in 1997 from $4.5 million in 1996. The
increase was primarily due to the higher level of subscribers added period to
period. Gross subscribers added in 1997 was 33,354 with subscribers added in the
Eastern Region and in Arizona 5 since their acquisitions making up 16,469 and
1,307, respectively, of the gross subscribers added. The number of gross
subscribers added in 1996 was 11,970. As a percentage of total operating
revenue, marketing and selling costs decreased to 16.0% in 1997 from 16.6% in
1996.
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GENERAL AND ADMINISTRATIVE COSTS. For the year ended December 31, 1997,
general and administrative costs increased $7.7 million, or 196.2%, to $11.6
million from $3.9 million for the same period of 1996. The increase was
primarily due to increased billing costs as a result of the growth in wireless
subscribers, the 1997 Acquisitions, the inclusion of the Kansas/Missouri markets
for all of 1997, and increased salary costs resulting from additional personnel.
As a percentage of total operating revenue, general and administrative costs
increased from 14.5% in 1996 to 17.3% in 1997. This increase is a result of
additional personnel necessary to support the Company's expanded operations.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1997, depreciation and amortization expense increased $11.6 million, or 220.5%,
to $16.8 million from $5.2 million in 1996. There was a $12.1 million increase
as a result of the amortization of assets acquired in the acquisition of the
Maryland and Arizona properties in 1997 and the Kansas/Missouri Acquisition in
1996 offset by a slight decrease related to assets in the Central Region.
INTEREST EXPENSE. For the year ended December 31, 1997, interest expense
increased $23.3 million to $27.6 million from $4.3 million in 1996. The increase
was primarily the result of increased borrowings to finance the acquisitions of
the Maryland and Arizona properties.
OTHER INCOME (EXPENSE), NET. For the year ended December 31, 1997, total
other income expense (net) (consisting of interest income, and other
income/expense) increased $4.3 million to $2.8 million from $(1.5) million in
1996. The increase was primarily a result of interest earned on securities
purchased which were pledged to secure payment of the first four semi-annual
interest payments on the Senior Notes.
EXTRAORDINARY EXPENSE. In 1997 and 1996, the Company incurred an
extraordinary pretax loss of approximately $2.2 million and $0.9 million,
respectively, as a result of writing off previously capitalized financing costs
associated with a revolving credit facility that was refinanced in February 1997
and March 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUE. For the year ended December 31, 1996, total operating
revenue increased $7.2 million, or 36.9%, to $26.9 million from $19.7 million in
1995. Total service, roaming and equipment revenue represented 65.3%, 29.1% and
2.5% of total operating revenue, respectively, in 1996 and 70.9%, 22.2% and 3.4%
of total operating revenue, respectively, in 1995.
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue...................................................... $ 13,949 $ 17,593
Roaming revenue...................................................... 4,369 7,852
Equipment sales...................................................... 672 662
Other revenue........................................................ 693 832
--------- ---------
Total............................................................ $ 19,683 $ 26,939
--------- ---------
--------- ---------
</TABLE>
Service revenue increased $3.6 million, or 26.1%, to $17.6 million in 1996
from $14.0 million in 1995. Of the $3.6 million increase, $2.5 million was
attributable to increased penetration and usage in Oklahoma and in the Texas
Panhandle and $1.1 million was attributable to the acquisition of the
Kansas/Missouri markets in March 1996. The Company's subscriber base increased
27.6% to 33,955 at December 31, 1996, from 26,614 at December 31, 1995, of which
58.6% (4,301 subscribers) of the increase was attributable to
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increased penetration in Oklahoma and the Texas Panhandle. However, the
Company's average monthly service revenue per subscriber decreased 3.4% to
$48.31 for the year ended December 31, 1996 from $50.00 for the year ended
December 31, 1995 due to competitive market pressures and the addition of new
lower usage subscribers.
Roaming revenue increased $3.5 million, or 79.7%, to $7.9 million in 1996
from $4.4 million in 1995. Of the $3.5 million increase, $1.9 million, or 54.3%,
was the result of the inclusion of the Kansas/Missouri markets with roaming
minutes of use totaling 1.3 million from the acquisition date in March 1996 to
December 31, 1996. The remaining $1.6 million of the increase, or 45.7%,
resulted from a 44.9% increase in roaming minutes of use in 1996 in Oklahoma and
the Texas Panhandle due to improved coverage areas and an increase in minutes of
use.
Equipment sales of $0.7 million in 1996 represented a slight decrease over
1995. Although the Company sold more equipment during the year ended December
31, 1996, the Company increased its use of discounted equipment and free phone
promotions with the signing of one-year service contracts.
COST OF SERVICE. For the year ended December 31, 1996, the total cost of
service increased $1.4 million, or 31.5%, to $6.1 million from $4.7 million in
1995. Of the increase, $1.0 million was attributable to the inclusion of the
Kansas and Missouri properties from March 1996. The remaining increase primarily
was the result of roaming agreements entered into by the Company in 1995 with
eleven other carriers in Texas and Oklahoma to expand its home rate coverage.
Cost of wireless service decreased as a percentage of service and roaming
revenue to 24.0% for the year ended December 31, 1996 from 25.4% for 1995.
COST OF EQUIPMENT. For the year ended December 31, 1996, the total cost of
equipment increased $0.6 million, or 27.8%, to 2.6 million from $2.0 million in
1995. The increase resulted primarily from increases in the volume of equipment
sales due to the growth of subscribers during 1996, partially offset by a
decrease in equipment costs.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $1.4
million, or 43.8%, to $4.5 million in 1996 from $3.1 million in 1995. The
increase was primarily due to the higher level of wireless subscribers added
period to period. Gross subscribers added for the year ended December 31, 1996
was 11,970 with the Kansas/Missouri markets making up 1,511 of the gross
subscribers added. The gross number of subscribers added in 1995 was 9,653. As a
percentage of total operating revenue, marketing and selling costs increased to
16.6% in 1996 from 15.8% in 1995.
GENERAL AND ADMINISTRATIVE COSTS. For the year ended December 31, 1996,
general and administrative costs increased $0.9 million, or 28.5%, to $3.9
million from $3.0 million for 1995. The increase was primarily due to increased
billing costs as a result of the growth in subscribers, the inclusion of the
Kansas/ Missouri markets from March 1996 and increased salary costs resulting
from additional personnel in its wireless and fiber operations. General and
administrative costs decreased as a percentage of the Company's total revenues
to 14.5% in 1996 from 15.4% in 1995.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1996, depreciation and amortization expense increased $2.7 million to $5.2
million from $2.5 million in 1995. Approximately $1.2 million of the increase
was the result of the amortization of the licenses acquired in the Kansas/
Missouri markets, with the remainder due primarily to the increase in equipment
in the Company's business.
INTEREST EXPENSE. For the year ended December 31, 1996, interest expense
increased $2.4 million to $4.3 million from $1.9 million in 1995. The increase
was primarily a result of increased borrowings to finance the Kansas/Missouri
acquisition.
OTHER INCOME (EXPENSE), NET. For the year ended December 31, 1996, other
income (expense), net decreased $1.3 million to $(1.5) million from $(0.2)
million in 1995 primarily as a result of a $1.7 million
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loss on the disposal of two mobile telecommunications switching offices made in
connection with system upgrades in Oklahoma and the Texas Panhandle.
EXTRAORDINARY EXPENSE. For the year ended December 31, 1996, the Company
incurred a pretax loss of approximately $.9 million as a result of writing off
previously capitalized financing costs associated with a revolving credit
facility that was refinanced in March 1996.
RESULTS OF OPERATIONS--SYGNET
Sygnet's operating results have been significantly affected as a result of
the Horizon Acquisition in October 1996 and the Erie Acquisition in September
1995. The systems acquired for $252.9 million in the Horizon Acquisition serve
contiguous markets representing approximately 1.4 million Pops in western
Pennsylvania and New York. The systems acquired in the Erie Acquisition for
$42.5 million represent approximately 282,300 Pops.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE. For the nine months ended September 30, 1998, Sygnet's total
revenue increased 22.6% to $76.9 million, from $62.8 million in the first nine
months of 1997. The growth in revenue was the result of continued growth of the
subscriber base and increased roaming revenue generated by additional usage.
Subscriber revenue grew 21.3% to $46.7 million for the nine months ended
September 30, 1998 from $38.5 million in the comparable period in 1997 mainly as
a result of continued subscriber growth, despite a decline in average revenue
per subscriber. Sygnet's number of subscribers increased by 28.2% to 166,886 at
September 30, 1998 from 130,146 at September 30, 1997 due to internal growth. On
a per subscriber basis, average monthly subscriber revenue per subscriber
declined by 6.8% to $33.85 for the nine months ended September 30, 1998 from
$36.33 during the comparable period in 1997. This was due to competitive market
pressures, continuing promotional activity and the changing mix of subscribers
reflecting increasing levels of subscribers who purchase less expensive rate
plans that include packaged minutes of use.
Roamer revenue grew 24.6% to $24.8 million during the nine months ended
September 30, 1998 compared to $19.9 million in the comparable period in 1997.
This increase was mainly a result of increased roaming traffic throughout all of
Sygnet's systems which more than offset the decline in roaming revenue per
minute of use. Roaming minutes of use increased by 30.5% to 43.6 million for the
nine months ended September 30, 1998 from 33.4 million for the comparable period
in 1997. Roaming revenue per minute, including toll, for the nine months ended
September 30, 1998 decreased to $0.57 from $0.59 for the comparable period in
1997. This decrease was mainly a result of increased intrasystem roaming traffic
that is priced lower than other roaming traffic.
Equipment sales revenue increased 39.4% to $4.3 million for the nine months
ended September 30, 1998 from $3.1 million in the comparable period in 1997.
This increase was due mainly to an increased number of telephones and
accessories sold to new customers as well as from additional sales of equipment
to existing customers for retention purposes for which credits are given on the
sales price and reflected in general and administrative costs.
COST OF SERVICES. Cost of services increased 25.5% to $9.0 million for the
nine months ended September 30, 1998 from $7.2 million for the comparable period
in 1997. This increase was mainly a result of an increase in home subscriber net
roaming costs as well as increased billing and call delivery expenses associated
with the growth in the subscriber base. The increase in net roaming costs is
attributed mostly to increased levels of intrasystem roaming for which rates to
customers are lower than other roaming traffic which has stimulated usage.
Partially offsetting this increase are lower costs to Sygnet for long distance
charges and the elimination of costs associated with a terminated switching
agreement. As a percentage of total revenue, cost of services was 11.7% for the
nine months ended September 30, 1998 compared to 11.4% for the same period in
1997.
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COST OF EQUIPMENT SALES. Cost of equipment sales increased 14.5% to $7.8
million for the nine months ended September 30, 1998 from $6.8 million in the
comparable 1997 period. This increase was due mainly to an increased number of
telephones and accessories sold to existing subscribers, as well as equipment
subsidies and sales to new subscribers, offset by a reduction in the average
cost of telephones and accessories.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased 25.7% to $14.7 million for the nine months ended September 30, 1998
from $11.7 million for the comparable period in 1997. This increase was mainly a
result of the growth in the subscriber base which caused an increase in
compensation and increased customer retention costs due to competitive
pressures. As a percentage of total revenues, general and administrative expense
was 19.1% for the nine months ended September 30, 1998 compared to 18.6% for the
same period in 1997.
SELLING AND MARKETING COSTS. Selling and marketing costs increased 21.3% to
$9.1 million for the nine months ended September 30, 1998 from $7.5 million for
the comparable period in 1997. This increase is mainly due to an increase in new
subscribers added period to period which caused higher compensation and
commission expenses as well as an increase in advertising and promotional
expenses. Selling and marketing cost per gross new subscriber, including
equipment subsidies, decreased by 6.2% to $287 for the nine months ended
September 30, 1998 from $306 for the comparable period in 1997. This was
primarily a result of an improvement in the margin on telephone and accessory
subsidies and sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 1.0%
to $21.3 million for the nine months ended September 30, 1998 from $21.1 million
for the comparable period in 1997 due primarily to the depreciation on higher
levels of fixed assets resulting from capital expenditures for system growth.
This increase more than offset the decrease in depreciation due to certain cell
site equipment obtained in the Horizon Acquisition which become fully
depreciated in April 1998. For the nine months ended September 30, 1998, Sygnet
incurred $11.5 million in capital expenditures, primarily for cell site and
system enhancements.
INTEREST EXPENSE, NET. Interest expense decreased 4.2% to $21.6 million for
the nine months ended September 30, 1998 from $22.6 million for the comparable
period in 1997. This decrease was primarily a result of a lower level of
borrowing due to the repayment of certain indebtedness with the proceeds from
the sale of common stock.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. For 1997, Sygnet's total revenue increased 91.2% to $85.6 million
from $44.8 million for 1996. The growth in revenue was the result of the Horizon
Acquisition, which occurred on October 9, 1996, and continued growth of the
subscriber base.
Subscriber revenue grew by 69.3% to $52.6 million for 1997 from $31.1
million for 1996 mainly as a result of the Horizon Acquisition and continued
subscriber growth. Subscriber revenue, on a pro forma basis giving effect to the
Horizon Acquisition, would have grown by 22.7% due to growth in the subscriber
base, offset by a decline in average revenue per subscriber. Sygnet's
subscribers grew by 34.1% to 142,934 at December 31, 1997 from 106,574 at
December 31, 1996 due mainly to internal growth. On a pro forma basis giving
effect to the Horizon Acquisition, average monthly subscriber revenue per
subscriber would have declined by 7.3% to $35.91 during 1997 from $38.75 in
1996. This was due to the changing mix of subscribers reflecting increasing
levels of subscribers purchasing less expensive rate plans that include limited
free minutes of use, increased promotional activity and competitive market
pressures.
Roamer revenue increased 178.6% to $27.0 million during 1997 from $9.7
million for 1996. This increase was mainly a result of the Horizon Acquisition
as well as increased roaming traffic throughout all of Sygnet's systems. On a
pro forma basis giving effect to the Horizon Acquisition, roamer revenue would
have grown by 21.5% due to a greater volume of roaming traffic offset by a
reduction in roaming revenue
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<PAGE>
per minute. Roaming revenue per minute for 1997 would have decreased to $0.58
from $0.59 for 1996 on a pro forma basis giving effect to the Horizon
Acquisition mainly as a result of reductions in roaming rates with roaming
partners.
Equipment sales increased 78.9% to $4.3 million for 1997 compared to $2.4
million for 1996. This increase was due mainly to the Horizon Acquisition, an
increased number of telephones and accessories distributed as new subscriber
acquisitions increased, as well as from additional sales of equipment to
existing customers. On a pro forma basis giving effect to the Horizon
Acquisition, equipment sales for 1997 would have increased 12.4% over 1996.
COST OF SERVICES. Cost of services increased 82.4% to $10.0 million during
1997 from $5.5 million for 1996 due mainly to the Horizon Acquisition. On a pro
forma basis giving effect to the Horizon Acquisition, cost of services for 1997
would have increased by 12.0% from 1996. This increase was mainly a result of an
increase in billing, call delivery and roaming costs associated with the growth
in the subscriber base, partially offset by lower rates for interconnection and
long distance charges. As a percentage of total revenues, on a pro forma basis
giving effect to the Horizon Acquisition, cost of services was 11.7% in 1997
compared to 12.7% in 1996.
COST OF EQUIPMENT SALES. Cost of equipment sales increased 66.2% to $9.7
million for 1997 from $5.8 million in 1996. This increase was due mainly to the
Horizon Acquisition and to an increased number of telephones and accessories
distributed as new subscriber acquisitions increased. Sales of equipment to
existing subscribers were also responsible for a portion of this increase. On a
pro forma basis giving effect to the Horizon Acquisition, cost of equipment
sales for 1997 would have increased 18.6% over 1996.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs grew
72.3% to $17.0 million in 1997 from $9.9 million in 1996. This increase was due
primarily to the Horizon Acquisition and an increase in costs due to internal
growth. On a pro forma basis giving effect to the Horizon Acquisition, general
and administrative expenses for 1997 would have increased 19.8% over 1996. This
increase was mainly a result of an increase in compensation, customer retention,
occupancy and maintenance expenses associated with the growth in the subscriber
base as well as the additional cell sites added during 1997. As a percentage of
total revenues, on a pro forma basis giving effect to the Horizon Acquisition,
general and administrative expense would have been 19.8% in 1997 compared to
20.0% in 1996.
SELLING AND MARKETING COSTS. Selling and marketing costs grew 78.3% to
$10.8 million for 1997 from $6.1 million in 1996. This increase is due to the
Horizon Acquisition and a higher level of new subscribers added period to
period. On a pro forma basis giving effect to the Horizon Acquisition, selling
and marketing costs grew by 12.3% and selling and marketing cost per gross new
subscriber decreased to $291 in 1997 from $324 in 1996 reflecting a decrease in
cost of telephone and accessories in addition to improved operating
efficiencies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
$28.7 million for 1997 from $10.0 million in 1996 due to depreciation on higher
levels of fixed assets resulting from the Horizon Acquisition and purchases of
equipment to enhance systems in existing markets, and amortization of the
license acquired in the Horizon Acquisition. The amortization of the acquired
cellular licenses and subscriber lists contributed $10.3 million to this
increased amortization. For 1997, Sygnet spent $25.6 million in capital
expenditures, primarily for new cell sites, cell site conversions, and system
growth.
INTEREST EXPENSE, NET. Interest expense increased to $29.9 million in 1997
from $11.2 million in 1996. This increase was primarily a result of increased
borrowings associated with the Horizon Acquisition.
NET OPERATING LOSSES. At December 1997, Sygnet had a net operating loss
carryforward of $28.7 million. No benefit of the loss carryforward has been
recorded in 1997. If, in the future, this loss carryforward is utilized, the
related benefits will be recorded.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. For 1996, Sygnet's total revenue increased 82.3% to $44.8 million
from $24.6 million for 1995. The growth in revenue was the result of the Horizon
and Erie Acquisitions and continued growth of the subscriber base.
Subscriber revenue grew 80.8% to $31.0 million for 1996 compared to $17.2
million for 1995 mainly as a result of the Horizon and Erie Acquisitions and
continued subscriber growth. Sygnet's subscribers increased to 106,574 at
December 31, 1996 from 44,665 at December 31, 1995 due mainly to the Horizon
Acquisition as well as internal growth. On a pro forma basis giving effect to
the Horizon Acquisition, the subscriber base increased by 36.8% to 106,574 at
December 31, 1996 from 77,891 at December 31, 1995. On a per subscriber basis
giving effect to the Horizon Acquisition, average monthly subscriber revenue
would have declined to $38.75 during 1996 from $41.66 in 1995 due in part to the
changing mix of subscribers reflecting increasing levels of subscribers
purchasing less expensive rate plans that include limited free minutes of use as
well as competitive market pressures.
Roamer revenue increased 132.0% to $9.7 million during 1996 compared to $4.2
million in 1995. This increase was mainly a result of the Horizon and Erie
Acquisitions as well as increased roaming traffic throughout all of Sygnet's
systems. Roamer revenue per minute during 1996 decreased to $.55 from $.57 in
1995. This decrease was due mainly to reductions made to roaming rates received
from other cellular carriers in the first quarter of 1995 which were in effect
for the full year in 1996, mitigated by the effects of the Horizon Acquisition.
Equipment sales increased 58.0% to $2.4 million in 1996 compared to $1.5
million in 1995. This increase was due mainly to the Horizon and Erie
Acquisitions and an increased number of telephones and accessories distributed
as new subscriber acquisitions increased, as well as from additional sales of
equipment to existing customers. Other revenue declined 4.4% to $1.6 million in
1996 from $1.7 million in 1995 as equipment rental revenue continued to decrease
due to the continued phase out of rental programs.
COST OF SERVICES. Cost of services increased 63.7% to $5.5 million in 1996
from $3.4 million in 1995 due mainly to the Horizon and Erie Acquisitions. Cost
of services decreased to 12.3% of total revenues in 1996 from 13.7% in 1995, as
a result of operating efficiencies gained from the Horizon and Erie
Acquisitions.
COST OF EQUIPMENT SALES. Cost of equipment sales increased 39.7% to $5.8
million in 1996 from $4.2 million in 1995. This increase was due mainly to the
Horizon and Erie Acquisitions and to an increased number of telephones and
accessories distributed as new subscriber acquisitions increased. The increased
cost of equipment sold resulting from the increase in gross activations was
mitigated by the declining cost to acquire new telephones.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased 77.1% to $9.9 million in 1996 from $5.6 million in 1995. This increase
is due primarily to the Horizon and Erie Acquisitions and the effects of a third
quarter 1995 one time adjustment to the personal property tax accrual resulting
from a substantial decrease in tax rates.
SELLING AND MARKETING COSTS. Selling and marketing costs increased 97.3% to
$6.1 million in 1996 from $3.1 million in 1995. This increase is due to the
Horizon and Erie Acquisitions and a higher level of new subscribers added period
to period. Selling and marketing cost per gross new subscriber, including
equipment subsidies, decreased 10.1% to $310.0 in 1996 from $345.0 for 1995 as a
result of a decrease in cost of telephones and accessories in addition to
improved efficiencies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
187.9% to $10.0 million in 1996 from $3.5 million in 1995 due to depreciation on
higher levels of fixed assets resulting from the Horizon and Erie Acquisitions
and purchases for system growth, and amortization of the licenses acquired in
the Horizon and Erie Acquisitions. The amortization of the acquired cellular
licenses and subscriber
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lists contributed $3.4 million to this increased amortization. For 1996, Sygnet
spent $10.0 million in capital expenditures, primarily for new cell sites, cell
site conversions, and system growth.
INTEREST EXPENSE, NET. Interest expense increased to $11.2 million in 1996
from $2.7 million in 1995. This increase was primarily a result of increased
borrowings associated with the Horizon and Erie Acquisitions.
EXTRAORDINARY LOSS. In October 1996, Sygnet incurred an extraordinary loss
of $1.4 million to write off unamortized financing costs associated with an
extinguished bank credit agreement.
IMPACT OF YEAR 2000 ISSUE
DOBSON
The Year 2000 issue is the result of computer programming being written
using two digits rather than four to define the applicable year. Any of the
Company's systems, as well as those of key suppliers and customers, that have
date sensitive logic may interpret a date using "00" as the year 1900 rather
than 2000. This may result in inaccurate processing or possible system failure
causing potential disruption of operations, including, among other things, a
temporary inability to process transactions, send invoices, supply services or
engage in similar normal business activities.
In April 1998, the Company established a multi-disciplined team to perform a
Year 2000 impact analysis for the Company. The team consists of representatives
from each of the lines of business, as well as representatives from key
corporate departments, and is headed by a full-time Year 2000 compliance
manager. The team created a Year 2000 assessment methodology which brought a
structured approach to the assessment and management reporting process, as well
as disaster recovery approach.
To date, the Company has completed an inventory of its automated systems and
services and an impact analysis that identified significant risk areas by line
of business, specific compliance requirements and costs and estimated completion
dates for affected systems. All of the Company's automated systems and services
are or will be Year 2000 compliant by the end of the second quarter of 1999.
The Company does not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, the
Company has historically relied on outsourcing relationships for most of its
business and operational support applications. Those applications that have not
been outsourced to service providers have been deployed using packaged software
from outside vendors. Management has also focused on evaluating software systems
of pending acquisitions. As a result, the remediation phase is not focused on a
large scale in-house effort, but on identification of third party systems and
services that are not currently Year 2000 compliant and oversight of third party
compliance efforts.
The results of the impact analysis revealed that for most of the Company's
information systems, services and telecommunications infrastructure, Year 2000
compliant versions will be included as a part of existing maintenance and/or
service agreements at no additional cost to the Company and should be in place
and tested by the second quarter of 1999. The Company estimates total costs of
approximately $.5 million to upgrade or replace those systems that are not Year
2000 compliant and will not be upgraded through existing maintenance or service
agreements. In addition, the Company's contingency plan for the Year 2000 is
encompassed by a disaster recovery plan for the business which will be in place
by the end of the second quarter of 1999.
The Company will continue to analyze systems and services that utilize
date-embedded codes that may experience operational problems when the Year 2000
is reached. The Company will continue communicating with third party vendors of
systems software and equipment, suppliers of telecommunications capacity and
equipment, roaming partners customers and others with which it does business to
coordinate Year
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2000 compliance. To further mitigate risks, the Company will conduct its own
Year 2000 tests on mission critical systems as Year 2000 compliant versions are
released by vendors.
SYGNET
Sygnet has substantially completed an inventory of all its systems and
equipment in each market to determine the impact of the Year 2000 Issue. Based
on this inventory, Sygnet has contacted its significant vendors to determine how
their products and services might be affected by the Year 2000 Issue. Generally,
Sygnet is relying upon representations made by the vendors as to their state of
readiness for the Year 2000 Issue. Based on internal evaluations and on
information provided by these vendors certain systems have been upgraded and
tested for Year 2000 compliance. Sygnet estimates that it is 60% complete with
this phase of the project.
Sygnet is placing special emphasis on areas that present a risk of
materially interrupting its revenue stream in the event of a Year 2000 problem.
Presently, it appears three main systems have the potential to materially
interrupt the revenue stream due to the Year 2000 Issue. They are the two
cellular switches, which could prevent calls from being made, and the billing
system, which could prevent Sygnet from billing and subsequently receiving
revenue from its customers. To address this risk, the Northern Telecom switch,
which serves Ohio and Pennsylvania, has recently undergone a software upgrade to
a Year 2000 compliant version. Sygnet has monitored testing of this software in
a Year 2000 situation with commonly known critical dates and has encountered no
problems. Accordingly, Sygnet has deemed this system to have a minimal risk of
failure regarding the Year 2000 Issue and will not develop contingency plans for
the Northern Telecom switch unless new information becomes available that
suggests a contingency plan is warranted. The Ericsson switch, which serves New
York, is expected to have its software upgraded to a Year 2000 compliant version
in the first quarter of 1999. It is expected that like Northern Telecom,
Ericsson will provide sufficient testing prior to installation. In connection
with the planned upgrade of the New York system, Sygnet plans to replace the
Ericsson switching equipment with Northern Telecom equipment that is believed to
be year 2000 compliant. In addition, the upgrade of the billing system software
to a Year 2000 compliant version is expected to be completed in the first
quarter of 1999. The vendor that provides this system has indicated that Year
2000 compliance testing will be completed by June of 1999. Sygnet has deemed
this system to have a moderate risk of not being able to handle the Year 2000
requirements and a contingency plan is being prepared that may include selecting
a new billing vendor in mid 1999.
The cost of testing and upgrading these systems can not be determined at
this time. Management's current estimate is that the cost of becoming year 2000
compliant is not expected to exceed $250,000. This estimate may change
significantly downward or upward as the process continues or if problems arise
with either a switch or billing system. Additionally, this estimate may change
substantially if other systems or vendors are unable to become Year 2000
compliant causing a material interruption of the revenue stream.
LIQUIDITY AND CAPITAL RESOURCES
SYGNET
Sygnet has historically relied on internally generated funds to fund debt
service and a substantial portion of its capital expenditures. Bank credit
facilities and equity issuances have been used for additional support of capital
expenditure programs and to fund acquisitions.
Sygnet's net cash provided by operating activities was $13.5 million for the
nine months ended September 30, 1998 compared to $7.1 million for the comparable
period in 1997. The increase was primarily the result of the increase in
operating income, offset somewhat by a decrease in net working capital. Net cash
provided by operating activities was $9.4 million for 1997 compared to $14.8
million for 1996 and $2.4 million in 1995. This decrease from 1996 to 1997 was
primarily due to interest paid of $30.0 million in 1997 compared to $4.7 million
in 1996, which was offset significantly by the increase in revenue
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due to growth in subscribers. The increase from 1995 to 1996 was primarily the
result of the increase in the number of subscribers and their related growth in
revenue.
Sygnet's net cash used in investing activities was $11.1 million for the
nine months ended September 30, 1998 compared to $17.6 million for the
comparable period in 1997. In 1998, this activity reflects decreased levels of
purchases of property and equipment primarily for system buildout in addition to
proceeds of $300,000 associated with the sale of an undeveloped patent to an
officer/shareholder of Sygnet. In 1997, this activity reflects final payments
made in connection with the Horizon Acquisition and the completion of the
buildout of the system acquired in the Horizon Acquisition. Net cash used in
investing activities, which totaled $25.8 million, $264.2 million and $49.1
million for the years ended December 31, 1997, 1996 and 1995, respectively,
principally related to the system buildout in 1997, the Horizon Acquisition in
1996 and the Erie Acquisition in 1995 and capital expenditures required to
support the growth of the business.
Sygnet's net cash used in financing activities was $2.9 million for the nine
months ended September 30, 1998 compared to $10.0 million provided by financing
activities for the comparable period in 1997 as the combination of reduced
capital expenditures and increased cash flow from operating activities reduced
the need for outside financing. In 1997, this activity included $43.6 million in
net proceeds from the sale of Sygnet's common stock which were used primarily to
redeem the remaining outstanding preferred stock and to reduce amounts
outstanding under the Sygnet Bank Facility and fund capital expenditures. Net
cash provided by financing activities was $15.0 million for 1997 compared to
$251.2 million for 1996 and $46.6 million in 1995. The 1996 amount includes
primarily funds received, net of financing cost, from the issuance of the Sygnet
Notes and preferred stock and borrowings under the Sygnet Bank Facility to fund
acquisitions. Dividends of $.3 million and $1.2 million were paid in 1996 and
1995, respectively.
DOBSON
The Company's cellular operations require substantial capital to acquire,
construct and expand wireless telephone systems and to fund operating
requirements. Dobson has financed its operations through bank debt and the sale
of debt and equity.
At December 31, 1996, the Company had working capital of $10.6 million (a
ratio of current assets to current liabilities of 2.9:1) and a cash balance $1.0
million. At December 31, 1997, the Company had working capital of $15.9 million
(a ratio of current assets to current liabilities of 1.7:1) and a cash balance
of $2.8 million, which compares to working capital of $10.9 million (a ratio of
current assets to current liabilities of 1.2:1) and an unrestricted cash balance
of $5.0 million at September 30, 1998.
The Company's net cash provided by operating activities totaled $20.7
million for the nine-month period ended September 30, 1997 compared to $10.4
million for the nine months ended September 30, 1998. The decrease of $10.3
million was primarily due to the Company's net loss for the 1998 period, of
which $17.2 million related to discontinued operations, offset by net changes in
current assets and liabilities, depreciation and amortization, and deferred
income taxes and investment tax credits.
The Company's net cash provided by operating activities totaled $8.6 million
for 1995 compared to $11.6 million for 1996 and $12.3 million for 1997. The
increase of $3.0 million from 1995 to 1996 was primarily due to depreciation and
amortization and a loss on the disposition of assets offset by the Company's net
loss for the period. The increase of $.7 million from 1996 to 1997 was primarily
due to net changes in current assets and liabilities, depreciation and
amortization and deferred income taxes and investment tax credits, offset by the
Company's net loss for the period.
Net cash used in investing activities totaled $189.1 million and $440.3
million for the nine months ended September 30, 1997 and 1998, respectively. In
1997, investing activities consisted primarily of acquisitions of systems in the
Eastern Region, as well as capital expenditures. The 1998 investing activities
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principally related to acquisitions, escrow deposits and capital expenditures.
Of the 1998 investing activities, discontinued operations accounted for
approximately $17.8 million of capital expenditures and $131.5 million of
acquisition expenditures.
Net cash used in investing activities, which totaled $11.1 million, $49.4
million and $221.1 million for the years ended December 31, 1995, 1996 and 1997,
respectively, principally related to deposits made in 1995 related to the
Maryland acquisitions and PCS license acquisitions, the Kansas/Missouri
acquisition in 1996 and the Maryland and Arizona acquisitions in 1997, as well
as capital expenditures in all periods. Acquisitions accounted for $30.0 million
and $190.7 million in 1996 and 1997, respectively, and capital expenditures were
$3.9 million, $17.4 million and $23.2 million in 1995, 1996 and 1997,
respectively.
Net cash provided by financing activities was $168.5 million for the nine
months ended September 30, 1997 compared to $498.1 million for the nine months
ended September 30, 1998. Financing activities for the nine months ended
September 30, 1998 consisted primarily of $284.0 million of proceeds from
long-term debt and $175.0 million of proceeds from the issuance of Senior
Preferred Stock, offset by the repayment of $171.5 million of bank debt and
approximately $12.7 million of deferred financing costs in connection with the
issuance of Senior Preferred Stock and the March 1998 credit facilities
discussed below. In 1998, financing activities of the discontinued operations
provided proceeds of $350.0 million from the issuance of 12 1/4% Senior Notes.
Approximately $11.2 million of deferred financing costs were incurred in
connection with such Senior Notes offering.
Net cash provided by financing activities was $1.8 million for 1995 compared
to $38.3 million for 1996 and $210.2 million for 1997, respectively. Financing
activities for the year ended December 31, 1997 consisted primarily of $343.5
million of proceeds from long-term debt, including the issuance of $160.0
million principal amount of Senior Notes and bank borrowings. Proceeds from
long-term debt exceeded repayment thereof by $2.7 million, $39.8 million and
$254.7 million in 1995, 1996, and 1997, respectively.
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. Subsequent to
September 30, 1998, the counterparty exercised its rights under the swap
agreement, fixing the interest rate at 6.13% plus a factor based on the
Company's leverage. The Company accounts for this as a hedge.
The minority partners in the Company's partnerships that own certain of its
wireless operations receive distributions equal to their share of the profit
multiplied by estimated income tax rates. Under the Company's bank credit
agreements, the Company's minority partners are not entitled to receive any cash
distributions in excess of amounts required to meet income tax obligations until
all indebtedness of their respective partnerships to the Company is paid or
extinguished.
The Company's capital expenditures (excluding cost of acquisitions and
discontinued operations) were $23.7 million for the nine months ended September
30, 1998 and the Company expects its capital expenditures (excluding cost of
acquisitions) to be approximately $30.2 million for all of 1998, exclusive of
acquisition costs, and $50.2 million for 1999. Of such capital expenditures for
1999, approximately $16.0 million is expected to relate to Sygnet and
approximately $4.0 million to Maryland 1. The Company has not budgeted any
amounts to be expended in 1998 or 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 wireless 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 in cash. The Sygnet
Acquisition was financed through borrowings under the Credit Facilities, the net
proceeds of offering of the Preferred Stock, the Equity Investments and the
Tower Sale Leaseback. In addition, the Company expects to borrow $9.1 million
under the DOC Facility to close
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the Maryland 1 Acquisition and $6.0 million under the New Credit Facilities to
close the Pennsylvania 2 Acquisition.
The Company has agreed to purchase approximately $65 million of cell site
and switching equipment between June 1997 and November 2001. Of this commitment,
approximately $34.6 million remained at September 30, 1998. Under another
equipment supply agreement, the Company agreed to purchase approximately $81.0
million of cell site and switching equipment by January 13, 2002. Of this
commitment, $67 million remained at September 30, 1998.
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 1998 or 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
Facility"). Under the terms of the DCOC 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 $200.0 million facility. DCOC's
obligations under the DCOC Facility are secured by all existing and future
assets of DCOC, and are guaranteed by DCOC' subsidiaries. In addition, the
Company's subsidiary, Dobson Operating Company ("DOC"), established a $250.0
million senior secured credit facility (the "DOC Facility") to replace a prior
bank facility. The DOC Facility is secured by all of DOC's stock and the stock
or partnership interests of its 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
Facility. The DCOC Facility and the DOC Facility require the Company to maintain
certain financial ratios. The failure to maintain such ratios would constitute
an event of default, notwithstanding the Company's ability to meet its debt
service obligations. The DOC Facility and DCOC Facility each amortize quarterly
beginning June 30, 2000 and terminate on June 30, 2006. At September 30, 1998,
the Company had credit available of $109.0 million under the DOC Facility and
$57.0 million under the DCOC Facility, subject to covenant limitations. See
"Description of Certain Indebtedness."
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 New Credit
Facilities are secured by a pledge of the capital stock of Sygnet's operating
subsidiary as well as a lien on substantially all of the assets of Sygnet and
its operating subsidiary. The New Credit Facilities require Sygnet and the
Company to maintain certain financial ratios. The failure to maintain such
ratios would constitute an event of default, notwithstanding Sygnet's ability to
meet its debt service obligations. See "Description of Certain Indebtedness."
The ability of Sygnet to borrow under the New Credit Facilities will be limited
by the requirement that, on a quarterly basis beginning December 31, 2000, the
amount available under the New Credit Facilities will reduce until they
terminate.
As part of the Sygnet Financing, Sygnet sold to Dobson Tower, a wholly owned
subsidiary of the Company, substantially all of the towers it owns for $25.0
million. Dobson Tower then leased these towers back to Sygnet under an operating
lease, with annual lease payments of approximately $1.6 million. Dobson Tower
obtained the funds for such purchase from borrowings under a new credit facility
of
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$17.5 million and the sale of $7.5 million of preferred stock of Dobson Tower to
an affiliate of the Company.
On September 30, 1998, after giving pro forma effect to the Sygnet
Acquisition and Sygnet Financing, the Company and its subsidiaries would have
had approximately $1,054.9 million of indebtedness outstanding.
Although the Company cannot provide you 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, the net proceeds from the offering of the Old Shares,
together with the Equity Investments, borrowings under the New Credit
Facilities, the DOC Facility, the Tower Sale Leaseback, the DCOC Facility and
cash flow from operations, were sufficient to consummate the Sygnet Acquisition,
the Maryland 1 Acquisition and the Pennsylvania 2 Acquisition, to repay the
$25.0 million loan from Dobson to fund the earnest money deposit in connection
with the Sygnet Acquisition, to repay all outstanding indebtedness under the
Sygnet Bank Facility, to repurchase all of the Sygnet Notes in the Sygnet Note
Repurchase, to pay fees and expenses incurred in connection with the Sygnet
Acquisition and Sygnet Financing, 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 Credit
Facilities, the Senior Notes and the Dobson/Sygnet Notes at their maturities and
refinance its mandatory redemption obligations with respect to its preferred
stock, including the Preferred Stock and Senior 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.
See "Risk Factors--Refinancing Risk." 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. The
Company has not yet evaluated the impact of adopting SFAS 133 and has not
determined the timing or method of adoption of SFAS 133.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities,"
effective for fiscal years beginning after December 15, 1998, with earlier
application encouraged. The Company adopted SOP 98-5 as of January 1, 1998. SOP
98-5 requires costs of start-up activities and organization costs to be expensed
as incurred. Logix recognized a pretax loss of approximately $1.2 million in the
first quarter of 1998 as a result of adopting this SOP. This loss has been
reflected in income (loss) from discontinued operations in the accompanying
consolidated statement of operations for the nine months ended September 30,
1998.
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BUSINESS
The Company is a leading provider of rural and suburban cellular telephone
services. Since it began providing cellular service in 1990 in Oklahoma and the
Texas Panhandle, the Company has rapidly expanded its cellular operations with
an acquisition strategy targeting rural and suburban areas which have a
significant number of potential customers with substantial needs for cellular
communications. At September 30, 1998, the Company's cellular systems covered
2.8 million total Pops in Arizona, California, Kansas, Maryland, Missouri,
Oklahoma, Pennsylvania and Texas. On July 28, 1998, a subsidiary of the Company
entered into an agreement to acquire all of the outstanding capital stock of
Sygnet for $337.5 million in cash. Sygnet owns and operates cellular telephone
systems covering 2.4 million Pops in northeastern Ohio, western Pennsylvania and
western New York. For the nine months ended September 30, 1998, after giving
effect to the California 4 Acquisition and the Sygnet Acquisition as if each
acquisition had occurred on January 1, 1997, the Company would have had revenue
of $176.5 million, an operating loss of $13.7 million and Adjusted EBITDA of
$75.9 million.
The Company believes that its mix of rural and suburban cellular systems
generally provides strong growth opportunities due to lower penetration rates,
higher subscriber growth rates and a higher proportion of roaming revenue
compared to cellular systems located in larger MSAs. The Company focuses on
systems that are adjacent to major metropolitan areas and include a high
concentration of expressway corridors that tend to have a significant amount of
roaming activity. Management believes these areas are not as fully developed as
large MSAs, which were licensed earlier by the FCC, and have the potential for
increased cellular usage and superior financial performance. The Company has
entered into roaming agreements with operators of cellular systems in
neighboring MSAs and other MSAs that allow customers to roam at competitive
prices that, in certain instances, are comparable to the Company's home area
rates.
The Company was organized to establish and maintain a strong and visible
local presence while achieving economies of scale and synergies through regional
and centralized functions. The Company's local management teams have day-to-day
operating authority, with the flexibility to respond to individual market
requirements and to foster a strong sense of customer service and community
spirit. In addition, the Company believes that its marketing and customer
service functions are more effective when tailored to the local market
population. The regional presence of Dobson's call centers enhances its
knowledge of local markets, which improves the Company's ability to provide
customer service, credit and collection and order activation. However, the
Company retains centralized control of marketing, customer service, pricing,
system design, engineering, purchasing, financial and administrative functions
to maximize operating leverage and continuity over its cellular systems.
The Company has developed organizational, marketing and operational programs
designed to increase the number and retention of subscribers, promote superior
customer service, control subscriber acquisition costs and enhance operating
cash flow. The Company intends to apply these programs to the properties it
acquires. In addition to the Sygnet Acquisition, the Company recently closed
into escrow its acquisitions of the FCC licenses for, and certain assets related
to, Texas 10 RSA for $55.0 million in cash, and Ohio 2 RSA for $39.3 million in
cash. Recently, the Company entered into an agreement for the purchase of the
FCC licenses for, and certain assets related to, Maryland 1 RSA for $9.1 million
in cash, subject to adjustment.
STRATEGY
The Company's business strategy is to focus on the development and
acquisition of rural and suburban cellular systems. The principal elements of
the Company's strategy include:
INTEGRATE ACQUIRED OPERATIONS. The Company intends to integrate the
operations of systems it acquires, including Sygnet, with the Company's existing
cellular operations to achieve economies of scale.
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Management believes that these increased efficiencies will come from the
centralized control of pricing, customer service and marketing, system design,
engineering, purchasing, financial and administrative functions and from the
consolidation of billing functions. The Company expects to consolidate Sygnet's
three call service centers and one of the Company's call centers. Following
completion of the Maryland 1 Acquisition, the Company's subscribers and total
Pops will approximately double to 347,306 and 5.8 million, respectively. The
Company intends to use its increased leverage in negotiating prices and services
from third party service providers and equipment vendors.
EXPAND STRATEGIC RELATIONSHIPS. The Company intends to continue to maintain
and expand strategic relationships with operators of cellular systems in major
MSAs near the Company's systems. These relationships include roaming agreements
which allow the Company's subscribers to use the system in the neighboring MSA
at favorable rates. Under these agreements, similar benefits are available to
the MSA operator's subscribers roaming in the Company's areas. In addition, the
Company will deploy digital technology in its system area which is the same as
that selected by the Company's roaming partner in the neighboring MSA. The
Company also markets its cellular products and services under the predominant
brand name in the neighboring MSA. Such brand names include CELLULAR
ONE-Registered Trademark-, AIRTOUCH-SM- CELLULAR and AT&T Wireless
Services-Registered Trademark-. These strategic relationships and agreements
enable the Company to increase its roaming revenue, offer its subscribers larger
home rate areas and leverage the recognized brand names of its roaming partners
and their extensive marketing efforts. See "Risk Factors-- Reliance on Use of
Third Party Service Marks."
AGGRESSIVE LOCAL MARKETING AND PROMOTION OF CELLULAR SERVICES. The
Company's marketing objective is to continue to distinguish itself as the local
market's leading cellular services provider, stressing its service quality,
local sales offices and commitment to the community. The Company's sales efforts
are conducted primarily through its retail outlets and its direct sales force
and, to a lesser extent, through independent agents.
TARGETED SALES EFFORTS. The Company seeks to attract subscribers who are
likely to generate high monthly revenue and low churn rates. Local management
conducts market research to identify and design marketing programs to attract
these subscribers and tailor distinctive rate plans and roaming rates to
emphasize the quality, value and advantage of the Company's cellular service.
SUPERIOR CUSTOMER SERVICE. The Company intends to maintain a high level of
customer satisfaction through a variety of techniques, including maintaining
24-hour customer service. The Company supports local customer service through
the Company's direct sales force and its retail stores, and through regional
customer service centers.
CONTINUED SYSTEM DEVELOPMENT. The Company believes that increasing capacity
and upgrading its systems will attract additional subscribers, enhance the use
of its systems by existing subscribers, increase roaming activity and further
enhance the overall efficiency of the network. The Company intends to continue
to upgrade its systems with digital technology to enable it to increase roaming
(by servicing the increasing number of digital cellular subscribers and PCS
subscribers with dual mode phones) and provide enhanced capabilities, including
caller ID, longer battery life and zone billing. From January 1, 1997 through
September 30, 1998, the Company installed digital technology in its Eastern and
Central Regions, with the exception of the Kansas/Missouri RSAs, and expects to
complete the installation of digital technology in its Western Region in 1999.
Sygnet's digital systems covered approximately 84% of the total Pops in its
market areas at September 30, 1998. The remaining Sygnet systems are expected to
be upgraded to digital during 1999. Substantially all of the Company's and
Sygnet's systems are or will be serviced by digital technology by the end of
1999.
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DISCIPLINED EXPANSION THROUGH ACQUISITIONS. The Company continually
evaluates opportunities to acquire additional rural and suburban cellular
systems. In evaluating acquisitions, the Company targets RSAs and small MSAs
that have some or all of the following characteristics in addition to others:
- are adjacent to major metropolitan areas;
- have positive population growth trends;
- include a high concentration of expressway corridors that have a
significant amount of roaming activity; and
- have the potential to develop strategic relationships with operators of
neighboring wireless systems and the ability to offer service under a
leading brand name.
The Company is presently evaluating, and is in discussions with, a number of
potential acquisition candidates. Sygnet is 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 license remains subject to
administrative and judicial review, the closing of such acquisition has been
delayed. Pending such closing, Sygnet is managing the operation of the cellular
system in the market under the supervision and control of the seller. The
Company has no agreements with respect to any acquisitions other the Maryland 1
Acquisition and the Pennsylvania 2 Acquisition.
DISCONTINUED OPERATIONS
The Company, through its wholly owned subsidiary, Logix, provides integrated
local, long distance, data and other telecommunications services to small and
medium-sized business customers throughout the Southwest United States. Logix
operates long-haul fiber optic facilities in Oklahoma, Texas and Colorado. Logix
recently began offering switch-based integrated communications provider services
in Oklahoma City, Tulsa and Amarillo. In addition, since the consummation of the
American Telco Acquisition on June 15, 1998, it has offered these services in
Houston, Austin, Dallas, Fort Worth and San Antonio. For the year ended December
31, 1997 and the nine months ended September 30, 1998, Logix had revenues of
$20.2 million and $40.2 million, respectively, operating income (loss) of $3.2
million and $(10.6) million, respectively, and Adjusted EBITDA of $8.2 million
and $(2.9) million, respectively. At September 30, 1998, Logix had total assets
of $402.8 million, total debt of $377.9 million and shareholder's deficit of $.6
million.
Logix has been designated an Unrestricted Subsidiary with respect to the
Preferred Stock and will not be subject to certain covenant restrictions which
apply to the rest of the Company's operations. The Company intends to distribute
the stock of Logix to certain of the Company's shareholders, subject to receipt
of a favorable tax ruling from the Internal Revenue Service. Logix is accounted
for as a discontinued operation in the Company's consolidated financial
statements.
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MARKETS AND SYSTEMS
The following table sets forth certain data with respect to the Company's
existing cellular systems and its Recent and Pending Acquisitions:
<TABLE>
<CAPTION>
TOTAL TOTAL MARKET YEAR
PROPERTIES POPS OWNERSHIP NET POPS SUBSCRIBERS(1) PENETRATION(2) ACQUIRED/EXPECTED
- ------------------------------------ ---------- ------------- ---------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
CENTRAL REGION(3)
Oklahoma 5 and 7................... 148,500 64.4% 95,634 17,266 11.6% 1989
Texas Panhandle................... 88,500 61.0 53,985 14,328 16.2 1989
Northwest Oklahoma................ 105,100 100.0 105,100 6,938 6.6 1991
Kansas/Missouri................... 246,500 100.0 246,500 7,881 3.2 1996
Texas 16.......................... 334,000 100.0 334,000 5,761 1.7 1998
---------- ---------- -------------
Total........................... 922,600 835,219 52,174
---------- ---------- -------------
EASTERN REGION(4)
East Maryland...................... 453,700 100.0 453,700 33,942 7.5 1997
West Maryland..................... 441,000 100.0 441,000 28,248 6.4 1997
---------- ---------- -------------
Total........................... 894,700 894,700 62,190
---------- ---------- -------------
WESTERN REGION
Arizona 5.......................... 202,100 75.0 151,575 10,081 5.0 1997
California 7...................... 149,300 100.0 149,300 3,280 2.2 1998
California 4...................... 377,300 100.0 377,300 17,888 4.7 1998
Santa Cruz........................ 245,600 86.9 213,426 17,407 7.1 1998
---------- ---------- -------------
Total........................... 974,300 891,601 48,656
---------- ---------- -------------
Total--All Regions................ 2,791,600 2,621,520 163,020
---------- ---------- -------------
RECENT AND PENDING ACQUISITIONS
Ohio 2(5).......................... 262,100 100.0 262,100 14,000(6) 5.3(6) September 1998
Texas 10 (5)...................... 317,900 100.0 317,900 3,000(6) 0.9(6) December 1998
Sygnet(7)......................... 2,374,000 100.0 2,374,000 166,886(6) 7.0(6) December 1998
Maryland 1........................ 29,800 100.0 29,800 400(6) 1.3(6) March 1999
---------- ---------- -------------
Total--Acquisitions................. 2,983,800 2,983,800 184,286
---------- ---------- -------------
Total--All Properties............... 5,775,400 5,605,320 347,306
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
- ------------------------
(1) As of September 30, 1998.
(2) Determined by dividing total subscribers by the total Pops covered by the
applicable FCC cellular license or authorizations held or to be acquired by
the Company.
(3) The Central Region consists of Oklahoma 5 RSA and Oklahoma 7 RSA, Texas 2
RSA, Enid, Oklahoma MSA, Oklahoma 2 RSA, Texas 16 RSA, Kansas 5 RSA,
Missouri 1 RSA, Missouri 4 RSA and Missouri 5 RSA. The Company's FCC
licenses for Oklahoma 5 RSA and Oklahoma 7 RSA do not include Kingfisher and
Blaine Counties, approximately one-half of Dewey County (total Pops
estimated by the Company to be 3,000 for the area in Dewey County not
covered by the Company's FCC license), Harmon and Greer Counties. The
Company also owns a 5% interest in a partnership which owns the cellular
system in Oklahoma 3 RSA which has total Pops of 205,600. Information
regarding Oklahoma 3 RSA is excluded because the Company does not manage the
system. The Company's license for Missouri 5 RSA covers only the Linn County
portion of the RSA.
(4) East Maryland consists of Maryland 2 RSA. West Maryland includes Cumberland,
Maryland MSA, Hagerstown, Maryland MSA, Maryland 3 RSA and Pennsylvania 10
West RSA. The FCC license for the Pennsylvania 10 West RSA covers only
Bedford County. Information for this RSA relates only to the area covered by
the Company's FCC licenses. Upon the closing of the Maryland 1 Acquisition,
Maryland 1 will become part of the West Maryland market area.
(5) The Company completed the acquisition of the FCC licenses for Ohio 2 RSA on
September 2, 1998 and the Texas 10 RSA on December 2, 1998. The Company is
negotiating with AirTouch in Ohio 2 RSA and with AT&T Wireless in Texas 10
RSA for the purchase of subscribers and the lease of certain equipment
necessary to operate systems in each area. The purchase price for each of
Ohio 2 RSA and Texas 10 RSA is held in escrow pending resolution of claims
made against the titles to the FCC licenses of the respective sellers to the
Company. See "Risk Factors--Recent Acquisitions."
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(6) Based upon information provided by the sellers of the subscribers.
(7) Consists of the Youngstown, Ohio MSA, Sharon, Pennsylvania MSA, Ohio 11 RSA,
Erie, Pennsylvania MSA, New York 3 RSA, Pennsylvania 1 RSA, Pennsylvania 2
RSA, Pennsylvania 6 RSA and Pennsylvania 7 RSA. Sygnet had previously
operated Pennsylvania 2 RSA under an interim operating authority which was
terminated on June 3, 1997 when the FCC awarded a permanent license to
Pinellas Communications. On June 8, 1998, Sygnet entered into an agreement
to purchase Pennsylvania 2 RSA for $6.0 million in cash. Since then, Sygnet
has been operating Pennsylvania 2 under a management and lease agreement
with the present owner of Pennsylvania 2, which will continue in effect
until the FCC's grant of the license to the present owner is no longer
subject to reconsideration or judicial review.
CENTRAL REGION
The Company's licensed systems and related assets in the Central Region
include properties in western Oklahoma (Oklahoma 5 RSA and Oklahoma 7 RSA), the
Texas Panhandle (Texas 2 RSA), Northwest Oklahoma (Enid, OK MSA and Oklahoma 2
RSA), Kansas/Missouri (Kansas 5, Missouri 1, Missouri 4 and Missouri 5 RSAs) and
Texas 16 RSA.
OKLAHOMA AND TEXAS PANHANDLE
GENERAL. The Company initiated cellular operations in western Oklahoma and
the Texas Panhandle area in 1990 as a start-up operation, activated its first
cell site in March 1991, and acquired additional properties in the area and in
Northwest Oklahoma in 1991. The Company's systems in Oklahoma 5 and 7, Northwest
Oklahoma, Central Texas and the Texas Panhandle include 0.3 million total Pops,
and 38,532 subscribers representing a 11.3% market penetration as of September
30, 1998.
DEMOGRAPHICS. The Oklahoma and the Texas Panhandle properties cover a
contiguous area of approximately 27,000 square miles and extend west from
Oklahoma City along I-40 to Amarillo, Texas. The Northwest Oklahoma properties
are located north and northwest of Oklahoma City. The principal industries in
Oklahoma and the Texas Panhandle are agriculture and oil and gas.
MARKETING AND ROAMING. The Company operates under the brand name CELLULAR
ONE-Registered Trademark- in Northwest Oklahoma and Dobson Cellular-TM- in
Oklahoma 5 and 7 and in and the Texas Panhandle. The Company currently has 10
retail stores, six kiosks locations and approximately 50 agents in the area. The
Company has roaming agreements with SWBM, AT&T Wireless and several other
companies which include their respective market areas in Oklahoma City, Amarillo
and adjacent RSAs.
SYSTEMS. There are 46 cell sites covering substantially all of the total
Pops in Oklahoma 5 and 7, Northwest Oklahoma and the Texas Panhandle. The
Company has completed upgrading its system in this area to analog/TDMA IS-136
digital service.
KANSAS/MISSOURI
GENERAL. In March 1996, the Company purchased the FCC license, and related
assets for, the Kansas 5 RSA, Missouri 1 RSA, Missouri 4 RSA and a portion of
the Missouri 5 RSA. The Kansas/Missouri properties are located in northeastern
Kansas and northwestern Missouri near Kansas City, and cellular services have
been provided in this area since 1992. The Company's Kansas/Missouri systems
include 246,500 total Pops and, at September 30, 1998, the Company had 7,881
subscribers, representing a 3.2% market penetration.
DEMOGRAPHICS. The Kansas and Missouri properties cover a contiguous area of
approximately 10,500 square miles. Leavenworth, Kansas, the largest city in the
Kansas and Missouri properties, serves primarily as a bedroom community to
Kansas City.
MARKETING AND ROAMING. The Company operates under the CELLULAR
ONE-Registered Trademark- service mark in its Kansas and Missouri properties.
Since March 1996, the Company has increased the number of retail locations from
one to four, and currently has 16 sales agents in this area. The Company has a
roaming agreement with CMT, a partnership between AirTouch and AT&T Wireless,
which includes the Kansas
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City and St. Joseph MSAs and adjacent RSAs. The Company also has roaming
agreements with Western Wireless and U.S. Cellular, each of which has systems
adjacent to the Kansas and Missouri properties.
SYSTEMS. The Kansas and Missouri properties include 28 cell sites which
cover approximately 75% of the population. The Company currently expects to
convert its system to analog/CDMA digital technology, which is the digital
technology for the Kansas City and St. Joseph MSAs chosen by CMT. However, a
final selection of the digital technology to be employed, and the timing of its
installation, is pending the choice of digital technology by the holder of the
Kansas City MSA.
TEXAS 16
GENERAL. On January 26, 1998, the Company purchased the FCC cellular
license for, and certain assets relating to, the Texas 16 RSA which is located
in south-central Texas in an area bordered by Austin, Houston and San Antonio.
Texas 16 has 334,000 total Pops and, as of September 30, 1998, there were over
5,761 subscribers (representing a 1.7% market penetration).
DEMOGRAPHICS. Texas 16 covers an area of approximately 10,900 square miles
in central Texas in which the principal industries are agriculture, oil and gas,
steel and plastics. The service area includes approximately 100 miles of I-10,
which connects Houston and San Antonio, 60 miles of US-59, and 90 miles of
US-290. US-290 runs parallel to I-10 and connects Houston to Austin.
MARKETING AND ROAMING. The Company has entered into roaming agreements with
Houston Cellular, a partnership between AT&T Wireless and BellSouth Mobility,
for the Houston market, and with AT&T Wireless for the San Antonio and Austin
markets. The Company operates under the brand name CELLULAR
ONE-Registered Trademark- in Texas 16. The Company has six existing retail
outlets in Texas 16 and intends to open one additional outlet.
SYSTEMS. Texas 16 has one Lucent switch and 27 cell sites which cover
substantially all of the Pops in the market area. The Company has recently
completed upgrading its system in Texas 16, and currently provides analog/TDMA
IS-136 service.
EASTERN REGION
The Company's licensed systems and related assets in the Eastern Region
include its properties in eastern Maryland (Maryland 2 RSA) and western Maryland
and southeastern Pennsylvania (Cumberland MSA, Hagerstown MSA and Pennsylvania
10 West RSA) near the Washington-Baltimore area and along the eastern shore of
Maryland.
GENERAL. On March 3, 1997, the Company purchased the FCC cellular license
for, and certain assets relating to, East Maryland for $75.8 million. The prior
owner of the East Maryland license had no employees, distribution facilities or
cell sites, and the property was serviced by Washington Baltimore Cellular
Limited Partnership ("WBCLP"), an affiliate of SWBM, under an interim operating
authority. In October 1997, the Company assumed control of customer service,
billing and activations in East Maryland and in May 1998, the Company assumed
all operations in East Maryland. The Company intends to add additional cell
sites and voice channels in East Maryland as its local subscriber base and
roaming traffic increase. On February 28, 1997, the Company also purchased the
FCC cellular licenses for, and certain assets relating to West Maryland for
$77.6 million. Cellular service has been provided in West Maryland since 1991.
The Company's systems in its Eastern Region include 894,700 total Pops, and at
September 30, 1998, the Company had 62,190 subscribers, representing a 7.0%
market penetration.
DEMOGRAPHICS. The Eastern Region covers approximately 6,200 square miles.
East Maryland encompasses suburban areas south and east of Washington, D.C. as
well as the eastern shore of Maryland. Many residents in Maryland commute to
Annapolis, Baltimore and Washington, D.C. and there is a heavy traffic pattern
in East Maryland during the summer months as tourists travel to and from several
popular vacation spots along the eastern shore, especially Ocean City. Maryland
properties are within 50 miles of
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Washington, D.C. and Baltimore. The areas has numerous high-technology
businesses and is considered a high-commuter market due to its proximity to
nearby metropolitan areas.
MARKETING AND ROAMING. In its Eastern Region, the Company operates under
the brand name CELLULAR ONE-Registered Trademark-, which is the dominant brand
name within the Washington/Baltimore area. The Company presently has nine retail
stores, five kiosks and 42 agents in its Eastern Region, and intends to open
additional retail locations.
The Company has a roaming agreement with AT&T Wireless which covers the
Company's entire Eastern Region. The Company also has roaming agreements with
SWBM, which operates under the CELLULAR ONE-Registered Trademark- brand name in
the Washington, D.C. area, that allows each party to include in its home
coverage footprint the other party's system, and with Vanguard, which operates a
system adjacent to certain of the Company's properties on the north and east of
the Eastern Region.
SYSTEMS. The Company has 44 cell sites in its Eastern Region which cover
substantially all the population in the market area. The Company has converted
its Eastern Region systems to analog/IS-136 TDMA digital technology. In West
Maryland, the Company currently has 19 cell sites covering substantially all of
the population in the market area. In East Maryland the Company has 25 cell
sites which cover substantially all of the population in the market area.
WESTERN REGION
The Company's licensed systems and related assets in the Western Region
includes its properties in southern California (California 7 RSA) and Arizona
(Arizona 5 RSA) ("Arizona/Southern California") and California 4 RSA and Santa
Cruz MSA in Northern California.
ARIZONA/SOUTHERN CALIFORNIA
GENERAL. On October 1, 1997, the Company acquired a 75% interest in the
Arizona 5 Partnership, which owns the FCC license for, and certain assets
relating to, Arizona 5 RSA for $39.8 million. The Company is the operating
manager of the Arizona 5 Partnership. On July 29, 1998, the Company acquired the
FCC license for, and certain assets relating to, California 7 RSA for $21.0
million. The Company's systems in Arizona/Southern California include 351,400
Pops and, at September 30, 1998, the Company had 13,361 subscribers representing
3.8% market penetration.
DEMOGRAPHICS. The Arizona/Southern California properties cover an area of
approximately 10,100 square miles in southern Arizona between Phoenix and
Tucson, and an area of approximately 4,200 square miles between San Diego and
the Arizona state line bordering Mexico. The principal industries in Arizona 5
are mining and smelting. Arizona 5 experiences significant tourist traffic to
the local Indian dwellings and commuter traffic to Phoenix and Tucson.
California 7 has experiences high roaming traffic as I-8, connecting San Diego
to Phoenix and Tucson, runs through California 7.
MARKETING AND ROAMING. In Arizona 5 and California 7, the Company has
roaming agreements with AirTouch. The Company is licensed to use the
AIRTOUCH-TM- CELLULAR service mark to identify and promote its cellular
telephone service in Arizona 5 and California 7. The roaming agreements provide
for Airtouch and the Company to include each other's service area in its home
coverage footprint, allowing each party to offer a wider service area.
AirTouch's service area includes Phoenix and Tucson. Airtouch's service area
includes San Diego. At present, the Company has one retail location and 14
agents in Arizona and 4 retail locations and 9 agents in California 7. The
Company intends to open additional retail locations, increase the number of
agents, and increase the use and marketing of the AIRTOUCH-TM- CELLULAR name in
the coverage area.
SYSTEMS. Arizona 5 has 18 cell sites which cover approximately 90% of the
population in the market area. The system is currently switched out of the
Phoenix office of US WEST. The Company intends to continue this arrangement with
US WEST until it installs its own switch. The core cell sites in Arizona 5
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are analog/CDMA digital, which is the digital technology used by AirTouch in the
Phoenix and Tucson MSAs. California 7 has seven cell sites and a central
switching office, covering approximately 90% of the population. The Company
intends to replace all of the equipment in these two markets in the first
quarter of 1999 and install additional cell sites over the next several years
utilizing analog/CDMA digital technology.
NORTHERN CALIFORNIA
GENERAL. On April 1, 1998, the Company acquired the corporation that owned
the FCC license for, and certain assets related to, California 4 for an
aggregate purchase price of $90.9 million. California 4 is located in northern
California approximately 50 miles inland from California's central coast in an
area between Fresno and Modesto. California 4 has 377,300 total Pops and, as of
September 30, 1998, there were approximately 17,888 subscribers (representing a
4.7% market penetration).
On June 16, 1998, the Company purchased 86.4% of the outstanding stock of
the corporation that owns the FCC cellular license for, and the assets relating
to, the Santa Cruz MSA, for $31.0 million. Subsequent to September 30, 1998, the
Company acquired an additional 0.5% interest in the corporation for $.2 million.
The Santa Cruz property is adjacent to California 4 and is located southwest of
San Jose and north of the Monterey Peninsula, on California's Pacific coastline.
Santa Cruz has 245,600 total Pops (213,426 Net Pops) and, as of September 30,
1998, there were 17,407 subscribers (representing a 7.1% market penetration).
DEMOGRAPHICS. The Northern California properties cover an area of
approximately 5,900 square miles in northern and north-central California. The
principal industries in these areas are manufacturing and agriculture. In
addition, the areas experience significant tourist traffic as one of the
entrances to Yosemite National Park is located in the eastern segment California
4. The service area includes approximately 37 miles of Route 99 between
Sacramento and Los Angeles, 60 miles of I-25 between San Francisco and Los
Angeles, 37 miles of State Highway 1 that runs along the California Pacific
coastline, and 13 miles of State Highway 17 that connects Santa Cruz to San
Jose.
MARKETING AND ROAMING. The Company has entered into roaming agreements with
AT&T Wireless in California 4 which will permit the Company to include AT&T
Wireless' service area in its home rate area, allow the Company to offer a wider
service area. The AT&T Wireless service area includes San Francisco, Fresno and
Modesto. The Company has a roaming agreement with AT&T Wireless and Bay Area
Cellular, a partnership between AT&T Wireless and AirTouch, for Santa Cruz, and
is negotiating a new roaming agreement. The Company uses the brand name CELLULAR
ONE-Registered Trademark- to market its services in Northern California and
currently operates 13 retail locations in the area.
SYSTEMS. California 4 has one switch and 25 cell sites which cover
substantially all of the population in the market area, and Santa Cruz has 15
cell sites which cover substantially all of the population in the market area.
The Company intends to replace the systems' and existing equipment and install
additional cell sites utilizing analog/TDMA IS-136 digital technology in 1999.
RECENT AND PENDING ACQUISITIONS
OHIO 2
GENERAL. On September 2, 1998, the Company purchased the FCC license for,
and related assets of, Ohio 2 RSA for $39.3 million, subject to resolution of
certain matters regarding the seller's title to the FCC licenses. Ohio 2 is
located in north-central Ohio bordered by Lake Erie on the north and Cleveland
on the east, and includes total Pops of 262,100. The Company is negotiating with
AirTouch for an agreement to purchase approximately 14,000 subscribers in Ohio 2
and to lease certain equipment necessary to operate the property. The Company
expects to convert the Ohio 2 subscriber base to the Company's system and assume
all operations of Ohio 2 in the first quarter of 1999. Along with the Sygnet
properties, Ohio 2 will be included in the Company's Northern Region.
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DEMOGRAPHICS. Ohio 2 covers an area of approximately 1,700 square miles in
north central Ohio in which the principal industries are manufacturing and
agriculture. The Ohio 2 market includes 54 miles of I-80, linking Sandusky to
Toledo, Akron and Cleveland, 56 miles of US-224 and 35 miles of State Highway 4.
MARKETING AND ROAMING. The Company will market its products and services in
Ohio 2 under the name Airtouch Cellular. Ohio 2 currently has two retail outlets
and two sales agents. The Company plans to open three additional retail outlets
in 1999. The Company is in negotiations with AirTouch for a roaming agreement
that will provide for the Company and Airtouch to include each other's service
area in its coverage footprint.
TEXAS 10
GENERAL. On December 2, 1998, the Company purchased the FCC licenses for,
and certain assets related to, Texas 10 RSA for $55.0 million, subject to
resolution of certain matters regarding the seller's title to the FCC licenses.
Texas 10 is located in north-central Texas, in an area bordered by Dallas,
Austin, Tyler and Longview MSAs, with approximately 317,900 total Pops. The
Company is negotiating with AT&T Wireless for an agreement to purchase
approximately 3,000 subscribers in Texas 10 and to lease certain equipment
necessary to operate the property. The Company expects to convert Texas 10
subscribers to the Company's system and assume all operations in the first
quarter of 1999. Texas 10 will be included in the Company's Central Region.
DEMOGRAPHICS. Texas 10 covers an area of approximately 9,000 square miles
in central Texas in which the principal industries are agriculture, oil and gas
and manufacturing. The service area includes 90 miles of I-45 connecting Dallas
and Houston, 30 miles of I-20 connecting Dallas and Shreveport and 130 miles of
US-79.
MARKETING AND ROAMING. The Company expects to market its products and
services in Texas 10 under the CELLULAR ONE brand name. Additionally, the
Company intends to enter into roaming agreements with Houston Cellular and AT&T
Wireless similar to the existing agreements at Texas 16. There are currently no
retail outlets in Texas 10; however, the Company plans to open five retail
outlets in 1999.
SYGNET
GENERAL. Sygnet owns and operates a single large cluster covering nine
contiguous 100%-owned markets (six RSAs and three MSAs) in northeastern Ohio,
western Pennsylvania and western New York. Sygnet's rural and suburban markets
are located between several major cities (Cleveland, Buffalo, and Pittsburgh).
Sygnet's markets have approximately 2.4 million total Pops and, as of September
30, 1998, there were 166,886 cellular subscribers representing a 7.0% market
penetration. Along with Ohio 2, the Sygnet properties will be operated by the
Company as its Northern Region.
DEMOGRAPHICS. The Sygnet properties cover an area in which the principal
industries are manufacturing, healthcare, high-technology and tourism. The
Sygnet properties include major transportation corridors connecting the
Cleveland, Akron-Canton, Pittsburgh, Buffalo and Rochester metropolitan areas.
The Youngstown market contains a portion of the Ohio Turnpike, a key traffic
corridor between Pittsburgh and Cleveland and straddles I-80, a major
transportation link between the Midwest and New York City; the Erie market
includes portions of I-79 and I-90; the Pennsylvania market includes the
Pennsylvania Turnpike, I-79 and I-80 and other key commuting routes to
Pittsburgh; and the New York market includes the New York Thruway between
Buffalo and Rochester, as well as many recreational areas.
MARKETING AND ROAMING. Roaming revenue is a substantial source of revenue
for Sygnet as a number of its cellular systems are located along major travel
and commuting corridors. Sygnet has roaming agreements with AT&T Wireless,
AirTouch and SBC and is a member of NACN, the world's largest telephone network
system, linking non-wireline cellular operations throughout the United States
and Canada. Most of Sygnet's cellular products and services are marketed under
the CELLULAR ONE-Registered Trademark-
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brand name. In its Youngstown market, Sygnet's cellular products and services
are marketed under the name "Wilcom Cellular" which has a strong local identity.
At September 30, 1998, Sygnet had 51 retail stores and outlets and agreements
with over 60 independent sales agents.
SYSTEMS. At September 30, 1998, the Sygnet network consisted of a Nortel
and an Ericsson cellular switch, 181 cell sites, 4 high power enhancers, 1 low
power enhancer and a large microwave network with 151 links. The Sygnet system
supports AMPS and TDMA services. Sygnet has upgraded its Ohio and Pennsylvania
systems to TDMA IS-136 digital technology for its systems which includes 130 of
its 181 cell sites. Sygnet owns 124 of its 134 cellular towers. In connection
with the Sygnet Acquisition, Sygnet sold substantially all of its own towers to
Dobson Tower in the Tower Sale Leaseback.
MARYLAND 1
GENERAL. On November 24, 1998, the Company entered into an agreement to
purchase the FCC licenses for, and certain assets related to, Maryland 1 RSA for
$9.1 million, subject to adjustment. Maryland 1 is located in western Maryland
and will be operated by the Company as a part of its West Maryland market.
Maryland 1 has approximately 29,800 total Pops with an estimated subscriber base
of 400, representing a 1.3% market penetration. The acquisition of Maryland 1 is
expected to close late in the first quarter of 1999.
DEMOGRAPHICS. Maryland 1 is adjacent to the Company's West Maryland market.
It includes 32 miles of I-68 which connects Morgantown, West Virginia and
Cumberland, Maryland.
SYSTEMS. Maryland 1 currently has six cell sites. The Company plans to add
five additional cell sites in 1999.
MARKETING AND ROAMING. Maryland 1 will be operated as part of the Company's
West Maryland market area. Maryland 1 has two retail locations and the Company
plans to add one additional outlet in 1999. Maryland 1 will be operated under
the Company's existing roaming agreements applicable to the West Maryland area.
CELLULAR OPERATIONS
PRODUCTS AND SERVICES
The Company provides a variety of cellular services and products designed to
address a range of consumer, business and personal needs. In addition to mobile
voice and data transmission, the Company offers ancillary services such as call
forwarding, call waiting, three-party conference calling, voice message storage
and retrieval and no-answer transfer. The nature of the services offered by the
Company varies depending upon the market area. The Company also sells cellular
equipment at discount prices and uses free phone promotions as a way to
encourage use of its mobile services. The Company offers cellular service for a
fixed monthly access fee (accompanied by varying allotments of unbilled or
"free" minutes), plus additional variable charges per minute of use and for
custom calling features. Various pricing programs (which include single year
and, to a lesser extent, multi-year service contracts) are utilized. Unlike some
of its competitors, the Company designs rate plans on a market-by-market basis.
The Company's local general managers generally have the authority to initiate
and modify rate plans, depending upon market and competitive conditions.
Generally, these rate plans include a high-volume user plan, a medium-volume
user plan, a basic plan and an economy plan. In general, rate plans which
include a higher monthly access fee typically include a lower usage rate per
minute. An ongoing review of equipment and service plan pricing is maintained
and, as appropriate, revisions to pricing are made to meet the demands of the
local marketplace.
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CUSTOMER SERVICE
Customer service is an essential element of the marketing and operating
philosophies of the Company. The Company is committed to attracting new
subscribers and retaining existing subscribers by providing consistently
high-quality customer service. In each of its cellular service areas, the
Company maintains installation and repair facilities and a local staff,
including a market manager, customer service representatives, technical and
sales representatives. Each cellular service area handles its own customer-
related functions such as customer activations, account adjustments and rate
plan changes. Local offices and installation and repair facilities enable the
Company to service customers better, schedule installations and make repairs.
Through the use of sophisticated, centralized monitoring equipment, the Company
will be able to centrally monitor the technical performance of its cellular
service areas.
In addition, the Company's customers generally are able to report cellular
telephone service or account problems 24-hours a day to the Company's regional
customer service centers located in Oklahoma City, OK and Frederick, MD on a
toll-free access number (with no airtime charge). Upon consummation of the
Sygnet Acquisition, the Company intends to provide customer service for Sygnet's
markets through its Frederick, MD service center. The Company recently opened a
regional customer service center in California 4. Management believes its
emphasis on customer service affords it a competitive advantage over its large
competitors. The Company contacts its subscribers at frequent intervals in order
to evaluate and measure, on an ongoing basis, the quality and competitiveness of
its services.
SALES, MARKETING AND DISTRIBUTION
The Company focuses its marketing program on attracting subscribers who are
likely to generate high monthly revenue and low churn rates. The Company
undertakes extensive market research to identify and design marketing programs
to attract these subscribers and tailor distinctive rate plans and roaming rates
to emphasize the quality, value and advantage of the Company's cellular service.
The Company has established marketing alliances with neighboring cellular
systems to create larger home rate areas and to effectively expand the Company's
footprint in order to increase its roaming revenue and to attract new
subscribers. The Company markets its service offerings primarily through its
direct sales force and Company-owned retail stores. The Company also uses a
network of dealers and other agents, such as electronics stores, car dealerships
and department stores. In addition to these traditional channels, the Company's
marketing team continuously evaluates other, less traditional, methods of
distributing the Company's services and products, such as targeted telemarketing
and direct mail programs.
The Company markets its cellular products and services under both national
brand names and a Company brand name. See "--Service Marks." The service mark
selected for use by the Company in each of its markets depends, to a large
extent, upon the service mark used in neighboring MSAs. The Company markets its
cellular products and services under the name Dobson Cellular-TM- in portions of
Oklahoma 5 and 7 and the Texas Panhandle. In its Northwest Oklahoma, Kansas and
Missouri, and Eastern Region markets, the Company markets its cellular service
under the name CELLULAR ONE-Registered Trademark-, one of the most recognized
brand names in the cellular industry. The national advertising campaign
conducted by the Cellular One Group enhances the Company's advertising exposure
at a fraction of the cost of what could be achieved by the Company alone. The
Company uses the service mark AIRTOUCH-TM- CELLULAR in its southern California
and Arizona properties and expects to use a national brand name in central Texas
and the name CELLULAR ONE-Registered Trademark- in northern California. In its
Northern Region, the Company expects to continue Sygnet's use of the CELLULAR
ONE-Registered Trademark- brand name in all of Sygnet's areas other than the
Youngstown and Sharon MSAs in which the name Wilcom Cellular will continue to be
utilized. In Ohio 2, the Company intends to use the service mark AIRTOUCH-TM-
CELLULAR. The service mark selected for use by the Company in each of its
clusters depends, to a large extent, upon the service mark used in neighboring
MSAs. See "--Service Marks."
Management trains and compensates its sales force in a manner designed to
stress the importance of customer service, high penetration levels and minimum
acquisition costs per subscriber. The Company believes that its direct sales
force is better able to select and screen new subscribers and select pricing
plans
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that realistically match subscriber means and needs than are independent agents.
In addition, the Company motivates its direct sales force to sell appropriate
rate plans to subscribers, thereby reducing churn, by linking payment of
commissions to subscriber retention. As a result, the Company's use of a direct
sales force keeps marketing costs low both directly, because commissions are
lower, and indirectly, because subscriber retention is higher than when
independent agents are used. The Company currently has 167 and Sygnet has over
60 direct sales agents.
The Company believes that the after-sale telemarketing program conducted by
its sales force and customer service personnel helps to reduce its churn rate.
This program enhances customer loyalty and allows the sales staff to check
customer satisfaction as well as to offer additional calling features, such as
voicemail, call waiting and call forwarding.
The Company operated 58 retail outlets and Sygnet operated 51 retail outlets
as of September 30, 1998. The Company's retail stores range in size from 420
square feet to 6,400 square feet, and each retail store is fully equipped to
handle customer service and telephone maintenance and installation. Some of
these stores are also authorized warranty repair centers. The Company's stores
provide subscriber-friendly retail environments (extended hours, large
selection, an expert sales staff and convenient locations) which make the sales
process quick and easy for the subscriber.
ROAMING
The Company believes that regional roaming is an important service component
for many subscribers. Accordingly, where possible, the Company attempts to
arrange reciprocal roaming agreements that allow customers to roam at
competitive prices. The Company believes this increases usage on all cellular
systems, including the Company's. Roaming is a substantial source of revenue for
the Company. The Company focuses on systems that are adjacent to major
metropolitan areas and include a high concentration of expressway corridors that
tend to result in a significant amount of roaming activity. The Company has
entered into roaming agreements with operators of cellular systems in adjoining
MSAs and others which provide for reciprocal roaming rates that allow customers
to roam at competitive prices which, in certain instances, are comparable to
home area rates. The following table lists the Company's principal roaming
partners in each of its cellular markets and in the markets to be acquired:
<TABLE>
<CAPTION>
CELLULAR MARKETS PRINCIPAL CELLULAR ROAMING PARTNERS
- ---------------------------------------------- ----------------------------------------------
<S> <C>
CENTRAL REGION:
Oklahoma 5 and 7............................ SWBM; AT&T Wireless
Texas Panhandle............................. SWBM; AT&T Wireless
Northwest Oklahoma.......................... SWBM; AT&T Wireless
Central Texas:
Texas 10.................................. AT&T Wireless
Texas 16.................................. AT&T Wireless; Houston Cellular
Kansas/Missouri............................. CMT; Western Wireless; U.S. Cellular
EASTERN REGION:
East Maryland............................... SWBM; AT&T Wireless; Vanguard
West Maryland............................... SWBM
WESTERN REGION:
Arizona/California:
Arizona 5................................. AirTouch
California 7.............................. AirTouch
California 4................................ AT&T Wireless
Santa Cruz.................................. AT&T Wireless; Bay Area Cellular
NORTHERN REGION:
Youngstown.................................. AT&T Wireless; AirTouch
Erie........................................ AT&T Wireless; AirTouch
New York.................................... AT&T Wireless; AirTouch
Pennsylvania................................ AT&T Wireless; AirTouch
Ohio 2...................................... AirTouch
</TABLE>
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The Company and Sygnet have agreements with NACN, which is the largest
wireless telephone network system in the world linking cellular operators
throughout the United States and Canada. NACN connects key areas across North
America so that customers can use their cellular phones to place and receive
calls in these areas as easily as they do in their home areas. Through NACN,
customers receive calls automatically without the use of complicated roaming
codes as they roam in more than 5,000 cities and towns in the United States and
Canada. In addition, special services such as call forwarding and call waiting
automatically follow subscribers as they travel.
PCS
In April 1997, the Company was granted PCS licenses in nine markets in
Oklahoma, Kansas and Missouri that are adjacent to or overlap the Company's
existing cellular markets. The PCS licenses obligate the Company to construct
network facilities that cover at least 25% of the population in each market
within five years from the grant of the license. The licenses cover an aggregate
of approximately 4.2 million total Pops. The Company has an agreement with AT&T
Wireless (PCS) under which the Company is a preferred roaming partner. See "Risk
Factors--PCS Risks," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
TECHNOLOGY AND SYSTEM DEVELOPMENT
OVERVIEW. Historically, most cellular services have transmitted voice and
data signals over analog-based systems, which use one continuous electronic
signal that varies in amplitude or frequency over a single radio channel.
Digital systems, on the other hand, convert voice or data signals into a stream
of digits that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions. This enhanced
capacity, along with enhancements in digital protocols, allows digital-based
wireless technologies to offer new and enhanced services, such as greater call
privacy and single number (or "find me") service, and more complex data
transmission features, such as "mobile office" applications (including
facsimile, electronic mail and connecting notebook computers with computer/data
networks).
While digital technology generally serves to reduce transmission
interference relative to analog technology, capacity limitations in the 8
kilobit cellular digital handsets now deployed by most digital cellular
operators also cause a perceptible decline in transmission quality. This gap in
transmission quality has proven to be a significant barrier to cellular
operators seeking to switch their customers from analog to digital service.
Enhanced 13 kilobit digital handsets developed by vendors for digital cellular
systems became available in late 1997. These new handsets offer transmission
quality comparable to current analog cellular handsets.
SYSTEM DEVELOPMENT. The Company develops or builds out its cellular service
areas by adding channels to existing cell sites and by building new cell sites
with an emphasis on improving coverage for hand-held phones in
heavily-trafficked areas. Such development is designed to increase capacity and
to improve coverage for projected subscriber demand and in response to
competitive factors. Projected subscriber demand is calculated for each cellular
service area on a cell-by-cell basis. The Company has historically met such
demand through a combination of augmenting channel capacity in existing cell
sites and building new cell sites. In January 1998, the Company entered into an
agreement with Lucent to purchase, over a four year period, 300 cell sites, two
switches and certain related hardware and software. The aggregate net cost to
the Company under this agreement is estimated to be $81.0 million. The Company
is also party to another equipment supply agreement, with Nortel, to purchase
approximately $65.0 million of cell site and switching equipment over the period
June 1997 to November 2001.
Cell site expansion is expected to enable the Company to continue to add and
retain subscribers, enhance subscriber use of the systems, increase roamer
traffic due to the larger geographic area covered by
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the cellular network and further enhance the overall efficiency of the network.
The Company believes that the increased cellular coverage will have a positive
impact on market penetration and subscriber usage.
The Company also continues to evaluate expansion through acquisitions of
other cellular properties that will further enhance its network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage and required capital expenditures. See "--Strategy."
DIGITAL TECHNOLOGY. Digital signal transmission is accomplished through the
use of frequency management technologies, or "protocols." These protocols
"manage" the radio channel either by dividing it into distinct time slots (TDMA)
or by assigning specific coding instructions to each packet of digitized data
that comprises a signal (CDMA). While the FCC has mandated that licensed
cellular systems in the United States must utilize compatible analog signaling
protocols, at present there is no required universal digital signaling protocol.
Because the CDMA and TDMA protocols are incompatible, a subscriber of a system
that relies on TDMA technology, for example, will be able to use a handset in an
area served by a system using CDMA, only if it is a dual-mode handset that
permits the subscriber to use the digital cellular system in that area.
Dual-mode handsets for TDMA/CDMA are not yet available and analog/TDMA handsets
have only recently become available. However, the FCC or industry organizations
may decide to move toward a universal digital switching protocol in the future.
Over the next decade, it is expected that many cellular systems will convert
from analog to digital technology. This conversion is due in part to capacity
constraints in many of the largest cellular markets, such as New York, Los
Angeles and Chicago. As carriers reach limited capacity levels, it may not be
possible to complete certain calls, especially during peak hours. Digital
technology increases system capacity and offers other advantages, often
including improved overall average signal quality, improved call security,
potentially lower incremental costs for additional subscribers and the ability
to provide data transmission services. The conversion from analog to digital
technology is expected to be an industry-wide process that will take a number of
years to complete. The Company has completed the conversion of many of its
systems to digital technology and expects to convert the remainder of its
systems (except for Kansas/ Missouri) by the end of 1999.
The technology utilized by the Company will be governed, to a large extent,
by the technology used by the large, dominant carriers in MSAs near the
Company's systems. The timing of the conversions will be governed by the
conversion rate of larger, neighboring MSAs, market conditions and financial
considerations.
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The following table reflects the digital technology currently used or
expected to be selected by the Company in each of its cellular markets.
<TABLE>
<CAPTION>
STATUS/EXPECTED
COMPLETION
CELLULAR MARKET DIGITAL TECHNOLOGY DATE
- ----------------------------------------------------------------------- ------------------------ --------------
<S> <C> <C>
CENTRAL REGION:
Oklahoma 5 and 7..................................................... analog/TDMA IS-136 Completed
Texas Panhandle...................................................... analog/TDMA IS-136 Completed
Northwest Oklahoma................................................... analog/TDMA IS-136 Completed
Central Texas:
Texas 10........................................................... analog/TDMA IS-136 3/31/99
Texas 16........................................................... analog/TDMA IS-136 Completed
Kansas/Missouri...................................................... N/A Pending(1)
EASTERN REGION:
East Maryland........................................................ analog/TDMA IS-136 Completed
West Maryland........................................................ analog/TDMA IS-136 Completed
WESTERN REGION:
Arizona/California:
Arizona 5.......................................................... analog/CDMA Completed
California 7....................................................... analog/CDMA 12/31/98
California 4......................................................... analog/TDMA IS-136 3/31/99
Santa Cruz........................................................... analog/TDMA IS-136 3/31/99
NORTHERN REGION:
Youngstown........................................................... analog/TDMA IS-136 Completed
Erie................................................................. analog/TDMA IS-136 Completed
New York............................................................. analog/TDMA IS-136 3/31/99
Pennsylvania......................................................... analog/TDMA IS-136 Completed
Ohio 2............................................................... analog/TDMA IS-136 3/31/99
</TABLE>
- ------------------------
(1) The Company has not yet selected the digital technology to deploy in the
Kansas/Missouri market.
INFORMATION SYSTEMS. Billing functions for the Company's cellular
operations are primarily provided by International Telecommunications Data
Service ("ITDS"). Proprietary software furnished by ITDS serves all functions of
billing for corporate and retail locations. All administrative and customer
maintenance functions are handled in-house with invoice processing and printing
handled by ITDS. The Company uses complementing software to the billing system
allowing the use of credit, collection and switch interfaces.
The Company operates a Nortel Meridian phone system with voice mail
features. In addition, the Company's customer service and collections groups
extensively utilize the automatic call distribution queues and traffic and
productivity reporting capacities of the system.
SERVICE MARKS
The Company owns the service mark Dobson Cellular-TM- which it uses in its
cellular telephone systems in western Oklahoma. While the Company has not
attempted to federally register the brand name "Dobson Cellular," the Company
believes that its prior use of this brand name in the limited areas where it is
used will enable the Company to effectively police against any infringing uses
of such brand name.
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The following table sets forth the brand names used, or intended to be used,
by the Company for products and services in each of its cellular markets:
<TABLE>
<CAPTION>
CELLULAR MARKET SERVICE MARK
- ------------------------------------------------------------ --------------------------------
<S> <C>
CENTRAL REGION:
Oklahoma 5 and 7.......................................... Dobson Cellular-TM-
Texas Panhandle........................................... Dobson Cellular-TM-
Northwest Oklahoma........................................ CELLULAR
ONE-Registered Trademark-
Central Texas............................................. CELLULAR
ONE-Registered Trademark-
Kansas and Missouri....................................... CELLULAR
ONE-Registered Trademark-
EASTERN REGION:
East Maryland............................................. CELLULAR
ONE-Registered Trademark-
West Maryland............................................. CELLULAR
ONE-Registered Trademark-
WESTERN REGION:
Arizona/California........................................ AIRTOUCH-TM- CELLULAR
California 4.............................................. CELLULAR
ONE-Registered Trademark-
Santa Cruz................................................ CELLULAR
ONE-Registered Trademark-
NORTHERN REGION:
Youngstown................................................ Wilcom Cellular
Erie...................................................... CELLULAR
ONE-Registered Trademark-
New York.................................................. CELLULAR
ONE-Registered Trademark-
Pennsylvania.............................................. CELLULAR
ONE-Registered Trademark-
Ohio 2.................................................... AIRTOUCH-TM- CELLULAR
</TABLE>
CELLULAR ONE-Registered Trademark- is a registered service mark with the
U.S. Patent and Trademark Office. The service mark is owned by Cellular One
Group, a Delaware general partnership of Cellular One Marketing, Inc., a
subsidiary of SWBM, Cellular One Development, Inc., a subsidiary of AT&T
Wireless, and Vanguard. The Company uses the CELLULAR ONE-Registered Trademark-
service mark to identify and promote its cellular telephone service pursuant to
licensing agreements with Cellular One Group. Licensing and advertising fees are
determined based upon the population of the licensed areas. The licensing
agreements require the Company to provide high-quality cellular telephone
service to its customers and to maintain a certain minimum overall customer
satisfaction rating in surveys commissioned by the licensor. The licensing
agreements have original five-year terms that begin expiring in 2000 and may be
renewed at the Company's option, subject to the satisfaction of certain
operating standards, for two additional five-year terms.
AIRTOUCH-TM- CELLULAR is a registered service mark licensed by AirTouch. In
connection with the Arizona 5 Acquisition, the Company entered into a licensing
agreement which permits the Company to use the AIRTOUCH-TM- CELLULAR service
mark to identify and promote its cellular telephone service in Arizona 5. The
Company's right to use the service mark in the territory is non-exclusive and
non-transferrable. The licensing agreement for the AIRTOUCH-TM- CELLULAR mark
requires the Company to provide high-quality cellular telephone services to its
customers and to otherwise maintain reasonable standards set by AirTouch. The
licensing agreement is for an initial term of 20 years with automatic extensions
for additional five-year periods.
The Company intends to market its services using CELLULAR
ONE-Registered Trademark- in the Sygnet properties, except in the Youngstown
market where it will continue to market its services under the name "Wilcom
Cellular." The Company intends to market its services using the name
AIRTOUCH-TM- CELLULAR in Ohio 2 and CELLULAR ONE-Registered Trademark- in Texas
10. However, the Company has not yet entered into any license agreements with
respect to Ohio 2 and Texas 10, and the Company cannot assure you that it will
be able to do so.
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COMPETITION
The Company competes with various companies in each of its markets. The
following table lists the Company's principal competitors in each of its
cellular markets:
<TABLE>
<CAPTION>
CELLULAR MARKET PRINCIPAL COMPETITORS
- --------------------------------- -----------------------------------------------------------
<S> <C>
CENTRAL REGION:
Oklahoma 5 and 7............... AT&T Wireless; Western Wireless
Texas Panhandle................ Western Wireless
Northern Oklahoma.............. Enid Cellular
Central Texas.................. GTE
Kansas and Missouri............ SWBM; Kansas Cellular; ALLTEL; Chariton Cellular
EASTERN REGION:
East Maryland.................. BAM; Sprint
West Maryland.................. BAM; US Cellular; Sprint
WESTERN REGION:
Arizona/California............. BAM
California 4................... GTE
Santa Cruz..................... GTE
NORTHERN REGION:
Youngstown..................... ALLTEL
Erie........................... GTE Mobilenet
New York....................... Frontier
Pennsylvania................... ALLTEL; BAM
Ohio 2......................... ALLTEL
</TABLE>
The telecommunications industry is experiencing significant technological
changes, as evidenced by the increasing pace of improvements in the capacity and
quality of digital technology, shorter cycles for new products and enhancements,
and changes in consumer preferences and expectations. Accordingly, the Company
expects competition in the wireless telecommunications industry to be dynamic
and intense as a result of the entrance of new competitors and the development
of new technologies, products and services.
Each of the markets in which the Company competes will be served by other
two-way wireless service providers, including licensed cellular and PCS
operators and resellers. Many of these competitors have been operating for a
number of years, currently serve a substantial subscriber base and have
significantly greater financial and technical resources than those available to
the Company. Some competitors are expected to market other services, such as
long distance, landline local exchange and internet access service, with their
cellular telecommunication service offerings. Several of the Company's
competitors are operating, or planning to operate, through joint ventures and
affiliation arrangements, wireless telecommunications systems that encompass
most of the United States.
The Company competes primarily against one other facilities-based cellular
carrier in each of its RSA and MSA markets. Competition for customers between
cellular licensees is based principally upon price, the services and
enhancements offered, the quality of the cellular system, customer service,
system coverage and capacity. Such competition may increase to the extent that
licenses are transferred from smaller, stand-alone operators to larger, better
capitalized and more experienced cellular operators that may be able to offer
consumers certain network advantages.
Cellular carriers also face to a lesser extent competition from PCS, ESMR
and mobile satellite service ("MSS") providers, as well as from resellers of
these services and cellular service. In the future, cellular operators may also
compete more directly with traditional landline telephone service providers.
Continuing technological advances in telecommunications make it impossible to
predict the extent of future competition. However, due to the depth and breadth
of these competitive services offered by operators
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using these other technologies, such competition could be significant and is
expected to become more intense.
The FCC requires that all cellular system operators provide service to
resellers on a nondiscriminatory basis. A reseller provides cellular service to
customers but does not hold an FCC license or own cellular facilities. Instead,
the reseller buys blocks of cellular telephone numbers from a licensed carrier
and resells service through its own distribution network to the public.
Therefore, a reseller may be both a customer of a cellular licensee's services
and a competitor of that licensee. Several well-known telecommunications
companies resell cellular service as a complement to their long distance, local
telephone, paging, cable television or internet offerings.
The most likely source of direct competition to cellular providers in the
near term from a new technology is broadband PCS. Broadband PCS services consist
of wireless two-way telecommunications services for voice, data and other
transmissions employing digital micro-cellular technology. PCS operates in the
1850 to 1990 MHz band. PCS technology utilizes a network of small, low-powered
transceivers placed throughout a neighborhood, business complex, community or
metropolitan area to provide customers with mobile and portable voice and data
communications. Many of the PCS licensees that compete, or will compete, with
the Company have access to substantial capital resources. In addition, many of
these companies or their predecessors and affiliates already operate large
cellular telephone systems and thus bring significant wireless experience.
ESMR is a wireless communications service supplied by converting analog SMR
services into an integrated, digital transmission system. The ESMR system
incorporates characteristics of cellular technology, including multiple low
power transmitters and interconnection with the landline telephone network. ESMR
service providers such as Nextel Communications, Inc., may compete with analog
cellular service by providing high quality digital communication technology,
lower rates, enhanced privacy and additional features such as electronic mail
and built-in paging. ESMR handsets are likely to be more expensive than cellular
telephones.
A consortium of telecommunications providers known as American Mobile
Satellite Corporation has been licensed by the FCC to provide MSS and is
currently providing such services. The FCC has also licensed four entities to
provide MSS as low earth-orbit satellite-based systems. One such licensee,
controlled by Motorola, operates a low earth-orbit satellite-based system called
"Iridium" and recently initiated such service in some markets. None of the other
licensees have yet launched MSS service. Other proposals for MSS are pending
before the FCC. The FCC is developing rules for these services and international
and foreign regulatory authorities must also approve aspects of some MSS
services. Mobile satellite systems could augment or replace communications
within land-based cellular systems. While the Company may experience increased
competition from low earth-orbit satellite-based systems in the future, to date,
such systems have not affected the Company's operations.
The commercial development and deployment of most of these new technologies
remain in an early phase. The Company expects this activity to be focused
initially in relatively large markets in view of the substantial costs involved
in building and launching systems using these technologies. The Company believes
that it can effectively face this competition from its position as an incumbent
in the cellular industry with a high quality network, an extensive footprint
that is not capacity constrained, strong distribution channels, superior
customer service capabilities and an experienced management team. Since the
Company operates in medium to small markets, the new entrants may be unable to
offer wireless service at competitive rates in many of the Company's markets in
the near term. The extensive capital expenditures required to deploy
infrastructure are more readily justifiable from an economic standpoint in
larger, more densely populated urban areas, than in the rural areas in which the
Company operates.
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REGULATION
OVERVIEW. The wireless telecommunications industry is subject to extensive
governmental regulation on the federal level and to varying degrees on the state
level. Many aspects of such regulation have recently been impacted by the
enactment of the Telecommunications Act and are currently the subject of
administrative rulemakings and judicial proceedings that are significant to the
Company. The following is a summary of the federal laws and regulations that
materially affect the wireless telecommunications industry and a description of
certain state laws. This section does not purport to be a summary of all present
and proposed federal, state and local regulations and legislation relating to
the wireless telecommunications industry.
FEDERAL REGULATION. The licensing, construction, modification, operation,
ownership and acquisition of cellular telephone systems are subject to
regulations and policies of the FCC under the Communications Act of 1934, as
amended (the "Communications Act"). The FCC has promulgated rules and
regulations governing, among other things, applications to construct and operate
cellular communications systems, applications to transfer control of or assign
cellular licenses and technical and operational standards for the operation of
cellular systems (such as maximum power and antenna height).
The FCC licenses cellular systems in accordance with 734 geographically
defined market areas comprised of 306 MSAs and 428 RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal 25
MHz blocks and designated as wireline and non-wireline. Apart from the different
frequency blocks, there is no technical difference between wireline and
non-wireline cellular systems and the operational requirements imposed on each
by the FCC are the same. However, no entity may own, directly or indirectly,
more than a 5% interest in both systems in any one MSA or RSA, unless such
ownership will not pose a substantial threat to competition, and no entity may,
directly or indirectly, own a controlling interest in, or otherwise have the
ability to control, both such systems. The FCC may prohibit or impose conditions
on transfers of licenses. In addition, under FCC rules, no person may have an
attributable interest (as defined in FCC rules) in a total of more than 45 MHz
of licensed broadband PCS, cellular and ESMR spectrum regulated as CMRS with
significant overlap in any geographic area (significant overlap will occur when
at least 10% of the 1990 census population of the PCS licensed service area is
within the CGSA (as defined below) and/or the ESMR service area).
Under FCC rules, the authorized service area of a cellular provider in each
of its markets is referred to as the "Cellular Geographic Service Area" or
"CGSA." The CGSA may conform exactly with the boundaries of the FCC designated
MSA or RSA, or it may be smaller if a licensee has chosen not to provide
services to certain areas. A cellular licensee has the exclusive right to expand
its CGSA boundaries within the licensee's MSA or RSA for a period of five years
after grant of the licensee's initial construction permit. At the end of this
five-year build-out period, however, other entities may apply to serve portions
of the MSA or RSA outside the licensee's then designated CGSA. The five year
build-out period has expired for most licensees and the FCC has granted several
"unserved area" applications filed by parties other than the original MSA or RSA
licensee. Sygnet's five year buildout period has expired in all its markets. The
Company's buildout has been substantially completed in all of its markets.
Cellular service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The Company is obligated to pay annual regulatory fees and
assessments to support the FCC's regulation of its cellular operations, as well
as fees necessary to support centralized administration of telephone numbering,
telecommunications relay service ("TRS") for the hearing-impaired and
application filing fees.
The Communications Act requires prior FCC approval for substantive,
non-proforma transfers or assignments to or from the Company of a controlling
interest in any license or construction permit, or any
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rights thereunder, including the Sygnet Acquisition. All applications for FCC
approval filed in connection with the Sygnet Acquisition have been granted by
the FCC and became final on December 8, 1998. Although there can be no assurance
that any future requests for approval of applications filed will be approved or
acted upon in a timely manner by the FCC, the Company has no reason to believe
such requests or applications would not be approved or granted in due course.
The FCC also regulates a number of other aspects of the cellular business.
For example, the FCC regulates cellular resale practices and recently extended
the resale requirement to broadband PCS and ESMR licensees. Cellular, PCS and
ESMR providers may not restrict any customer's resale of their services or
unreasonably discriminate against resellers of their services. All resale
obligations for cellular, broadband PCS and ESMR operators will terminate on
November 24, 2002. The FCC has also adopted requirements for cellular and other
providers of two-way voice services to implement basic and enhanced 911
services. These services provide emergency service providers with the ability to
better identify and locate callers using wireless services, including callers
using special devices for the hearing impaired. The Company's obligations to
implement these services is scheduled to occur in several stages ending in
October 2001. Cellular and PCS carriers are also required to provide law
enforcement agencies with capacity to support lawful wiretaps by March 12, 2001
and technical assistance for wiretaps by June 30, 2000. These wireless 911 and
law enforcement requirements may create additional capital obligations for the
Company to make necessary system changes.
In addition, the FCC regulates the ancillary service offerings that cellular
and PCS licensees can provide and recently revised its rules to permit cellular,
broadband PCS, paging and ESMR licensees to offer fixed services on a co-primary
basis along with mobile services. This rule change may facilitate the provision
of wireless local loop service, which involves the use of wireless links to
provide local telephone service by cellular licensees, as well as broadband PCS
and ESMR licensees. In this regard, the FCC also recently adopted telephone
number portability rules for local exchange carriers, as well as cellular,
broadband PCS and ESMR licensees, that could facilitate the development of local
exchange competition, including wireless local loop service. The new number
portability rules generally require cellular, broadband PCS and ESMR licensees
to have the capability to deliver calls from their systems to ported numbers by
December 31, 1998 and offer number portability and roaming to ported numbers by
March 31, 2000. These requirements may result in added capital expenditures for
the Company to make necessary system changes, although the Company currently has
no plans for any such expenditures.
Initial cellular and PCS licenses are generally granted for terms of ten
years, beginning on the date of the grant of the initial operating authority,
and are renewable upon application to the FCC. The initial term for three of the
Company's existing licenses expired in October 1998. Each license was renewed
for a new ten year term expiring in 2008. The balance of the Company's existing
licenses begin to expire in October 2000. Three of Sygnet's licenses have
already been renewed for a new ten year term, and the initial terms on the
balance of its licenses will expire over the next three years. Licenses may be
revoked and license renewal applications denied for cause after appropriate
notice and hearing. Near the conclusion of the license term, licensees must file
applications for renewal of licenses to obtain authority to operate for up to an
additional 10-year term. The FCC will award a renewal expectancy to a cellular
licensee that meets certain standards of past performance. If the existing
licensee receives a renewal expectancy, it is very likely that the existing
licensee's cellular license will be renewed without becoming subject to
competing applications. To receive a renewal expectancy, a licensee must show
that it has provided "substantial" service during its past license term, and has
substantially complied with applicable FCC rules and policies and the
Communications Act. "Substantial" service is defined as service which is sound,
favorable and substantially above a level of mediocre service that might only
minimally warrant renewal. If the existing licensee does not receive a renewal
expectancy, competing applications for the license will be accepted by the FCC.
The parties will be subject to a comparative hearing and the license may be
awarded to another entity.
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In order to increase competition in wireless communications, promote
improved quality and service and make available the widest possible range of
wireless services, federal legislation was enacted authorizing the FCC to
license radio frequency spectrum for all CMRS licensees, including PCS, by
competitive bidding. A PCS system operates under a protected geographic service
area license granted by the FCC for either an MTA or BTA on one of six frequency
blocks allocated for broadband PCS service. The FCC has divided the United
States and its possessions and territories into PCS markets based upon Rand
McNally's 493 BTAs, all of which are included in the 51 MTAs. The FCC has
allocated 120 MHz of radio spectrum in the 2 GHz band for licensed broadband PCS
services. The FCC divided the 120 MHz of spectrum into six individual blocks,
two 30 MHz blocks (A and B Blocks) licensed for each of the 51 MTAs, one 30 MHz
block (C Block) licensed for each of the 493 BTAs, and three 10 MHz blocks (D, E
and F Blocks) licensed for each of the 493 BTAs, a total of more than 2,000
licenses.
The FCC has adopted standards to apply to PCS renewals under which the FCC
will award a renewal expectancy using standards similar to those applied to
cellular licensees. All 30 MHz broadband PCS licensees must construct facilities
that offer coverage to one-third of the population of their service area within
five years, and two-thirds of the population within ten years, of their initial
license grants. All 10 MHz licensees must provide service to at least 25% of the
service area within five years of their initial license. Licensees that fail to
meet the coverage requirements may be subject to forfeiture of the license.
FCC rules restrict the voluntary assignments or transfers of control of
certain licenses awarded to "small businesses" with bidding enhancements in the
C Block and F Block auctions. During the first five years of the license term,
assignments or transfers affecting control are permitted only to assignees or
transferees that meet the eligibility criteria for participation in the
entrepreneur block auction at the time the application for assignment or
transfer of control is filed or, if the proposed assignee or transferee holds
other licenses for C Block and F Block, met the same eligibility criteria at the
time of receipt of such licenses. Any transfers or assignments by licensees that
qualified for installment payments during the entire ten-year initial license
terms are subject to unjust enrichment penalties; i.e., acceleration of any
installment payment plans should the assignee or transferee not qualify for the
same benefits. Any transfers or assignments by licensees that qualified for
bidding credits during the first five years of the license term are subject to
unjust enrichment penalties; i.e., forfeiture of any bidding credit based upon
the amount of time the initial license has been held should the assignee or
transferee not qualify for these same benefits. In the case of the C Block and F
Block, the FCC will conduct random audits to ensure that licensees are in
compliance with the FCC's eligibility rules. Violations of the Communications
Act or the FCC's rules could result in license revocations, forfeitures or
fines. The Company was qualified to hold C and F licenses at the time such
licenses were awarded, and anticipates remaining so qualified throughout the
term of the PCS licenses awarded to it.
For a period of up to five years after the grant of a PCS license (subject
to extension), a PCS licensee will be prohibited from interfering with existing
licensees that operate certain fixed microwave systems within its license area.
To secure a sufficient amount of unencumbered spectrum to operate its PCS
systems efficiently and with adequate population coverage, the Company may
therefore need to relocate many of these incumbent licensees, at the Company's
expense, to other frequencies or to reimburse other previously-licensed PCS
licensees for expenses they have incurred in relocating incumbent licensees that
the Company might have otherwise been required to relocate. In an effort to
balance the competing interests of existing microwave users and newly authorized
PCS licensees, the FCC has adopted (i) a transition plan to relocate such
microwave operators to other spectrum blocks and (ii) a cost sharing plan so
that if the relocation of an incumbent benefits more than one PCS licensee, the
benefitting PCS licensees will share the cost of the relocation. This transition
plan allows most microwave users to operate in the PCS spectrum for a one-year
voluntary negotiation period and an additional one-year mandatory negotiation
period. For public safety entities dedicating a majority of their system
communications for police, fire or emergency medical services operations, the
voluntary negotiation period is three years, with an additional two-year
mandatory negotiation period. After the voluntary and mandatory negotiation
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periods expire, the microwave user continues to hold primary status until April
4, 2005, but may be involuntarily relocated, albeit at the PCS licensee's
expense. Parties unable to reach agreement within these time periods may refer
the matter to the FCC for resolution, but the incumbent microwave user is
permitted to continue its operations until final FCC resolution of the matter.
The transition and cost sharing plans expire on April 4, 2005, at which time
remaining incumbents in the PCS spectrum will be responsible for their costs to
relocate to alternate spectrum locations. The Company has not yet determined the
extent, if any, of expenses it may need to incur for the relocation of microwave
incumbents in order to provide PCS services using the PCS licenses it has been
awarded.
Applications for FCC authority may be denied and in extreme cases licenses
may be revoked if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making the determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or administrative proceeding involving felonies, the possession or sale
of unlawful drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. If greater than
25 percent of the Company's equity is owned of record or voted by aliens or
their representatives, a foreign government or its representative, or any
corporation organized under the laws of a foreign country and the FCC determines
that the public interest would be so served, it may revoke the Company's
cellular licenses or require an ownership restructuring. However, the FCC will
generally permit additional indirect ownership in excess of the statutory 25
percent benchmark where that interest is to be held by an entity or entities
from member countries of the World Trade Organization ("WTO"). For investors
from non-WTO countries, however, the FCC will determine whether the home country
of the foreign investor extends reciprocal treatment called "equivalent
competitive opportunities" to U.S. entities. If such opportunities do not exist,
it is unlikely that the FCC will permit investment beyond the 25 percent
benchmark. These restrictions could adversely affect the Company's ability to
attract additional equity financing.
Interconnection charges paid to local exchange carriers are a major
component of the cost structure of the Company and Sygnet. Changes in the
interconnection charge rate structure imposed by the FCC or mandated by the
Telecommunications Act may have a material impact on the Company.
The Telecommunications Act, which makes significant changes to the
Communications Act and terminated the antitrust consent decree applicable to the
Regional Bell Operating Companies ("RBOCs"), affects the telecommunications
industry. This legislation, among other things, affects competition for local
telecommunications services, interconnection arrangements for carriers,
universal service funding and the provision of interexchange services.
The Telecommunications Act requires state public utilities commissions
and/or the FCC to implement policies that mandate reciprocal compensation
between local exchange carriers, a category that will, for these purposes,
include cellular carriers, for interconnection services at rates more closely
related to cost. On August 1, 1996, the FCC adopted rules implementing the
interconnection policies imposed by the Telecommunications Act. Various aspects
of the order not directly related to interconnection between wireless carriers
and local exchange carriers are currently being reviewed by the U.S. Supreme
Court and the FCC's orders are currently subject to a federal appellate court
stay. If the FCC's rules are upheld on appeal, such action could result in
further reductions of the Company's interconnection expenses.
The Telecommunications Act requires, and the FCC has adopted, rules that
require interstate communications carriers, including cellular carriers, to
"make an equitable and non-discriminatory contribution" to a universal service
fund that reimburses communications carriers that provide basic communications
services to users who receive services at subsidized rates. These rules could
result in increased costs for the Company's cellular operations. The
Telecommunications Act also eases the restrictions on the provision of
interexchange telephone services by wireless carriers affiliated with RBOCs.
RBOC-affiliated wireless carriers have interpreted the legislation to permit
immediate provision of in region long distance call delivery for their cellular
customers.
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The Telecommunications Act specifically exempts all cellular carriers from
the obligation to provide equal access to interstate long distance carriers.
However, the Telecommunications Act gives the FCC the authority to impose rules
to require unblocked access through carrier identification codes or 800/888
numbers, so that cellular subscribers are not denied access to the long distance
carrier of their choosing, if the FCC determines that the public interest so
requires. The Company currently provides "dial around" equal access to all of
its customers.
The Telecommunications Act also imposes restrictions on a telecommunications
carrier's use of customer proprietary network information. FCC rules
implementing these restrictions could impose new costly obligations on the
Company and impose burdens on its current marketing activities.
The overall impact of the Telecommunications Act on the business of the
Company is unclear and will likely remain so for the foreseeable future. New
limitations on local zoning requirements may facilitate the construction of new
cell sites and related facilities. See "--State, Local and Other Regulation."
However, these restrictions on zoning authority may provide only limited
assistance to cellular carriers, and other provisions of the new statute
relating to interconnection, telephone number portability, universal service,
equal access, use of customer proprietary network information and resale could
subject the Company to additional costs and increased competition.
STATE, LOCAL AND OTHER REGULATION. The Communications Act preempts state or
local regulation of the entry of, or the rates charged by, any commercial mobile
service or any private mobile service provider, which includes cellular
telephone service providers. The FCC has denied the petitions of eight states to
continue their rate regulation authority, including authority over cellular
operators. As a practical matter, the Company is free to establish rates and
offer new products and service with a minimum of regulatory requirements. The
states in which the Company operates, and in which it will operate upon
completion of the proposed wireless acquisitions, maintain nominal oversight
jurisdiction, primarily focusing upon prior approval of acquisitions and
transfers and resolution of customer complaints.
The location and construction of cellular transmitter towers and antennas
are subject to FCC and Federal Aviation Administration ("FAA") regulations and
are subject to federal, state and local environmental regulation, as well as
state or local zoning, land use and other regulation. Before a system can be put
into commercial operation, the grantee of a construction permit must obtain all
necessary zoning and building permit approvals for the cell site microwave tower
locations. The time needed to obtain zoning approvals and requisite state
permits varies from market to market and state to state. Likewise, variations
exist in local zoning processes. Additionally, any proposed site must comply
with the FCC's environmental rules.
Zoning and planning regulation may become more restrictive in the future as
many broadband PCS carriers are now seeking sites for network construction. The
Telecommunications Act may provide facilities some relief from state and local
laws that arbitrarily restrict the construction of personal wireless services,
which include cellular, PCS and ESMR systems. For example, under the
Telecommunications Act, localities are now precluded from denying zoning
approval for cell sites based upon electromagnetic emission concerns, if the
personal wireless service operator's system complies with FCC emissions
standards. In addition, localities are prohibited from adopting zoning
requirements that simply prohibit or have the effect of prohibiting personal
wireless services, or that discriminate between "functionally equivalent"
services. Notwithstanding these new requirements, wireless carriers have had
various degrees of success in challenging offensive zoning requirements and it
is still unclear whether the costs of expanding cellular systems by adding cell
sites will increase and whether significant delays will be experienced due to
local zoning regulations.
The Company cannot assure you that any state or local regulatory
requirements currently applicable to the Company's systems will not be changed
in the future or that regulatory requirements will not be adopted in those
states and localities which currently have none.
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FUTURE REGULATION. From time to time, legislation that could affect the
Company, either beneficially or adversely, is proposed by federal or state
legislators. The Company cannot assure you that federal or state legislation
will not be enacted, or that regulations will not be adopted or actions taken by
the FCC or state regulatory authorities, that might adversely affect the
business of the Company. Changes such as the allocation by the FCC of radio
spectrum for services that compete with the Company's business could adversely
affect the Company's operating results.
EMPLOYEES AND AGENTS
As of September 30, 1998, the Company had approximately 470 employees. In
addition, as of such date, the Company had agreements with 167 independent sales
agents, including car dealerships, electronics stores, paging service companies
and independent contractors. None of the Company's employees are represented by
a labor organization, and the Company considers its employee relations to be
good.
PROPERTIES
The Company maintains its corporate headquarters in Oklahoma City, Oklahoma.
The Company leases this space, which is approximately 24,600 square feet, at a
monthly rental of approximately $19,000. See "Management--Certain Transactions."
As of September 30, 1998, the Company's cellular operations leased 30 and owned
three sales and administrative offices, at aggregate annual rentals of
approximately $.7 million. The Company anticipates that it will review these
leases from time to time and may, in the future, lease or acquire new facilities
as needed. The Company expects to lease or purchase additional sales and
administrative office spaces in connection with the Pending Acquisitions. The
Company does not anticipate that it will encounter any material difficulties in
meeting its future needs for any leased space. The Company also owned and leased
210 cell sites as of September 30, 1998.
Sygnet owns office buildings in Youngstown and Warren, Ohio and land for a
proposed office site in Boardman, Ohio. As of September 30, 1998, Sygnet's
cellular operations leased 55 and owned two retail sales and administrative
offices. Sygnet anticipates that it will review these leases from time to time
and may, in the future, lease or acquire new facilities as needed. Sygnet does
not anticipate that it will encounter any material difficulties in meeting its
future needs for any leased space. Sygnet owned four cell sites and 124 towers
and leased 177 cell sites and ten towers as of September 30, 1998. Substantially
all of Sygnet's owned towers will be included in the Tower Sale Leaseback.
LEGAL PROCEEDINGS
Neither the Company nor Sygnet is currently involved in any pending legal
proceedings that individually or in the aggregate are material to the Company.
Each of the Company and Sygnet is a party to routine filings and customary
regulatory proceedings with the FCC and the state public utility commissions
relating to its operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The holders of the Company's voting securities have agreed that the Board
will consist of seven directors, four designated by the Dobson Partnership, one
designated by Childs, and two selected jointly by the Dobson Partnership and
Childs. See "Principal Shareholders." Two additional directors may be designated
by Senior Preferred Stock holders, two by Preferred Stock holders and one by the
holders of Class F Preferred Stock in the event certain voting rights triggering
events occur. See "Description of Capital Stock--Senior Preferred Stock,"
"--Other Preferred Stock" and "Description of the Preferred Stock."
The Company's Board of Directors presently consists of six directors, with
one vacancy to be filled by an independent director designee of the Dobson
Partnership. Upon consummation of the Sygnet Acquisition, Albert H. Pharis, Jr.,
President and Chief Executive Officer of Sygnet, and Dana L. Schmaltz, an
executive officer of Childs, became directors of the Company, and Thadeus J.
Mocarski resigned as a director of the Company. Directors and executive officers
of the Company are elected to serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. Directors of the Company are elected for one-year terms at the annual
meeting of stockholders which is held in April of each year. Officers of the
Company are appointed at the Board's first meeting after each annual meeting of
stockholders.
The directors and executive officers of the Company are set forth below.
Certain of the officers and directors hold or have held positions in several of
the Company's subsidiaries. The ages of the persons set forth below are as of
December 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Everett R. Dobson (1)...................... 38 Chairman of the Board, President and Chief
Executive Officer
G. Edward Evans............................ 37 President and Chief Operating Officer of
cellular subsidiaries
Bruce R. Knooihuizen....................... 42 Vice President and Chief Financial Officer
R. Thomas Morgan........................... 42 Vice President and Chief Information
Officer
Richard D. Sewell, Jr. .................... 41 Treasurer
Stephen T. Dobson (1)...................... 35 Secretary and Director
Russell L. Dobson (1)...................... 63 Director
Justin L. Jaschke.......................... 39 Director
Albert H. Pharis, Jr....................... 48 Director
Dana L. Schmaltz........................... 31 Director
</TABLE>
- ------------------------
(1) Everett R. Dobson and Stephen T. Dobson are sons of Russell L. Dobson.
Dobson was incorporated in February 1997 in connection with a corporate
reorganization (the "Reorganization") pursuant to which Dobson became the
holding company parent of DOC. Information below with respect to positions held
by the Company's executive officers and directors refers to their positions with
DOC and, since February 1997, also with Dobson.
EVERETT R. DOBSON has served as a director and officer of the Company since
1982. From 1990 to 1996, he served as a director, President and Chief Operating
Officer of the Company and President of the Company's cellular subsidiaries. He
was elected Chairman of the Board and Chief Executive Officer of the Company in
April 1996. Mr. Dobson served on the board of the Cellular Telecommunications
Industry
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Association ("CTIA") in 1993 and 1994. He holds a B.A. in Economics from
Southwestern Oklahoma State University and currently sits on its Foundation
Board and chairs the investment committee.
G. EDWARD EVANS joined the Company as President and Chief Operating Officer
of the cellular subsidiaries in January 1997. Mr. Evans was employed by
BellSouth Mobility, Inc. from 1993 to 1996, serving as General Manager-Kentucky,
Director of Field Operations at the company's corporate office in Atlanta and
Director of Marketing-Alabama. He was an Area Manager and a Market Manager of
United States Cellular, Inc. from 1990 to 1993 and was a Sales Manager of GTE
Mobilnet from 1989 to 1990. Mr. Evans serves on the board of CTIA. He has an
M.B.A. from Georgia State University.
BRUCE R. KNOOIHUIZEN joined the Company as Vice President and Chief
Financial Officer in July 1996. From 1994 to 1996, Mr. Knooihuizen was Chief
Financial Officer and Secretary for The Westlink Co. in San Diego, a wireless
provider which was formerly an operating unit of U S WEST. Previously, he was
Treasurer and Controller of Ameritech Cellular from 1990 to 1994, Director,
Accounting Operations of Ameritech Applied Technologies from 1988 to 1990, and
Controller of Ameritech Properties in 1988, all located in Chicago. From 1980 to
1988 he held various financial and accounting positions with The Ohio Bell
Telephone Company. Mr. Knooihuizen received a B.S. in finance from Miami
University in Oxford, Ohio and an M.B.A. in finance from the University of
Cincinnati.
R. THOMAS MORGAN joined the Company as Vice President and Chief Information
Officer in December 1997. During 1996 and 1997, Mr. Morgan was Director of
Corporate Services in the Information Services Department of American Electric
Power in Columbus, Ohio, an electric utility serving 3 million customers in the
Midwest. Previously, he was Manager of Accounting and Human Resources Systems
from 1994 through 1995 and held various positions in the Information Services
Department of American Electric Power from 1985. Mr. Morgan was Manager of
Software Engineering for Access Corporation, a software development company, in
Cincinnati, Ohio from 1981 to 1985 and worked as a Senior Consultant with Arthur
Andersen & Co. in Columbus, Ohio from 1978 to 1981. Mr. Morgan holds a B.S. in
systems analysis from Miami University in Oxford, Ohio.
RICHARD D. SEWELL, JR. joined the Company as Treasurer in September 1998.
Prior to joining the Company, Mr. Sewell was employed by Dal-Tile International
Inc., a ceramic tile manufacturer and distributor, as Vice President-Finance
from 1997 to 1998, as Vice President-Treasury from 1995 to 1997 and as Vice
President-Financial Reporting from 1990 to 1995. From 1979 to 1989, Mr. Sewell
was employed by Ernst & Young, a public accounting firm, concluding as a
principal in their Entrepreneurial Service Group. Mr. Sewell received a B.S. in
accounting from the University of Missouri-Kansas City.
STEPHEN T. DOBSON has been a director of the Company since 1990. He served
as Treasurer of the Company from 1990 until September 1998, and he has served as
Secretary of the Company since 1990. He has also served as General Manager and
Secretary of the Company's ILEC operations ("Telco") since 1994 and 1990,
respectively. He became President of Logix in January 1997. Mr. Dobson is a
member of the Western Rural Cellular Association ("WRTA"), National Telephone
Cooperative Association and Telecommunications Resellers Association. He holds a
B.S. in business administration from the University of Central Oklahoma.
RUSSELL L. DOBSON has been a director of the Company since 1990 and was
Chairman of the Board and Chief Executive Officer from 1990 to 1996. Mr. Dobson
joined his father at Telco in 1956 and became the controlling owner and Chief
Executive Officer in 1975 when he purchased his father's interest. He has been
active in many industry-related groups, including the OTA, WRTA and Organization
for the Protection and Advancement of Small Telephone Companies.
JUSTIN L. JASCHKE has been a director of the Company since October 1996. Mr.
Jaschke has been the Chief Executive Officer and a director of Verio Inc., a
privately held internet access provider based in Englewood, Colorado, since its
inception in March 1996. Prior to March 1996, Mr. Jaschke served as Chief
Operating Officer for Nextel Communications, Inc. following its merger with
OneComm Corporation ("OneComm") in July 1995. Mr. Jaschke served as OneComm's
President and a member of its Board of Directors from 1993 until the merger with
Nextel Communications, Inc. From May 1990 to April 1993, Mr.
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Jaschke served as President and CEO of Bay Area Cellular Telephone Company. Mr.
Jaschke currently serves as Chairman of the Board of Directors of Metricom,
Inc., a wireless data communications provider. Mr. Jaschke has a B.S. in
mathematics from the University of Puget Sound and an M.S. in management from
the Massachusetts Institute of Technology Sloan School of Management.
ALBERT H. PHARIS, JR. has served as President, Chief Executive Officer and
Director of Sygnet since Sygnet's inception in 1985. He has been active as a
board member of CTIA since 1985 and as a member of the CTIA Executive Committee
since 1989. He has also been Chairman of CTIA's Small Operators Caucus.
DANA L. SCHMALTZ became a director of the Company in accordance with the
terms of the Stockholders' Agreement dated December 23, 1998 between the Company
and J.W. Childs Associates, L.P. Mr. Schmaltz is a Vice President of J.W. Childs
Associates, L.P. and has been at J.W. Childs Associates, L.P. since February
1997. From 1995 to 1997, Mr. Schmaltz was an associate at DLJ Merchant Banking,
Inc. Mr. Schmaltz graduated from the Harvard Graduate School of Business
Administration in 1995.
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EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation during
1998, 1997 and 1996 earned by the Company's chief executive officer and its
other three most highly compensated executive officers as of December 31, 1998
("the Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTION AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) ($)(2) (# OF SHARES) ($)(3)
- ---------------------------------- --------- ---------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Everett R. Dobson ................ 1998 $ 380,400 $ -- $ 39,700(4) -- $ 6,400
Chairman of the Board and 1997 300,000 250,000 54,800(4) -- 9,500
Chief Executive Officer 1996 300,000 142,400 77,100(4) -- 6,000
Stephen T. Dobson ................ 1998 155,200 -- 32,600(5) -- 4,700
Secretary, Treasurer 1997 100,000 75,000 13,800(5) -- 6,500
and Director 1996 97,000 75,000 20,600(5) -- 3,900
G. Edward Evans .................. 1998 152,500 35,100(6) -- 1,000 4,300
President and Chief 1997 113,600 80,000(7) -- 6,033 --
Operating Officer 1996 -- -- -- -- --
Bruce R. Knooihuizen ............. 1998 165,000 -- -- 1,000 4,100
Vice President and 1997 152,500 82,500 -- -- 1,400
Chief Financial Officer 1996 65,900 37,500 57,600(8) 7,541 --
</TABLE>
- ------------------------
(1) Bonus amounts for Everett R. Dobson, Stephen T. Dobson, G. Edward Evans and
Bruce R. Knooihuizen with respect to services performed in 1998 have not yet
been determined. For 1997, represents the bonus paid in 1998 with respect to
services performed in 1997. For 1996, represents the amount of bonus paid in
1997 with respect to services performed in 1996, but does not include
$205,000 and $69,000 paid to Everett R. Dobson and Stephen T. Dobson,
respectively, in 1996 with respect to services performed in 1995.
(2) Represents the value of perquisites and other personal benefits in excess of
10% of annual salary and bonus.
(3) Includes the matching contributions made by the Company to the account of
the executive officer under the Company's 401(k) Profit Sharing Plan.
(4) Includes $26,000, $36,600 and $62,900 for personal use of Company aircraft
and $12,300, $18,200 and $12,500 for a Company-provided vehicle in 1998,
1997and 1996, respectively.
(5) Includes $16,100, $10,400 and $7,400 for personal use of Company aircraft
and $16,300, $3,400 and $6,500 for a Company-provided vehicle in 1998, 1997
and 1996, respectively.
(6) Represents an advance on bonus to be awarded.
(7) Includes $20,000 received upon commencement of employment.
(8) Includes $5,600 for interim housing expenses, $24,300 for home mortgage
closing costs and $27,700 for tax reimbursements for such expenses and
costs.
The Named Executive Officers listed below were granted options to purchase
shares of the Company's Class B Common Stock in 1997. No stock options were
exercised by the Named Executive Officers in 1997.
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OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ANNUAL RATES
INDIVIDUAL GRANTS OF
-------------------------------- STOCK APPRECIATION FOR
NUMBER OF PERCENT OF TOTAL OPTION TERM(1)
OPTIONS OPTIONS GRANTED TO EXERCISE PRICE ----------------------
NAME GRANTED EMPLOYEES IN 1998 ($/SHARE) EXPIRATION DATE $5%($) 10%($)
- --------------------------------- ----------- ------------------- --------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bruce R. Knooihuizen............. 1,000 9.1% $ 300 01/29/98 $ 188,668 $ 478,123
G. Edward Evans.................. 1,000 9.1% $ 300 01/29/08 $ 188,668 $ 478,123
</TABLE>
- ------------------------
(1) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a forecast
of possible future appreciation in stock prices.
1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/98(#) OPTIONS AT 12/31/98($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- --------------------------------------- ------------------------------- ---------------------------------------
<S> <C> <C>
Bruce R. Knooihuizen................... 3,016/5,525 $ 1,704,040/$2,921,625
G. Edward Evans........................ 1,206/5,827 $ 681,390/$3,092,255
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options at December 31, 1997 is
computed as the product of (i) stock value at December 31, 1997 less stock
option exercise price and (ii) number of underlying securities at December
31, 1997.
EMPLOYMENT AGREEMENTS
In connection with the employment of Bruce R. Knooihuizen in 1996 and G.
Edward Evans in 1997, the Company agreed to provide them compensation in the
form of salary, bonus, stock options and other benefits. The terms of Mr.
Knooihuizen's employment are an initial annual salary of $150,000, an annual
bonus ranging from 30% to 50% of his annual salary, and a 10-year option to
purchase 7,541 shares of Class B Common Stock at $100 per share vesting at the
rate of 20% per year. The terms of Mr. Evans' employment are an initial annual
salary of $120,000, an annual bonus ranging from 30% to 50% of his annual
salary, a five-year home mortgage loan of $300,000 at an annual interest rate of
4%, and a ten-year option to purchase 6,033 shares of Class B Common Stock at
$100 per share, with 60% of the option vesting ratably over five years and 40%
vesting over five years based on the achievement of annual performance
objectives. The Company also agreed to a severance payment equal to one year's
salary in the event of termination of employment of Messrs. Knooihuizen or Evans
without cause. The options to purchase shares of Class B Common Stock held by
these officers become fully vested upon a change of control of the Company.
Effective September 1, 1998, the Company entered into a consulting agreement
with Russell L. Dobson. Under the terms of the agreeement, Mr. Dobson has been
retained by Dobson Communications from September 1, 1998 through August 31,
2008. In exchange for Mr. Dobson's services, the Company will provide monthly
compensation of $15,000 and insurance benefits commensurate with the Company's
employee plan. Mr. Dobson's responsibilities will include representing the
Company at various functions, assisting with regulatory matters and assisting
executive officers of the Company in strategic planning and forecasting. In
addition, Mr. Dobson has agreed not to compete with the Company. During 1998,
Mr. Dobson was paid approximately $195,000 by the Company under the consulting
agreement.
Effective December 23, 1998 Albert H. Pharis, Jr. became a consultant to the
Company, to assist the Company on an as-needed basis, for term of five years.
Mr. Pharis will receive a fee of $40,000 for the first 90 days of such
consulting period and an annual fee of $60,000 thereafter. In addition, Mr.
Pharis received options to purchase 833 shares of the Company's Class B Common
Stock at an exercise price of $665 per
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share. Mr. Pharis's option vests ratably over a five-year period and fully vests
upon a change of control of the Company.
DIRECTOR COMPENSATION
The Company reimburses directors for out-of-pocket expenses incurred in
attending board meetings. Justin L. Jaschke, in connection with his election as
a director by the Fleet Investors in October 1996, was granted an option to
acquire 833 shares of Class B Common Stock at an exercise price of $100 per
share. Mr. Jaschke's option vests ratably over a five-year period and fully
vests upon a change of control of the Company. Directors who are officers or
consultants to the Company receive no additional compensation for services
rendered as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
determines the compensation of the Company's executive officers. During fiscal
year 1998, the members of the Compensation Committee were Russell L. Dobson,
Justin L. Jaschke and Thadeus J. Mocarski, a former director. Russell L. Dobson
previously served as Chairman of the Board and Chief Executive Officer from 1990
to 1996. For a description of certain transactions between Mr. Dobson and the
Company, see "--Certain Transactions."
STOCK OPTION PLAN
The Company's 1996 Stock Option Plan, as amended (the "Plan") was adopted to
encourage key employees of the Company (including Dobson and any present or
future parent or subsidiary of Dobson) by providing opportunities to participate
in the ownership of Dobson and its future growth through the grant of incentive
stock options and nonqualified stock options. The Plan also permits the grant of
options to directors. The Plan is presently administered by the Board of
Directors, but in the future may be administered by a committee of the Board
(whether the Board or a committee, the "Committee"). As of December 31, 1998
options to purchase an aggregate of 29,767 shares of Class B Common Stock and
2,414 shares of Class C Common Stock had been granted under the Plan.
The maximum number of shares for which options may be granted under the Plan
is 30,166 shares of Class B Common Stock and 30,166 shares of Class C Common
Stock, subject to adjustment in the event of any stock dividend, stock split,
recapitalization, reorganization or certain defined change in control events.
Shares subject to previously expired or terminated options become available
again for grants of options. The shares to be issued under the Plan will be
newly issued shares.
The number of shares and other terms of each grant are determined by the
Committee. The price payable upon the exercise of an incentive stock option may
not be less than 100% of the fair market value of the Class B Common Stock of
Class C Common Stock at the time of grant, or in the case of an incentive stock
option granted to an employee owning stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company (a "10%
Shareholder"), 110% of the fair market value on the date of grant. Incentive
stock options may be granted to an employee only to the extent that the
aggregate exercise price of all such options under all Company plans becoming
exercisable for the first time by the employee during any calendar year does not
exceed $100,000. The price payable upon the exercise of a nonqualified stock
option must be at least the minimum legal consideration required under the laws
of Oklahoma.
Each option granted under the Plan will expire on the date specified by the
Committee, but not more than ten years from the date of grant or, in the case of
a 10% Shareholder, not more than five years from the date of grant. Unless
otherwise agreed, an incentive stock option will terminate not more than 90 days
(or twelve months in the event of death or disability) after the optionee's
termination of employment.
An optionee may exercise an option by giving notice to the Company,
accompanied by an instrument of accession providing that the optionee agrees to
be bound by the terms applicable to shareholders under the Shareholders'
Agreement and full payment of the purchase price in cash or, at the discretion
of the
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Committee, (i) Common Stock having a fair market value equal to the exercise
price, (ii) the optionee's personal recourse note bearing interest payable not
less than annually at no less than 100% of the lowest applicable federal rate
(as defined in Section 1274(d) of the Internal Revenue Code), (iii) an
assignment of proceeds from the sale of a portion of the stock subject to the
option being exercised, or (iv) a combination of the foregoing.
Outstanding options become nonforfeitable and exercisable in full
immediately prior to certain defined change of control events. Unless otherwise
determined by the Committee, outstanding options will terminate immediately
prior to the consummation of the dissolution or liquidation of Dobson.
The Plan may be terminated or amended by the Board of Directors at any time
subject, in the case of certain amendments, to shareholder approval. If not
earlier terminated, the Plan expires on June 1, 2006.
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transaction
between the Company and persons or entities affiliated with officers, directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in an arms' length transaction
with independent third parties. Any other matters involving potential conflicts
of interests are to be resolved on a case-by-case basis.
In the Reorganization in February 1997, the shareholders of DOC exchanged
their DOC stock for Dobson stock, and Dobson assumed outstanding DOC stock
options, substituting shares of Dobson's Class B Common Stock for the DOC stock
subject to options. Also, in February 1997, Dobson issued 100,000 shares of its
Class C Preferred Stock to the Fleet Investors (each holding the same number of
shares as it holds of Class B Preferred Stock). See "Description of the
Preferred Stock."
Transactions with the Company described below refer to DOC if they occurred
prior to February 1997.
In March 1996, the Fleet Investors purchased 100,000 shares of Class B
Preferred Stock from the Company for $10.0 million. In connection with this
transaction, the Company and its shareholders entered into a Shareholders'
Agreement providing for, among other matters, registration rights, restrictions
on the transfer of Company stock, put and call rights with respect to the Class
B Preferred Stock, and the issuance of additional stock upon the happening of
certain events. The Fleet Investors also granted the Company a stock option. In
connection with the Reorganization, Dobson and its shareholders entered into a
new Shareholders' Agreement having substantially the same terms and conditions.
In January 1998, the Company issued the Fleet Investors 100,000 shares of Class
C Preferred Stock. In connection with the Sygnet Financing, the Fleet Investors
converted their Class B Preferred Stock into Class A Common Stock and disposed
of all their Class A Common Stock and Class C Preferred Stock. In addition, the
Shareholders' Agreement was replaced with a new shareholders' agreement and the
option granted to the Company by the Fleet Investors will terminated.
The Everett R. Dobson Irrevocable Family Trust, Steven T. Dobson Irrevocable
Family Trust and Robbin L. Dobson Irrevocable Family Trust (collectively, the
"Dobson Trusts") were co-borrowers with the Company and certain of its
subsidiaries under a prior bank facility, which was first entered into in 1994.
The Dobson Trusts are the limited partners of the Dobson Partnership, which
holds more than 99% of Dobson's Class A Common Stock and, prior to the
Reorganization, held more than 99% of DOC's Class A Common Stock. See "Principal
Shareholders." The Company and its borrower subsidiaries guaranteed, and the
Company pledged the equity securities of certain of its subsidiaries as security
for, the obligations of the Dobson Trusts under a $6.0 million promissory note
maturing in 2004 (the "Trust Loan"), and the Dobson Partnership guaranteed the
loan obligations of the Company and its subsidiaries under the prior bank
facility. All borrowings were secured by the Class A Common Stock. In accordance
with the terms of the Fleet Investors Purchase Agreement and the prior bank
facility, the Company paid dividends on the Class A Common Stock in amounts
sufficient to permit the Dobson Trusts to service the Trust Loan. The Dobson
Trusts incurred legal fees totaling approximately $.5 million in connection with
the negotiation and closing of the credit agreement for the prior bank facility
in 1994 and an amendment effected in 1996. Such fees were paid by the Company.
In connection with the Reorganization, the Company used $7.5 million of
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bank borrowings to pay a dividend to holders of its Class A Common Stock, of
which $6.0 million was used to fully pay the Trust Loan and $.5 million was used
to pay indebtedness owed to the Company by the Dobson Trusts with respect to the
legal fees described above.
Everett R. Dobson and Russell L. Dobson beneficially owned 67% of the
capital stock of ATTI. In December 1996, the Company consolidated $263,000 of
ATTI's outstanding indebtedness to the Company in an unsecured promissory note
which provided for interest at an annual rate of 10%. The consolidation
refinanced earlier loans made prior to 1994. At September 30, 1997, National
Telecommunications Technologies, Inc. ("Natelco"), a wholly-owned subsidiary of
ATTI, was indebted to the Company in the aggregate principal amount of $307,000,
representing funds advanced by the Company during 1992, 1993 and 1995. The
indebtedness was evidenced by an unsecured promissory note which provided for
interest at an annual rate of 10%. The ATTI and Natelco loans (combined
principal amount of $570,000) were paid in full on October 1, 1997 in connection
with the closing of the Arizona 5 Acquisition. The Company loaned another
subsidiary of ATTI $21,000 in 1994 and $32,000 in 1995, at annual interest rates
of 12% and 14%, respectively. These loans were paid in full in October 1995 and
January 1996.
Through September 30, 1997, the Company performed certain management
services for ATTI and its subsidiaries, including accounting, plant and central
office management and engineering. Billings for the services were based on the
time spent by, and hourly rates of, Company personnel and expenses incurred.
During 1995, 1996 and the nine months ended September 30, 1997, the aggregate
amounts billed for management fees and expenses to ATTI and its subsidiaries
were approximately $210,000, $333,000 and $110,000, respectively. The amounts
owed by these entities to the Company for management fees at December 31, 1995
and 1996 and September 30, 1997 were $1.0 million, $1.2 million and $1.3
million, respectively. All amounts owed by ATTI and its subsidiaries for
management services rendered prior to September 30, 1997 were paid in October
1997 in connection with the closing of the Arizona 5 Acquisition. In connection
with the Arizona 5 Acquisition, ATTI became a wholly owned subsidiary of the
Company, and a new company, NATELCO, LLC (an affiliate of Everett R. Dobson and
Russell L. Dobson), was created. For the year ended December 31, 1997 and the
nine months ended September 30, 1998 the amounts billed for management fees and
expenses to NATELCO, LLC were $21,000 and $47,700, respectively. The amounts
owed by NATELCO, LLC to the Company for management fees at December 31, 1997 and
September 30, 1998 were $8,900 and $8,200, respectively.
ATTI beneficially owned a 20.55% partnership interest in the Arizona 5
Partnership. In connection with the Arizona 5 Acquisition, the Company purchased
all of the outstanding capital stock of ATTI for $14.2 million, of which Everett
R. Dobson and Russell L. Dobson, together, received $9.5 million. The purchase
price for the ATTI stock was based on ATTI's beneficial ownership in the Arizona
5 Partnership and negotiations between the Company and the other partner of the
Arizona 5 Partnership.
In March 1996, the Company made a $1.4 million unsecured loan to Everett R.
Dobson. The loan was repaid on October 1, 1997 in connection with the Arizona 5
Acquisition. Interest on the amount borrowed was payable quarterly at the same
annual rate as that payable under the Company's prior bank facility. The loan
consolidated amounts borrowed prior to 1994, together with accrued interest.
In June 1997, Everett R. Dobson executed a promissory note in favor of the
Company in the amount of approximately $354,000, which refinanced loans made to
him by the Company during 1996, together with accrued interest. The loan was
repaid on October 1, 1997 in connection with the Arizona 5 Acquisition. The loan
bore interest at 8% per annum. In December 1996, the Company made a one-year
loan in the amount of $12,900 to Russell L. Dobson which bore interest at 9% per
annum. In June 1997, the Company made an additional loan to Russell L. Dobson in
the principal amount of $423,000, of which $304,000 consolidated amounts owed to
the Company since prior to 1994, and $119,000 refinanced a loan made to him in
November 1996, in each case together with accrued interest. This loan bore
interest at an annual rate of 9.07%. Both loans to Russell L. Dobson were paid
in full on October 1, 1997 in connection with the Arizona 5 Acquisition. The
interest rate charged on the loan to Everett R. Dobson represented the Company's
costs of borrowed funds. The interest rate on the loans to Russell L. Dobson
approximated
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the prevailing market rates at the time the loans were first made. In 1993,
Steven T. Dobson was indebted to the Company in the principal amount of $7,500,
which loan was paid in full in March 1995.
Prior to November 1, 1998, the Company leased its headquarters from WillRuss
Limited Liability Company ("WillRuss") pursuant to a 10-year lease expiring in
2005. WillRuss is owned by Russell L. Dobson and his wife. Monthly rent under
the lease was approximately $23,000, or $.93 per square foot. In October 1998,
WillRuss sold this building to an unrelated third party. As part of the sale
transaction, the Company entered into an agreement with the buyer to lease the
building for a one-year term at a monthly rent of approximately $19,000. In
August 1995, the Company loaned WillRuss $60,000, which was paid in full in
September 1995, together with interest at an annual rate of 10%.
The Company made a $300,000 home mortgage loan to G. Edward Evans in
February 1997 in connection with his employment. See "--Employment Agreements."
The loan is payable in 60 monthly installments of $1,400, including interest at
the annual rate of 4%, with the balance due at maturity in February 2002.
In 1995, the Company bought 75,000 shares of common stock of Zenex for
$75,000 and 400,000 shares of Zenex preferred stock for $400,000, and received
an option to purchase additional shares of Zenex common stock. In early 1996,
the Company purchased an additional 275,000 shares of Zenex preferred stock for
$275,000. In October 1996, Zenex redeemed all shares of Zenex preferred stock
held by the Company and purchased the Company's option for an aggregate of
$825,000. At the same time, the Company sold 30,000 shares of Zenex common stock
to an unrelated party for $142,000. In July 1997, the Company purchased 30,000
shares of Zenex common stock for $150,000 and resold the shares in November 1997
to Everett R. Dobson at a price equal to the Company's cost. In September 1997,
the Company purchased a loan for $263,882 made by a bank to Zenex and resold
such loan to Everett R. Dobson in November 1997 at a price equal to the
Company's cost plus accrued interest. Everett R. Dobson, an executive officer,
director and principal shareholder of the Company, was a director of Zenex from
August 1995 to September 1997.
In November 1997, Everett R. Dobson purchased an interest in the Company's
loan to Gila River Telecommunications Subsidiary, Inc., a wholly owned
subsidiary of the Gila River Indian Community. The Company repurchased this
interest in June 1998.
In January 1998, a subsidiary of the Company purchased contractual rights,
information data and other rights with respect to certain of Zenex's long
distance customers located in areas served by Logix for $105,000. In addition,
in June, 1998, Logix purchased certain long distance customers and related
assets for approximately $4.7 million. In connection with the purchase of these
assets of Zenex, a note payable in the amount of $284,765, including accrued
interest, from Zenex to Everett R. Dobson was paid in full.
In connection with the Sygnet Financing, the Company purchased for $1.9
million all of its outstanding shares (100,000 shares) of Class C Preferred
Stock held by the Fleet Investors and also purchased 43,348 shares of its Class
A Common Stock from Fleet Investors for $31.1 million. Thadeus J. Mocarski, a
principal of the Fleet Investors, was a director of the Company and resigned as
a director upon consummation of the Sygnet Acquisition. As part of the Sygnet
Financing, the Dobson Partnership acquired 37,630 shares of Class G Preferred
Stock from the Company in exchange for 37,630 shares of Class A Common Stock.
See "Description of Capital Stock--Other Preferred Stock" for a description of
the Class D Purchase Agreement and Investors Agreement entered into by the
Company in connection with the Sygnet Financing.
In the Tower Sale Leaseback, Dobson Tower Company purchased cellular towers
from Sygnet for $25.0 million and lease the towers back to Sygnet. Everett R.
Dobson, a director, executive officer and principal shareholder of the Company,
owns preferred stock issued by Dobson Tower Company. All of Dobson Tower
Company's common stock is owned by the Company.
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PRINCIPAL SHAREHOLDERS
The following table provides information concerning beneficial ownership of
the Company's voting securities at December 31, 1998, by (a) each person known
by the Company to beneficially own more than 5% of such stock, (b) each
director, nominee and Named Executive Officer, and (c) all directors, nominees
and executive officers as a group:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS D PREFERRED CLASS G PREFERRED STOCK
STOCK
---------------------- ---------------------- ------------------------ PERCENT OF
NAME AND ADDRESS OF BENEFICIAL NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF TOTAL VOTING
OWNER SHARES CLASS SHARES CLASS SHARES CLASS POWER(1)
- ------------------------------- --------- ----------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Everett R. Dobson (2) ......... 471,388 95.8% 3,534 4.7% 37,853 100.0% 84.8%
13439 N. Broadway Ext.
Oklahoma City, OK 73114
Russell L. Dobson ............. 3,154 * -- -- -- -- *
13439 N. Broadway Ext.
Oklahoma City, OK 73114
J.W. Childs
Associates, L.P. (3)......... 17,412 3.5% 71,560 95.3% -- -- 14.7%
One Federal St.
Boston, MA 02110
All directors, nominees and
executive officers as a group
(11 persons)................. 491,954 100.0% 75,094 100.0% 37,853 100.0% 100.0%
</TABLE>
- ------------------------
* Less than 1%.
(1) In calculating the percent of total voting power, the voting power of shares
of Class A Common Stock (one vote per share) and Class D Preferred Stock
(presently equivalent to one vote per share) is aggregated.
(2) All such shares are held by the Dobson Partnership. As the president and
sole director and shareholder of RLD, Inc., the general partner of the
partnership, Everett R. Dobson has voting and investment power with respect
to such shares.
(3) All such shares are beneficially owned by Dana L. Schmaltz, who became a
director following the closing of the Sygnet Financing.
Except as set forth above, no director, nominee or executive officer of the
Company owns or has the right to acquire within 60 days, or upon completion of
the Sygnet Financing will own or have the right to acquire within 60 days
thereafter, any of the Company's voting securities.
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<PAGE>
DESCRIPTION OF THE PREFERRED STOCK
The summary contained herein of certain provisions of the Preferred Stock
does not purport to be complete and is qualified in its entirety by reference to
the provisions of the Certificate of Designation, the form of which will be made
available from the Company upon request. The definitions of certain terms used
in the Certificate of Designation and in the following summary are set forth
under "--Certain Definitions."
GENERAL
The Certificate of Incorporation of the Company authorizes the Board of
Directors to issue classes of preferred stock from time to time in one or more
series, with such designations, voting powers, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions as may be determined by the Board of Directors. The Company has
authorized 2,500,000 shares of preferred stock, par value $1.00, including
184,000 shares of Preferred Stock, with a liquidation preference of $1,000 per
share. Such shares include the 64,646 shares of Preferred Stock issued in Old
Shares and additional shares of Preferred Stock which may be used to pay
dividends on the Preferred Stock if the Company elects to pay dividends in
additional Preferred Stock. The Company filed a Certificate of Designation with
respect thereto with the Secretary of State of Oklahoma as required by Oklahoma
law. The Preferred Stock will be exchangeable, at the option of the Company,
into the Exchange Debentures, at any time. See "--Exchange." The outstanding
Preferred Stock is fully paid and nonassessable and the holders thereof have no
subscription or preemptive rights related thereto. United States Trust Company
of New York will be the transfer agent and registrar for the Preferred Stock
(the "Transfer Agent" and "Registrar").
RANKING
The Preferred Stock, with respect to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of the Company,
ranks (i) senior to all classes of Common Stock of the Company, Class A
Preferred Stock, the Class D Preferred Stock, the Class E Preferred Stock, the
Class F Preferred Stock, the Class G Preferred Stock, the Class H Preferred
Stock and to each other class of capital stock or series of preferred stock
established after the date of this Memorandum by the Board of Directors, the
terms of which do not expressly provide that it ranks senior to or on a parity
with the Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred
to, together with all classes of Common Stock of the Company, as the "Junior
Securities"); (ii) on a parity with the Senior Preferred Stock and, subject to
certain conditions, with any class of capital stock or series of preferred stock
issued by the Company established after the date of this Memorandum by the Board
of Directors, the terms of which expressly provide that such class or series
will rank on a parity with the Preferred Stock as to dividend distributions and
distributions upon the liquidation, winding-up and dissolution of the Company
(collectively referred to as "Parity Securities"); and (iii) subject to certain
conditions, junior to each class of capital stock or series of preferred stock
issued by the Company established after the date of this Memorandum by the Board
of Directors, the terms of which expressly provide that such class or series
will rank senior to the Preferred Stock as to dividend distributions and
distributions upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Securities"). The Preferred Stock is
subject to the issuance of series of Junior Securities, Parity Securities and
Senior Securities, PROVIDED that the Company may not issue any new class of
Senior Securities without the approval of the holders of at least a majority of
the shares of Preferred Stock then outstanding, voting or consenting, as the
case may be, separately as one class, except that, without the approval of
holders of the Preferred Stock, the Company may issue shares of Senior
Securities in exchange for, or the proceeds of which are used to redeem or
repurchase, (1) all (but not less than all) shares of Preferred Stock then
outstanding or (2) indebtedness of the Company.
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<PAGE>
DIVIDENDS
Holders of Preferred Stock are entitled to receive, when, as and if declared
by the Board of Directors, out of funds legally available therefor, dividends on
the Preferred Stock at a rate per annum equal to 12.25% of the liquidation
preference per share, payable quarterly. All dividends will be cumulative,
whether or not earned or declared, on a daily basis from the Issue Date and will
be payable quarterly in arrears on January 15, April 15, July 15 and October 15
of each year, commencing January 15, 1999. On and before January 15, 2003, the
Company may pay dividends, at its option, in cash or in additional fully paid
and nonassessable Preferred Stock having an aggregate liquidation preference
equal to the amount of such dividends. Dividends paid in additional shares of
Preferred Stock will be calculated and paid to registered holders to the nearest
whole share. The Company may pay dividends in cash during the period on or
before January 15, 2003 on the Senior Preferred Stock only if it also pays
dividends in cash on the Preferred Stock during such period.
The Depository Trust Company ("DTC") will not permit the allocation of
fractional shares. Consequently, payments made to Cede & Co. (as nominee for
DTC) will include cash in lieu of fractional shares based on the liquidation
preference of the Preferred Stock. Registered holders other than Cede & Co., if
any, will continue to receive fractional shares of Preferred Stock calculated to
the fifth decimal place.
After January 15, 2003, dividends may be paid only in cash. However, the
Senior Note Indenture, the certificate of designation for the Senior Preferred
Stock and the Credit Facilities restrict the payment of cash dividends by the
Company, and future agreements may provide the same. If any dividend (or portion
thereof) payable on any dividend payment date is not declared or paid in full in
cash (or on or prior to January 15, 2003, in cash or Preferred Stock) on such
dividend payment date, the amount of accrued and unpaid dividends will bear
interest at the dividend rate on the Preferred Stock, compounding quarterly,
until declared and paid in full.
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Securities for any period unless full cumulative
dividends shall have been or contemporaneously shall be declared and paid in
full or declared and, if payable in cash, a sum in cash shall be set apart for
such payments on the Preferred Stock. If full dividends are not so paid, the
Preferred Stock shall share dividends PRO RATA with the Parity Securities. No
dividends may be paid or set apart for such payment on Junior Securities (except
dividends on Junior Securities in additional shares of Junior Securities) and no
Junior Securities or Parity Securities may be repurchased, redeemed or otherwise
retired nor may funds be set apart for payment with respect thereto if full
cumulative dividends shall not have been paid on the Preferred Stock.
OPTIONAL REDEMPTION
The Preferred Stock may be redeemed (subject to contractual and other
restrictions with respect thereto and to the legal availability of funds
therefor) at any time on or after January 15, 2003, at the Company's option, in
whole or in part, at the redemption prices (expressed as a percentage of the
liquidation preference thereof) set forth below, plus an amount in cash equal to
all accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the dividend payment date immediately
prior to the redemption date to the redemption date, but subject to the right of
holders of Preferred Stock on a record date to receive dividends on a dividend
payment date), if redeemed during the 12-month period beginning January 15 of
each of the years set forth below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 106.125%
2004.............................................................................. 104.084%
2005.............................................................................. 102.042%
2006 and thereafter............................................................... 100.000%
</TABLE>
110
<PAGE>
In addition, on or prior to January 15, 2001, the Company may redeem
Preferred Stock at a redemption price equal to 112.250% of the liquidation
preference, plus an amount in cash equal to all accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the redemption date to the
redemption date, but subject to the right of holders of Preferred Stock on a
record date to receive dividends due on a dividend payment date), with the
proceeds of any sale of its Common Stock, PROVIDED that such redemption date
occurs within 180 days after consummation of such sale and at least 65%
aggregate liquidation preference of Preferred Stock originally issued remains
outstanding after each such redemption.
The Company will not exercise its optional redemption rights provided in the
certificate of designation with respect to the Senior Preferred Stock unless it
contemporaneously redeems the Preferred Stock pro rata.
No optional redemption may be authorized or made unless prior thereto full
unpaid cumulative dividends shall have been paid or a sum set apart for such
payment on the Preferred Stock.
In the event of partial redemptions of Preferred Stock, the shares to be
redeemed will be determined PRO RATA or by lot, as determined by the Company,
except that the Company may redeem such shares held by any holder of fewer than
100 shares without regard to such PRO RATA redemption requirement. The Senior
Note Indenture and the Credit Facilities restrict the Company's ability to
redeem the Preferred Stock and future agreements may contain similar provisions.
See "Description of Certain Indebtedness-- The Senior Notes," "--The DOC
Facility" and "--The DCOC Facility." Notice of redemption will be mailed by
first-class mail to each holder's registered address at least 30 but no more
than 60 days prior to the redemption date. If any Preferred Stock is to be
redeemed in part, the notice of redemption that related to such Preferred Stock
shall state the portion of the liquidation preference to be redeemed. New shares
of Preferred Stock having an aggregate liquidation preference equal to the
unredeemed portion will be issued in the name of the holder thereof upon
cancellation of the original Preferred Stock and, unless the Company fails to
pay the redemption price on the redemption date, after the redemption date,
dividends will cease to accrue on the Preferred Stock called for redemption.
MANDATORY REDEMPTION
The Preferred Stock is subject to mandatory redemption (subject to the legal
availability of funds therefor but without regard to any contractual or other
restrictions with respect thereto) in whole on January 15, 2008 (the "Mandatory
Redemption Date") at a price, payable in cash, equal to the liquidation
preference thereof plus all accumulated and unpaid dividends to the date of
redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
(subject to any contractual and other restrictions with respect thereto existing
on the Closing Date and the legal availability of funds therefor) to make an
Offer to Purchase (the "Change of Control Offer") to each holder of Preferred
Stock to repurchase all or any part of such holder's Preferred Stock at a cash
purchase price equal to 101% of the liquidation preference thereof, plus an
amount in cash equal to all accumulated and unpaid dividends (including an
amount in cash equal to a prorated dividend for the period from the dividend
payment date immediately prior to the date of purchase to the date of purchase)
(the "Change of Control Payment"). The Change of Control Offer must be made
within 30 days following a Change of Control, must remain open for at least 30
and not more than 40 days and must comply with the requirements of Rule 14e-1
under the Exchange Act and any other applicable securities laws and regulations.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer if any Indebtedness outstanding on the Closing Date
which would prohibit such Change of Control Offer or any Indebtedness under the
DOC Facility or the DCOC Facility is outstanding upon the occurrence of a Change
of Control until such Indebtedness is repaid, redeemed or repurchased in full,
in
111
<PAGE>
which case the date on which all such Indebtedness is so repaid, redeemed or
repurchased will, under the Certificate of Designation, be deemed to be the date
on which such Change of Control shall have occurred.
None of the provisions in the Certificate of Designation relating to a
purchase upon a Change of Control are waivable by the Board of Directors. The
Company could, in the future, enter into certain transactions, including certain
recapitalizations of the Company, that would not constitute a Change of Control,
but would increase the amount of indebtedness outstanding at such time. If a
Change of Control were to occur, the Company would be obligated to offer to
repurchase all Indebtedness outstanding on the Closing Date which would prohibit
a Change of Control Offer prior to making an offer to repurchase Preferred
Stock, and there can be no assurance that the Company would have sufficient
funds to pay the purchase price for all Preferred Stock that the Company would
be required to purchase. In the event that the Company were required to purchase
outstanding Preferred Stock pursuant to a Change of Control Offer, the Company
expects that it would need to seek third-party financing to the extent it does
not have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing. In
addition, the Company's ability to purchase the Preferred Stock may be limited
by other then-existing agreements and by restrictions imposed by Oklahoma law.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Preferred Stock will be entitled to be paid, out of the
assets of the Company available for distribution, $1,000 per share, plus an
amount in cash equal to accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal to a
prorated dividend for the period from the last dividend payment date to the date
fixed for liquidation, dissolution or winding-up), before any distribution is
made on any Junior Securities, including, without limitation, the Class A
Preferred Stock, the Class D Preferred Stock, the Class E Preferred Stock, the
Class F Preferred Stock, the Class G Preferred Stock, the Class H Preferred
Stock and the Common Stock of the Company. However, in a bankruptcy proceeding
commenced by or against the Company under the U.S. Bankruptcy Code, the claim of
a holder of Preferred Stock may be limited to the sum of (i) the initial
offering price and (ii) that portion of the difference between the liquidation
preference and the initial offering price not held to be the equivalent of
"unmatured interest" for purposes of the U.S. Bankruptcy Code. If, upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company,
the amounts payable with respect to the Preferred Stock and all other Parity
Securities are not paid in full, the holders of the Preferred Stock and the
Parity Securities will share equally and ratably in any distribution of assets
of the Company in proportion to the full liquidation preference and accumulated
and unpaid dividends to which each is entitled. After payment of the full amount
of the liquidation preferences and accumulated and unpaid dividends to which
they are entitled, the holders of Preferred Stock will not be entitled to any
further participation in any distribution of assets of the Company. However, a
merger, consolidation or sale of all or substantially all of the assets of the
Company that complies with the provisions described below under
"--Consolidation, Merger and Sale of Assets" shall not be deemed to be a
liquidation, dissolution or winding-up of the Company.
The Certificate of Designation does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Preferred
Stock, although such liquidation preference will be substantially in excess of
the par value of such Preferred Stock. In addition, the Company is not aware of
any provision of Oklahoma law or any controlling decision of the courts of the
State of Oklahoma (the state of incorporation of the Company) that requires a
restriction upon the surplus of the Company solely because the liquidation
preference of the Preferred Stock will exceed its par value. Consequently, there
will be no restriction upon the surplus of the Company solely because the
liquidation preference of the Preferred Stock will exceed the par value and
there will be no remedies available to holders of the Preferred Stock before or
after the payment of any dividend, other than in connection with the liquidation
of the Company, solely by reason of the fact that such dividend would reduce the
surplus of the Company to an amount less than the difference between the
liquidation preference of the Preferred Stock and its par value.
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<PAGE>
VOTING RIGHTS
The holders of Preferred Stock have no voting rights with respect to general
corporate matters except as provided by law or as set forth in the Certificate
of Designation. The Certificate of Designation provides that if (a) dividends on
the Preferred Stock are in arrears and unpaid (and, with respect to dividends
that become payable after January 15, 2003, are not paid in cash) for four
quarterly periods (whether or not consecutive), (b) the Company fails to
discharge any redemption obligation with respect to the Preferred Stock, (c) the
Company fails to make an offer to purchase (and complete such purchase of) all
of the outstanding shares of Preferred Stock following a Change of Control, if
such offer to purchase is required by the provisions set forth above under the
caption "--Change of Control," (d) a breach or violation of the provisions
described under the caption "--Covenants" occurs and such breach or violation
continues for a period of 30 consecutive days or more after notice thereof to
the Company by holders of 25% or more of the shares of Preferred Stock then
outstanding or (e) there occurs with respect to any issue or issues of
Indebtedness of the Company and/or any Significant Subsidiary having an
outstanding principal amount of $10 million or more in the aggregate for all
such issues of the Company and/or any Significant Subsidiary, whether such
Indebtedness now exists or shall hereafter be created, (i) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (ii) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default, then the number of directors constituting the Board of
Directors will be adjusted to permit the holders of the majority of the then
outstanding shares of Preferred Stock, voting separately as a class, to elect
two directors. Such voting rights and the term of office of such elected
directors will continue until such time as all dividends in arrears on the
Preferred Stock are paid in full (and, in the case of dividends payable after
January 15, 2003, paid in cash) and any failure, breach or default referred to
in clause (b), (c), (d) or (e) is remedied, at which time the term of any
directors elected pursuant to the provisions of this paragraph shall terminate.
For the purpose of determining the number of quarterly periods for which accrued
dividends have not been paid, any accrued and unpaid dividend that is
subsequently paid shall not be treated as unpaid. Each such event described in
clauses (a) through (e) above is referred to herein as a "Voting Rights
Triggering Event." Within 15 days of the time the Company becomes aware of the
occurrence of any default referred to in clause (d) or (e) above, the Company
shall give written notice thereof to holders of the Preferred Stock.
The Certificate of Designation provides that, upon the occurrence of a
Voting Rights Triggering Event, the number of directors constituting the Board
of Directors will be increased by two directors, whom the holders of Preferred
Stock are entitled to elect. Whenever the right of the holders of Preferred
Stock to elect directors shall cease, the number of directors constituting the
Board of Directors will be restored to the number of directors constituting the
Board of Directors prior to the time or event that entitled the holders of
Preferred Stock to elect directors.
Any vacancy occurring in the office of a director elected by the holders of
Preferred Stock may be filled by the remaining director elected by such holders
unless and until such vacancy shall be filled by such holders.
The Certificate of Designation provides that, except as stated above under
"--Ranking," the Company will not authorize any class of Senior Securities
without the affirmative vote or consent of the holders of at least a majority of
the shares of Preferred Stock then outstanding, voting or consenting, as the
case may be, separately as one class. The Certificate of Designation also
provides that the Company may not amend the Certificate of Designation so as to
affect adversely the specific rights, preferences, privileges or voting rights
of holders of the Preferred Stock, or authorize the issuance of any additional
shares of Preferred Stock (other than to pay dividends in kind), without the
affirmative vote or consent of the holders of at least a majority of the
outstanding shares of Preferred Stock, voting or consenting, as the case may be,
separately as one class. The holders of at least a majority of the outstanding
shares of Preferred
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Stock, voting or consenting, as the case may be, separately as one class, may
also waive compliance with any provision of the Certificate of Designation. The
Certificate of Designation also provides that, except as set forth above, (a)
the creation, authorization or issuance of any shares of Junior Securities,
Parity Securities or Senior Securities or (b) the increase or decrease in the
amount of authorized capital stock of any class, including any preferred stock,
shall not require the consent of the holders of Preferred Stock and shall not be
deemed to affect adversely the rights, preferences, privileges or voting rights
of the holders of Preferred Stock.
Under Oklahoma law, the holders of Preferred Stock will be entitled to vote
as a class upon a proposed amendment to the Certificate of Incorporation,
whether or not entitled to vote thereon by the Certificate of Incorporation, if
the amendment would increase or decrease the par value of the shares of such
class, or alter or change the powers, preferences or special rights of the
shares of such class so as to affect them adversely.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Certificate of Designation. Reference is
made to the Certificate of Designation for the full definitions of all such
terms as well as any other capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; PROVIDED that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has a joint interest and the net income of any
Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person or such Unrestricted Subsidiary during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) except in the case of any restriction or encumbrance
permitted under clause (vi) of the "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Shares of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses, net of tax.
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"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
described under "Consolidation, Merger and Sale of Assets"; PROVIDED that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales or other dispositions of assets
for consideration at least equal to the fair market value of the assets sold or
disposed of, PROVIDED that the consideration received consists of property or
assets (other than current assets) of a nature or type or that are used in a
business (or a company having property or assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or business of, the Company and its Restricted Subsidiaries existing
on the date of such sale or other disposition or (c) sales, transfers or other
dispositions of assets constituting a Restricted Payment permitted to be made
under the "Limitation on Restricted Payments" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, including, without limitation,
all Common Stock and Preferred Shares.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
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"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date; or (ii) individuals who on the Closing Date constituted
the Board of Directors (together with any new directors whose election by the
Board of Directors or whose nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Class A Common Stock" means the Class A Common Stock, par value $.001 per
share, of the Company.
"Class A Preferred Stock" means the Class A Non-Voting, Non-Convertible
Preferred Stock, par value $1.00 per share, of the Company.
"Class D Preferred Stock" means the Class D 15% Convertible Preferred Stock,
par value $1.00 per share, of the Company.
"Class E Preferred Stock" means the Class E Preferred Stock, par value $1.00
per share, of the Company.
"Class F Preferred Stock" means the Class F 16% Preferred Stock, par value
$1.00 per share, of the Company.
"Class G Preferred Stock" means the Class G 16% Convertible Preferred Stock,
par value $1.00 per share, of the Company.
"Class H Preferred Stock" means the Class H Preferred Stock, par value $1.00
per share, of the Company.
"Closing Date" means January 22, 1998.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Shares of
such Person, whether now outstanding or issued after the Closing Date, including
without limitation, all series and classes of such Common Stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets), (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the quotient of (1) the number of shares of outstanding Common Stock of
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such Restricted Subsidiary not owned on the last day of such period by the
Company or any of its Restricted Subsidiaries divided by (2) the total number of
shares of outstanding Common Stock of such Restricted Subsidiary on the last day
of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Senior Notes and the Senior Preferred Stock, all as
determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date, plus,
solely for purpose of calculating whether a Restricted Payment may be made
pursuant to clause (vi) or (vii) of the " Limitation on Restricted Payments"
covenant, the maximum fixed redemption or repurchase price of the Preferred
Stock and any Senior Securities or Parity Securities at the time of
determination, to (ii) the aggregate amount of Consolidated EBITDA for the then
most recent four fiscal quarters for which financial statements of the Company
have been filed with the Commission (such four fiscal quarter period being the
"Four Quarter Period"); PROVIDED that (A) PRO FORMA effect shall be given to any
Indebtedness that is to be Incurred or repaid on the Transaction Date as if such
Incurrence or repayment had occurred on the first day of such Four Quarter
Period; (B) PRO FORMA effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving PRO FORMA effect to the application of proceeds
of any Asset Disposition) that occur during the period beginning on the first
day of the Four Quarter Period and ending on the Transaction Date (the
"Reference Period") as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; and (C) PRO FORMA effect shall be
given to asset dispositions and asset acquisitions (including giving PRO FORMA
effect to the application of proceeds of any asset disposition) that have been
made by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted Subsidiary as
if such asset dispositions or asset acquisitions were Asset Dispositions or
Asset Acquisitions that occurred on the first day of such Reference Period;
PROVIDED that to the extent that clause (B) or (C) of this sentence requires
that PRO FORMA effect be given to an Asset Acquisition or Asset Disposition,
such PRO FORMA calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed of for which financial
information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with
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GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Credit Facilities" means the DOC Facility and the DCOC Facility.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"DCOC" means Dobson Cellular Operations Company.
"DCOC Facility" means the $120 million and $80 million credit facilities
created and established by the DCOC Facility Agreement.
"DCOC Facility Agreement" means the agreement among DCOC, NationsBank of
Texas, N.A., First Union National Bank and Toronto Dominion (Texas), Inc., dated
as of March 25, 1998, establishing the DCOC Facility, together with all other
agreements, instruments, and documents executed or delivered pursuant thereto or
in connection therewith, in each cash as such agreement, other agreements,
instruments or documents may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Mandatory Redemption Date, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Mandatory
Redemption Date or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Mandatory Redemption Date; PROVIDED that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of a "change of control" occurring prior to
the Mandatory Redemption Date shall not constitute Disqualified Stock if the
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained in
the "Change of Control" covenant and such Capital Stock specifically provides
that such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of such Senior Preferred Stock as is
required to be repurchased pursuant to the "Change of Control" covenant.
"Dobson/Sygnet" means Dobson/Sygnet Communications Company.
"Dobson/Sygnet Indenture" means the Indenture dated as of December 23, 1998
between Dobson/ Sygnet and United States Trust Company of New York, relating to
the Dobson/Sygnet Notes, as such indenture may be amended, supplemented,
extended, renewed, replaced or otherwise modified from time to time.
"Dobson/Sygnet Notes" means the 12 1/4% Senior Notes due 2008 to be issued
by Dobson/Sygnet under the Dobson/Sygnet Indenture.
"DOC Facility" means that certain credit facility created and established by
the DOC Facility Agreement.
"DOC Facility Agreement" means the Third Amended and Restated Credit
Agreement among Dobson Operating Company, Corestates Bank, N.A., Toronto
Dominion (Texas), Inc. and NationsBank of Texas, N.A. dated as of March 25,
1998, together with all other agreements, instruments and documents executed or
delivered pursuant thereto or in connection therewith, in each case as such
agreements, instruments or documents may be amended, supplemented, extended,
renewed, replaced or otherwise modified from time to time.
"Existing Stockholders" means Everett R. Dobson.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be
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conclusive if evidenced by a Board Resolution; PROVIDED that for purposes of
clause (viii) of the second paragraph of the "Limitation on Indebtedness"
covenant, (x) the fair market value of any security registered under the
Exchange Act shall be the average of the closing prices, regular way, of such
security for the 20 consecutive trading days immediately preceding the sale of
Capital Stock and (y) in the event the aggregate fair market value of any other
property received by the Company exceeds $10 million, the fair market value of
such property shall be determined by a nationally recognized investment banking
firm and set forth in their written opinion which shall be delivered to the
Transfer Agent.
"FCC" means the Federal Communications Commission.
"Fleet Investors" means Fleet Venture Resources, Inc., Fleet Equity Partners
VI, L.P. and Kennedy Plaza Partners and their Affiliates.
"Fleet Investors Preferred Stock" means the Class B Preferred Stock and the
Class C Preferred Stock.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Certificate of Designation shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Certificate of Designation shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the offering of the
Senior Notes and the Senior Preferred Stock and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi),
(vii) or (viii) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third Business
Day following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the
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deferred and unpaid purchase price of property or services, which purchase price
is due more than six months after the date of placing such property in service
or taking delivery and title thereto or the completion of such services, except
Trade Payables, (v) all obligations of such Person as lessee under Capitalized
Leases, (vi) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED that the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person, (viii) the
maximum fixed redemption or repurchase price of Disqualified Stock of such
Person at the time of determination and (ix) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date (or in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, PROVIDED (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) money borrowed at the time
of the Incurrence of any Indebtedness in order to pre-fund the payment of
interest on such Indebtedness shall be deemed not to be "Indebtedness" and (C)
that Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary (other than as a result of being designated as an
Unrestricted Subsidiary under clause (i) above), including without limitation,
by reason of any transaction permitted by clause (iii) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below, (i) "Investment" shall include
the fair market value of the assets (net of liabilities (other than liabilities
to the Company or any of its Subsidiaries)) of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding Investments
and (iii) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
"Issue Date" means the date on which the Preferred Stock was originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Logix" means Logix Communications Enterprises, Inc., formerly named Dobson
Wireline Company.
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"Logix Notes" means the 12 1/4% Senior Notes due 2008 issued by Logix under
the Logix Indenture.
"Logix Indenture" means the Indenture dated as of June 12, 1998 between
Logix and United States Trust Company of New York, relating to the Logix Notes,
as such indenture may be amended, supplemented, extended, renewed, replaced or
otherwise modified from time to time.
"Mandatory Redemption Date" means January 15, 2008.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary of the Company as a reserve against any
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorney's fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof.
"New DCOC Facility Commitment Letter" means the commitment letter (including
the Summary of Terms and Conditions attached thereto) dated January 7, 1998
among Dobson Communications Corporation, Dobson Cellular Operations Company,
NationsBank of Texas, N.A. and NationsBanc Montgomery Securities LLC.
"New DOC Facility Agreement" means the credit agreement established pursuant
to the New DOC Facility Commitment Letter, together with all other agreements,
instruments and documents executed or delivered pursuant thereto or in
connection therewith, in each case as such credit agreement, other agreements,
instruments or documents may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time.
"New DOC Facility Commitment Letter" means the commitment letter (including
the Summary of Terms and Conditions attached thereto) dated January 7, 1998
among Dobson Communications Corporation, Dobson Operating Company, NationsBank
of Texas, N.A. and NationsBanc Montgomery Securities LLC.
"New Shares" means shares of the Company's 12 1/4% Senior Exchangeable
Preferred Stock which have been registered under the Securities Act and which
are issued in exchange for surrendered Old Shares.
"Offer to Purchase" means an offer by the Company to purchase Preferred
Stock from the Holders commenced by mailing a notice to the Transfer Agent and
each Holder stating: (i) the covenant pursuant
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to which the offer is being made and that all Preferred Stock validly tendered
will be accepted for payment on a PRO RATA basis; (ii) the purchase price and
the date of purchase (which shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed) (the "Payment Date");
(iii) that any Preferred Stock not tendered will continue to accrue dividends
pursuant to its terms; (iv) that, unless the Company defaults in the payment of
the purchase price, any Preferred Stock accepted for payment pursuant to the
Offer to Purchase shall cease to accrue dividends on and after the Payment Date;
(v) that Holders electing to have Preferred Stock purchased pursuant to the
Offer to Purchase will be required to surrender the Preferred Stock, together
with the form entitled "Option of the Holder to Elect Purchase" on the reverse
side of the Preferred Stock completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name of such
Holder, the liquidation preference of Preferred Stock delivered for purchase and
a statement that such Holder is withdrawing its election to have such Preferred
Stock purchased; and (vii) that Holders whose Preferred Stock is being purchased
only in part will be issued new shares of Preferred Stock equal in liquidation
preference to the unpurchased portion of the Preferred Stock surrendered;
PROVIDED that each share of Preferred Stock purchased and each new share of
Preferred Stock issued shall be in a liquidation preference of $1,000 or
integral multiples thereof. On the Payment Date, the Company shall (i) accept
for payment on a PRO RATA basis Preferred Stock or portions thereof validly
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Preferred Stock or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the
Transfer Agent all Preferred Stock or portions thereof so accepted together with
an Officers' Certificate specifying the Preferred Stock or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail to the
Holders of Preferred Stock so accepted payment in an amount equal to the
purchase price, and the Transfer Agent shall promptly countersign and mail to
such Holders new shares of Preferred Stock equal in liquidation preference to
any unpurchased portion of the Preferred Stock surrendered; PROVIDED that each
share of Preferred Stock purchased and each new share of Preferred Stock issued
shall be in a liquidation preference of $1,000 or integral multiples thereof.
The Company will publicly announce the results of an Offer to Purchase as soon
as practicable after the Payment Date. The Transfer Agent shall act as the
Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable, in the event that the
Company is required to repurchase Preferred Stock pursuant to an Offer to
Purchase.
"Old Shares" means shares of the Company's 12 1/4% Senior Exchangeable
Preferred Stock originally issued on December 23, 1998 and all additional shares
of the Company's 12 1/4% Senior Exchangeable Preferred Stock issued in the
payment of dividends thereon.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; and (iv) stock, obligations or securities received in
satisfaction of judgments.
"Preferred Shares" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
now outstanding or issued after the Closing Date, including, without limitation,
the Preferred Stock and all other series and classes of such preferred stock or
preference stock.
"Preferred Stock" means the Old Shares and the New Shares.
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"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Senior Indebtedness" means (i) Indebtedness of the Company under the Senior
Notes, the Senior Note Indenture, the DOC Facility Agreement and the DCOC
Facility Agreement and all fees, expenses and indemnities payable in connection
with any of the foregoing and (ii) all other Indebtedness of the Company,
including principal and interest on such Indebtedness, unless such Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to which
such Indebtedness is issued, would be PARI PASSU with, or subordinated in right
of payment to, the Exchange Debentures; PROVIDED that the term "Senior
Indebtedness" shall not include (a) any Indebtedness of the Company that, when
Incurred and without respect to any election under Section 1111(b) of the United
States Bankruptcy Code, was without recourse to the Company, (b) any
Indebtedness of the Company to a Subsidiary of the Company or to a joint venture
in which the Company has an interest, (c) any Indebtedness of the Company, to
the extent not permitted by the "Limitation on Indebtedness" or the "Senior
Subordinated Indebtedness" covenants described below, (d) any repurchase,
redemption or other obligation in respect of Disqualified Stock, (e) any
Indebtedness to any employee of the Company or any of its Subsidiaries, (f) any
liability for federal, state, local or other taxes owed or owing by the Company
or (g) any Trade Payables. Senior Indebtedness will also include interest
accruing subsequent to events of bankruptcy of the Company at the rate provided
for in the document governing such Senior Indebtedness, whether or not such
interest is an allowed claim enforceable against the debtor in a bankruptcy case
under federal bankruptcy law.
"Senior Note Indenture" means the Indenture dated as of February 28, 1997
between the Company and United States Trust Company of New York, relating to the
Senior Notes, as such indenture may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time.
"Senior Exchange Debentures" means the Company's 12 1/4% Senior Subordinated
Debentures due 2008 which may be issued by the Company in exchange for Senior
Preferred Stock.
"Senior Notes" means the 11 3/4% Senior Notes due 2007 issued by the Company
under the Senior Note Indenture.
"Senior Preferred Stock" means the Company's 12 1/4% Senior Exchangeable
Preferred Stock Mandatorily Redeemable 2008 issued by the Company on January 22,
1998.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
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"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) Logix, Dobson/Sygnet, Dobson Tower
Company or any other Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Restricted Subsidiary (including any newly
acquired or newly formed Subsidiary of the Company) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any Restricted Subsidiary; PROVIDED
that (A) any Guarantee by the Company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by the Company or such
Restricted Subsidiary (or both, if applicable) at the time of such designation;
(B) either (I) the Subsidiary to be so designated has total assets of $1,000 or
less or (II) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under the "Limitation on Restricted Payments" covenant
described below; and (C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted under
the "Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately after giving
effect to such designation (x) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be incurred for all purposes of the
Certificate of Designation and (y) no Voting Rights Triggering Event, or an
event which with the giving of notice or the passage of time, or both, would
become a Voting Rights Triggering Event, shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the
Transfer Agent by promptly providing the Transfer Agent a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
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"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Certificate of Designation will contain, among others, the following
covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than Indebtedness existing on the
Closing Date); PROVIDED that the Company and any Restricted Subsidiary may Incur
Indebtedness, if, after giving effect to the Incurrence of such Indebtedness and
the receipt and application of the proceeds therefrom, the Consolidated Leverage
Ratio would be less than 8 to 1, for Indebtedness Incurred on or prior to
December 31, 1998, or 7 to 1, for Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $250 million; (ii) Indebtedness (A) to the Company evidenced by a
promissory note or (B) to any of its Restricted Subsidiaries; PROVIDED that any
event which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Indebtedness (other than to the
Company or another Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of which are used
to refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi) or (ix) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, accrued dividends, fees and
expenses); PROVIDED that such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature or have a mandatory
redemption or repurchase date prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and PROVIDED FURTHER that in no event may Indebtedness
of the Company be refinanced by means of any Indebtedness of any Restricted
Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; PROVIDED that such
agreements (a) are designed solely to protect the Company or its Subsidiaries
against fluctuations in foreign currency exchange rates or interest rates and
(b) do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder, or (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations of
the Company or any of its Restricted Subsidiaries pursuant to such agreements,
in any case Incurred in connection with the disposition of any business, assets
or Restricted Subsidiary of the Company (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition), in an amount not to exceed the gross proceeds actually received by
the Company or any Restricted Subsidiary in connection with such disposition;
(v) Indebtedness of the Company, to the extent the net proceeds thereof are
promptly (A) used to purchase Senior Preferred Stock and Preferred Stock, pro
rata, tendered in an Offer to Purchase (or similar offer to purchase made under
the certificate of designation relating to the Senior Preferred Stock) made as a
result of a Change in Control or (B) deposited to defease the Senior Notes;
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(vi) Guarantees of Indebtedness of the Company by any Restricted Subsidiary;
(vii) Indebtedness Incurred to finance the cost (including the cost of design,
development, construction, installation or integration) of telecommunications
network assets, equipment or inventory acquired by the Company or a Restricted
Subsidiary after the Closing Date; (viii) Indebtedness of the Company not to
exceed, at any one time outstanding, two times the sum of (x) the Net Cash
Proceeds received by the Company on or after the Closing Date from the issuance
and sale of its Capital Stock (other than Disqualified Stock), including the
Preferred Stock, to a Person that is not a Subsidiary of the Company to the
extent such Net Cash Proceeds have not been used pursuant to clause (C) (2) of
the first paragraph, or clause (ix) of the second paragraph, of the "Limitation
on Restricted Payments" covenant described below to make a Restricted Payment
and (y) 80% of the fair market value of property other than cash received by the
Company after the Closing Date from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company; PROVIDED that such Indebtedness does not mature prior to the Mandatory
Redemption Date; and (ix) Indebtedness outstanding at any time in an aggregate
principal amount not to exceed $25 million.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this "Limitation on Indebtedness" covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, the Company, in its
sole discretion, shall classify, and from time to time may reclassify, such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Company shall not Incur any Indebtedness that is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness would be PARI PASSU
with, or subordinated in right of payment to, the Exchange Debentures; PROVIDED
that the foregoing limitation shall not apply to distinctions between categories
of Senior Indebtedness of the Company that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all such Senior
Indebtedness.
LIMITATION ON LIENS
The Company shall not Incur any Indebtedness secured by a Lien ("Secured
Indebtedness") which is not Senior Indebtedness unless effective provision is
made to have the Exchange Debentures (if and when issued) secured equally and
ratably with (or, if the Secured Indebtedness would be subordinated in right of
payment to the Exchange Debentures, prior to) such Secured Indebtedness for so
long as such Secured Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Junior Securities (other than (x) dividends or
distributions payable solely in shares of its Junior Securities (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Junior Securities and (y) pro rata dividends or distributions on Common
Stock of Restricted Subsidiaries held by minority stockholders, PROVIDED that
such dividends do not in the aggregate exceed the minority stockholders' pro
rata share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Junior Securities of
(A) the
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Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Junior Securities) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Junior Securities) held by any Affiliate of the Company (other
than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of
such holder) of 5% or more of the Capital Stock of the Company, or (iii) make
any Investment, other than a Permitted Investment, in any Person (such payments
or any other actions described in clauses (i) through (iii) being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Voting Rights Triggering Event, or an event
which with the giving of notice or the passage of time, or both, would become a
Voting Rights Triggering Event, shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant, (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss) (determined by excluding income resulting from transfers of assets
by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to the "Commission
Reports and Reports to Holders" covenant PLUS (2) the aggregate Net Cash
Proceeds received by the Company after the Closing Date from the issuance and
sale permitted by the Certificate of Designation of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the Company
(except to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the "Limitation on Indebtedness" covenant) or
from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Mandatory Redemption Date) PLUS (3) an amount equal to
the net reduction in Investments (other than reductions in Permitted Investments
and reductions in Investments made pursuant to clause (ix) of the second
paragraph of this "Limitation on Restricted Payments" covenant) in any Person
resulting from payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to the Company or
any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated Net Income),
or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments"), not to
exceed, in each case, the amount of Investments previously made by the Company
or any Restricted Subsidiary in such Person or Unrestricted Subsidiary or (D)
dividends on the Senior Preferred Stock and the Preferred Stock shall not have
been paid in full as provided in the certificate of designation with respect to
the Senior Preferred Stock and the Certificate of Designation, respectively.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the repurchase, redemption or other acquisition of Junior Securities of the
Company (or options, warrants or other rights to acquire such Junior Securities)
in exchange for, or out of the proceeds of a substantially concurrent offering
of, shares of Junior Securities (other than Disqualified Stock) of the Company;
(iii) the declaration or payment of dividends on the Common Stock of the Company
following a Public Equity Offering of such Common Stock, of up to 6% per annum
of the Net Cash Proceeds received by the Company in such Public Equity Offering;
(iv) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions described under
"Consolidation, Merger and Sale of Assets"; (v) the purchase, redemption,
acquisition, cancellation or other retirement for value of shares of Junior
Securities of the Company to the extent necessary in the good faith judgment of
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the Board of Directors of the Company, to prevent the loss or secure the renewal
or reinstatement of any license or franchise held by the Company or any
Restricted Subsidiary from any governmental agency; (vi) the purchase of shares
of Fleet Investors Preferred Stock of the Company (or the Class A Common Stock
into which the Class B Preferred Stock may be converted) pursuant to the
exercise of the put rights granted to the Fleet Investors under the
Shareholders' Agreement or any mandatory redemption provisions, in each case as
in effect on the Closing Date; PROVIDED (a) after giving pro forma effect to any
such purchase the Consolidated Leverage Ratio would be less than 7.5 to 1, and
(b) if the event triggering the exercisability of the put rights constitutes a
Change of Control, no such repurchase shall be made prior to the Company's
repurchase of such Preferred Stock as is required to be repurchased pursuant to
the "Change of Control" covenant; (vii) the declaration or payment of dividends
on the Fleet Investors Preferred Stock (I) if after giving pro forma effect to
any such dividend, the Consolidated Leverage Ratio would be less than 6 to 1 or
(II) following a Public Equity Offering of Junior Securities; PROVIDED (A) the
Net Cash Proceeds received by the Company in such Public Equity Offering is at
least equal to $90 million and (B) the aggregate amount of dividends permitted
to be made in any fiscal year of the Company under clause (iii) and this clause
(vii) shall not exceed 6% of the Net Cash Proceeds received by the Company in
the Public Equity Offering; (viii) the purchase, redemption, retirement or other
acquisition for value of Junior Securities of the Company, or options to
purchase such shares, held by directors, employees or former directors or
employees of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates) upon death, disability, retirement,
termination of employment or pursuant to the terms of any agreement under which
such shares of Junior Securities or options were issued; PROVIDED that the
aggregate consideration paid for such purchase, redemption, acquisition,
cancellation or other retirement of such shares of Junior Securities or options
after the Closing Date does not exceed $500,000 in any calendar year, or $1.5
million in the aggregate; (ix) Investments in any Person or Persons, the primary
business of which is related, ancillary or complementary to the business of the
Company and its Restricted Subsidiaries on the date of such Investments, in an
aggregate amount not to exceed $30 million plus an amount not to exceed the Net
Cash Proceeds received by the Company after the Closing Date from the issuance
and sale of its Capital Stock (other than Disqualified Stock) to a Person that
is not a Subsidiary of the Company, except to the extent such Net Cash Proceeds
are used to Incur Indebtedness outstanding pursuant to clause (viii) of the
"Limitation on Indebtedness" covenant or to make Restricted Payments pursuant to
clause (C)(2) of the first paragraph, or clause (ii) of this paragraph, of this
"Limitation on Restricted Payments" covenant; or (x) the distribution on or with
respect to the holders of the Company's Junior Securities of the Capital Stock
of Logix; PROVIDED that, except in the case of clauses (i) and (ii), no Voting
Rights Triggering Event, or an event which with the giving of notice or the
passage of time, or both, would become a Voting Rights Triggering Event, shall
have occurred and be continuing or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than an exchange of Junior Securities for Junior Securities referred to in
clause (ii) thereof) and the Net Cash Proceeds from any issuance of Junior
Securities referred to in clause (ii) or Capital Stock referred to in clause
(ix) shall be included in calculating whether the conditions of clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the certificate of designation
for the Senior Preferred Stock, the Bank Facility Agreement, the
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Senior Note Indenture or any other agreements in effect on the Closing Date or
in the Certificate of Designation, and any amendments, extensions, refinancings,
renewals or replacements of such agreements; PROVIDED that, other than as
contemplated in clause (vi) below, the encumbrances and restrictions in any such
amendments, extensions, refinancings, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Certificate of Designation or (C) arising or agreed
to in the ordinary course of business, not relating to any Indebtedness, and
that do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary; (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been entered
into for the sale or disposition of all or substantially all of the Capital
Stock of, or property and assets of, such Restricted Subsidiary; or (vi)
contained in the terms of (A) the DOC Facility Agreement or the DCOC Facility
Agreement, PROVIDED any encumbrance or restriction that would prevent payments
of dividends or other distributions to the Company to pay cash interest on the
Exchange Debentures or cash dividends on the Preferred Stock applies on or prior
to January 15, 2003, or applies thereafter only in the event of an event of
default (other than an event of default resulting solely from a breach of a
representation or warranty) under the DOC Facility Agreement or the DCOC
Facility Agreement; PROVIDED (x) with respect to any event of default (other
than a payment default (including by way of acceleration), bankruptcy default or
a loss of a material license or cellular system), such restriction will
terminate 180 days after the occurrence of such event of default and (y) the
financial covenants which create such encumbrance or restriction on dividends or
other distributions in the DOC Facility Agreement or the DCOC Facility Agreement
are no less favorable to the Company or its Subsidiaries than the financial
covenants set forth in the New DOC Facility Commitment Letter or the New DCOC
Facility Commitment Letter, respectively; or (B) any Indebtedness of a
Restricted Subsidiary, or any agreement pursuant to which such Indebtedness was
issued, if the encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in such
Indebtedness or agreement, if the encumbrance or restriction is not materially
more disadvantageous to the Holders of the Preferred Stock than is customary in
comparable financings (as determined by the Company) and if the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make dividend payments on the Preferred Stock or
principal or interest payments on the Exchange Debentures. Nothing contained in
this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital
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Stock of foreign Restricted Subsidiaries, to the extent required by applicable
law; (iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary,
PROVIDED any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant, if made on the date of such issuance or sale; and
(iv) sales of Common Stock of a Restricted Subsidiary; PROVIDED that the assets
of such Restricted Subsidiary consist solely of assets relating to the Company's
PCS or resale business.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Transfer Agent a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Company or
such Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction covered by the first paragraph of this
"Limitation on Transactions with Stockholders and Affiliates" covenant and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $2 million in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
LIMITATIONS ON SENIOR PREFERRED STOCK
The Company will not (a) exchange any Senior Preferred Stock for Senior
Exchange Debentures unless it will have previously exchanged, or will
contemporaneously exchange, all of the Preferred Stock for Exchange Debentures
or (b) redeem any Senior Preferred Stock unless it will contemporaneously redeem
a pro rata portion of the Preferred Stock.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the Commission,
for so long as any Preferred Stock is outstanding, the Company will file with
the Commission all such reports and other information as it would be required to
file with the Commission by Section 13(a) or 15(d) under the Securities Exchange
Act of 1934 if it were subject thereto. The Company shall supply the Transfer
Agent and each Holder or shall supply to the Transfer Agent for forwarding to
each such Holder, without cost to such Holder, copies of such reports and other
information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to any Person or permit any Person to merge with
or into the
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Company unless: (i) the Company shall be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of the
Company shall be a corporation organized and validly existing under the laws of
the United States of America or any jurisdiction thereof and the Preferred Stock
shall be converted into or exchanged for and shall become shares of such
successor company, having in respect of such successor company or resulting
company substantially the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions thereon that the Preferred Stock had immediately prior to such
transaction; (ii) immediately after giving effect to such transaction, no Voting
Rights Triggering Event, or an event which with the giving of notice or the
passage of time, or both, would become a Voting Rights Triggering Event, shall
have occurred and be continuing; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Company, or, if other than the Company,
the successor company or resulting company, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; (iv) immediately after giving
effect to such transaction on a pro forma basis the Company, or, if other than
the Company, the successor company or resulting company, as the case may be,
could Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant; PROVIDED that this clause (iv) shall not
apply to a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; PROVIDED that, in connection with any such
merger or consolidation, no consideration (other than Common Stock in the
surviving Person or the Company) shall be issued or distributed to the
stockholders of the Company; and (v) the Company delivers to the Transfer Agent
an Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case
stating that such consolidation, merger or transfer complies with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; PROVIDED, HOWEVER, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors of the Company, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company and any such transaction shall not have as one of
its purposes the evasion of the foregoing limitations.
EXCHANGE
Subject to the "Limitations on Senior Preferred Stock" covenant, the Company
may, at the sole option of the Board of Directors (subject to the legal
availability of funds therefor), exchange all, but not less than all, of the
outstanding Preferred Stock, including any Preferred Stock issued as payment for
dividends, for Exchange Debentures, subject to the conditions set forth in the
next succeeding paragraph. Presently, the exchange of the Preferred Stock for
Exchange Debentures would be restricted by covenants in the Senior Note
Indenture, the DOC Facility Agreement and the DCOC Facility Agreement. There can
be no assurance that the conditions in such covenants for the exchange of
Preferred Stock for Exchange Debentures will be satisfied or that the exchange
will occur or that future Indebtedness of the Company would not also restrict an
exchange. See "Description of Certain Indebtedness--The Senior Notes," "--The
DOC Facility" and "--The DCOC Facility." In order to effect such exchange, the
Company shall (a) if necessary to satisfy the condition set forth in clause (B)
in the following paragraph based upon the written advice of counsel to the
Company, file a registration statement with the Commission relating to the
exchange, and (b) if a registration statement is filed with the Commission
pursuant to clause (a), use its best efforts to cause such registration
statement to be declared effective as soon as practicable by the Commission
unless the opinion referred to in clause (B) in the following paragraph shall
have been subsequently delivered.
In order to effectuate such exchange, the Company shall send a written
notice of exchange by mail to each holder of record of Preferred Stock, which
notice shall state (i) that the Company is exchanging the Preferred Stock into
Exchange Debentures pursuant to the Certificate of Designation and (ii) the date
fixed for exchange (the "Exchange Date"), which date shall not be less than 15
days nor more than 60 days following the date on which such notice is mailed
(except as provided in the last sentence of this
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paragraph). On the Exchange Date, if the conditions set forth in clauses (A)
through (E) below are satisfied and the exchange is permitted under the
Company's then outstanding indebtedness, the Company shall issue Exchange
Debentures in exchange for the Preferred Stock as provided in the next
paragraph, PROVIDED that on the Exchange Date: (A) there shall be legally
available funds sufficient therefor (including, without limitation, legally
available funds sufficient therefor under Oklahoma law); (B) a registration
statement relating to the Exchange Debentures shall have been declared effective
under the Securities Act prior to such exchange and shall continue to be
effective on the Exchange Date or the Company shall have obtained a written
opinion of counsel that an exemption from the registration requirements of the
Securities Act is available for such exchange and that upon receipt of such
Exchange Debentures pursuant to such exchange made in accordance with such
exemption, each holder of an Exchange Debenture that is not an Affiliate of the
Company will not be subject to any restrictions imposed by the Securities Act
upon the resale of such Exchange Debenture, and such exemption is relied upon by
the Company for such exchange; (C) the Exchange Debenture Indenture and the
trustee thereunder shall have been qualified under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"); (D) immediately after giving
effect to such exchange, no Default or Event of Default (each as defined in the
Exchange Debenture Indenture) would exist under the Exchange Debenture
Indenture; and (E) the Company shall have delivered to the Trustee under the
Exchange Debenture Indenture a written opinion of counsel, dated the date of
exchange, regarding the satisfaction of the conditions set forth in clauses (A),
(B) and (C). In the event that (i) the issuance of the Exchange Debentures is
not permitted on the Exchange Date or (ii) any of the conditions set forth in
clauses (A) through (E) of the preceding sentence are not satisfied on the
Exchange Date, the Company shall use its best efforts to satisfy such conditions
and effect such exchange as soon as practicable.
Upon any exchange pursuant to the preceding paragraph, the holders of
outstanding Preferred Stock will be entitled to receive a principal amount of
Exchange Debentures for Preferred Stock, the liquidation preference of which,
plus the amount of accumulated and unpaid dividends (including a prorated
dividend for the period from the immediately preceding dividend payment date to
the Exchange Date) with respect to which, equals such principal amount; PROVIDED
that the Company at its option may pay cash for any or all accrued and unpaid
dividends in lieu of issuing Exchange Debentures in respect of such dividends.
The Exchange Debentures will be issued in registered form, without coupons.
Exchange Debentures issued in exchange for Preferred Stock will be in principal
amounts of $1,000 and integral multiples thereof to the extent practicable, and
will also be issued in principal amounts less than $1,000 so that each holder of
Preferred Stock will receive certificates representing the entire principal
amount of Exchange Debentures to which its Preferred Stock entitle it, PROVIDED
that the Company may, at the sole option of the Board of Directors, subject to
the restrictions in the Senior Note Indenture, the DOC Facility Agreement, the
DCOC Facility Agreement and any of its other then-existing Indebtedness, pay
cash in lieu of issuing an Exchange Debenture in a principal amount less than
$1,000. On and after the date of exchange, dividends will cease to accrue on the
outstanding Preferred Stock, and all rights of the holders of Preferred Stock
(except the right to receive the Exchange Debentures, an amount in cash, to the
extent applicable, equal to the accrued and unpaid dividends to the Exchange
Date, and, if the Company so elects, cash in lieu of any Exchange Debenture
which is in an amount that is less than $1,000) will terminate. The person
entitled to receive the Exchange Debentures issuable upon such exchange will be
treated for all purposes as the registered holder of such Exchange Debentures.
The Company will comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
PREFERRED STOCK EXCHANGE OFFER REGISTRATION
The Company has agreed with the Initial Purchaser, for the benefit of the
holders of Old Shares, that the Company will use its best efforts, at its cost,
to file and cause to become effective a registration statement with respect to a
registered offer to exchange the Old Shares for an issue of preferred stock of
the Company (the "New Shares") with terms identical to the Old Shares (the
"Preferred Stock Exchange Offer"). Upon such registration statement being
declared effective, the Company shall offer the New
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Shares in return for surrender of the Old Shares. Such offer shall remain open
for not less than 20 business days after the date that notice of the exchange
offer is mailed to holders of the Old Shares. In the event that applicable
interpretations of the staff of the Commission do not permit the Company to
effect such an exchange offer, or under certain other circumstances, the Company
shall, at its cost, use its best efforts to cause to become effective a shelf
registration statement with respect to resales of the Old Shares and to keep
such registration statement effective until the expiration of the time period
referred to in Rule 144(k) under the Securities Act after the Issue Date. The
Company shall, in the event of such shelf registration, provide to each holder
of Preferred Stock copies of the prospectus, notify each holder of Preferred
Stock when a registration statement for the Preferred Stock has become effective
and take certain other actions as are required to permit resales of the
Preferred Stock. In the event that the Preferred Stock Exchange Offer is not
consummated and a shelf registration statement is not declared effective on or
prior to 180 days after the Issue Date, additional dividends will accrue, at an
annual rate of .5% of the liquidation preference thereof, on the Old Shares from
the date that is 180 days after the Issue Date, payable in additional shares of
Preferred Stock quarterly in arrears on each January 15, April 15, July 15 and
October 15, commencing July 15, 1999, until the Preferred Stock Exchange Offer
is consummated or such shelf registration statement is declared effective. The
Company anticipates that it will consummate the Preferred Stock Exchange Offer
and that a shelf registration statement will not be required. Holders of Old
Shares who do not participate in the Preferred Stock Exchange Offer may
thereafter hold a less liquid security. Holders of Old Shares will not be named
as selling securityholders in a Preferred Stock Exchange Offer registration
statement.
PREFERRED STOCK BOOK-ENTRY; DELIVERY AND FORM
Preferred Stock will be represented by a single, permanent global Preferred
Stock certificate, in definitive, fully registered form (the "Restricted Global
Preferred Stock Certificate") and will be deposited with a custodian for DTC and
registered in the name of a nominee of DTC. The Restricted Global Preferred
Stock Certificate (and any Preferred Stock issued in exchange therefor) will be
subject to certain restrictions on transfer set forth therein and will bear the
legend regarding such restrictions set forth under "Notice to Investors." The
Preferred Stock is not issuable in bearer form.
THE GLOBAL PREFERRED STOCK CERTIFICATE
Upon the issuance of the Restricted Global Preferred Stock Certificate, DTC
or its custodian will credit, on its internal system, the respective liquidation
preference of the individual beneficial interests represented by such Restricted
Global Preferred Stock Certificate, to the accounts of persons who have accounts
with such depositary. Such accounts initially will be designated by or on behalf
of the Placement Agents. Ownership of beneficial interests in a Restricted
Global Preferred Stock Certificate will be limited to persons who have accounts
with DTC ("participants") or persons who hold interests through participants.
Ownership of beneficial interests in the Restricted Global Preferred Stock
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified Institutional Buyers
may hold their interests in the Restricted Global Preferred Stock Certificate
directly through DTC if they are participants in such system, or indirectly
through organizations that are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of a
Restricted Global Preferred Stock Certificate, DTC or such nominee, as the case
may be, will be considered the sole owner or holder of the Preferred Stock
represented by such Restricted Global Preferred Stock Certificate for all
purposes under the Certificate of Designation and the Preferred Stock. No
beneficial owner of an interest in a Restricted Global Preferred Stock
Certificate will be able to transfer that interest except in accordance with
DTC's applicable procedures, in addition to those provided for under the
Certificate of Designation.
Payments made with respect to a Restricted Global Preferred Stock
Certificate will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Company nor the Placement Agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Restricted
Global Preferred Stock
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Certificate or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payments
made with respect to the Restricted Global Preferred Stock Certificate, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the amount of such Restricted Global
Preferred Stock Certificate as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in such Restricted Global Preferred Stock Certificates held through
such participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in the names of nominees for such customers. Such payments will be
the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company understands that DTC will take any action permitted to be taken
by a holder of Preferred Stock (including the presentation of Preferred Stock
for exchange as described below) only at the direction of one or more
participants to whose account the interests in the Restricted Global Preferred
Stock Certificate are credited and only in respect of such portion of the
aggregate liquidation preference of Preferred Stock as to which such participant
or participants has or have given such direction.
The Company understands: DTC is a limited purpose trust company organized
under the laws of the State of New York, a "banking organization" within the
meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"Clearing Agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Restricted Global Preferred Stock
Certificate among participants of DTC, it is under no obligation to perform or
continue to perform such procedures, and such procedures may be discontinued at
any time. Neither the Company nor the Initial Purchaser will have any
responsibility for the performance by DTC or its respective participants or
indirect participants of its or their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED PREFERRED STOCK
If DTC is at any time unwilling or unable to continue as a depositary for
the Restricted Global Preferred Stock Certificate and a successor depositary is
not appointed by the Company within 90 days, the Company will issue certificated
Preferred Stock in exchange for the Restricted Global Preferred Stock
Certificate, which will bear the legend referred to under the heading "Notice to
Investors."
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DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under the Exchange
Debenture Indenture between the Company and United States Trust Company of New
York, as trustee (the "Trustee"), the form of which is available from the
Company upon request. The terms of the Exchange Debentures include those stated
in the Exchange Debenture Indenture and those made part of the Exchange
Debenture Indenture by reference to the Trust Indenture Act. The Exchange
Debentures will be subject to all such terms, and prospective holders of the
Exchange Debentures are referred to the Exchange Debenture Indenture and the
Trust Indenture Act for a statement of such terms. The following summary of
certain provisions of the Exchange Debenture Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act and to all of the provisions of the Exchange Debenture
Indenture, including the definitions of certain terms therein and those terms
made a part of the Exchange Debenture Indenture by reference to the Trust
Indenture Act. The definitions of certain terms used in the Exchange Debentures
and the Exchange Debenture Indenture and in the following summary are set forth
below under "--Certain Definitions."
GENERAL
The Exchange Debentures will be unsecured obligations of the Company, will
be initially limited in aggregate principal amount to the aggregate liquidation
preference of the Preferred Stock (including any Preferred Stock issued in
payment of dividends), plus accrued and unpaid dividends, on the date of
exchange of the Preferred Stock into Exchange Debentures (plus any additional
Exchange Debentures issued in lieu of cash interest as described herein). The
Exchange Debentures will be issued in fully registered form only in
denominations of $1,000 and integral multiples thereof (other than as described
in "Description of Preferred Stock--Exchange" or with respect to additional
Exchange Debentures issued in lieu of cash interest as described herein). The
Exchange Debentures will be senior subordinated obligations of the Company,
subordinated to all existing and future Senior Indebtedness of the Company and
senior to all subordinated obligations of the Company.
Principal of, premium, if any, and interest on the Exchange Debentures will
be payable, and the Exchange Debentures may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar. At the
Company's option, interest, to the extent paid in cash, may be paid by check
mailed to the registered address of holders of the Exchange Debentures as shown
on the register for the Exchange Debentures. The Trustee will initially act as
Paying Agent and Registrar. The Company may change any Paying Agent and
Registrar without prior notice to Holders of the Exchange Debentures. Holders of
the Exchange Debentures must surrender Exchange Debentures to the Paying Agent
to collect principal payments.
The Exchange Debentures will mature on January 15, 2008. Each Exchange
Debenture will bear interest at the same rate in effect with respect to the
Preferred Stock on the date the Exchange Debentures are issued from the Exchange
Debenture Issue Date or from the most recent interest payment date to which
interest has been paid or provided for. Interest will be payable semi-annually
in cash (or, on or prior to January 15, 2003, at the option of the Company, in
additional Exchange Debentures) in arrears on each of January 15 and July 15
commencing with the first such date after the issue date of the Exchange
Debentures. The Company may pay dividends in cash during the period on or before
January 15, 2003 on the exchange debentures which may be issued upon exchange of
the Senior Preferred Stock only if it also pays interest in cash on the Exchange
Debentures during such period. Interest on the Exchange Debentures will be
computed on the basis of a 360-day year of twelve 30-day months and the actual
number of days elapsed.
Because of the Company's option through January 15, 2003 to pay interest on
the Exchange Debentures by issuing additional Exchange Debentures, any Exchange
Debentures issued prior to that date will be treated as issued with original
issue discount unless under special rules for interest holidays the
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amount of original issue discount is treated as DE MINIMIS. See "Federal Income
Tax Considerations to U.S. Holders."
The Company may, subject to the covenants described below under "Covenants"
and applicable law, issue additional Exchange Debentures under the Exchange
Debenture Indenture. Exchange Debentures issued in exchange for Preferred Stock
and any additional Exchange Debentures subsequently issued would be treated as a
single class for all purposes under the Exchange Debenture Indenture.
SUBORDINATION
The Exchange Debentures will be senior subordinated Indebtedness of the
Company, subordinated to the prior payment when due of the principal of, and
premium, if any, and accrued and unpaid interest on, all existing and future
Senior Indebtedness of the Company and senior to the prior payment when due of
the principal of, and premium, if any, and accrued and unpaid interest on, all
subordinated Indebtedness of the Company.
Upon (a) any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property or
(b) an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Indebtedness will be
entitled to receive payment in full of all obligations due in respect of such
Senior Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness) before
holders of the Exchange Debentures will be entitled to receive any payment with
respect to the Exchange Debentures. Until all obligations with respect to Senior
Indebtedness are paid in full, any distribution to which holders of the Exchange
Debentures would be entitled will be made to holders of Senior Indebtedness.
Notwithstanding the foregoing, holders of the Exchange Debentures may receive
securities that are subordinated, at least to the same extent as the Exchange
Debentures, to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness.
In addition, the Company may not make any payment upon or in respect of the
Exchange Debentures (except in such subordinated securities) if (a) a default in
the payment of any principal, premium, if any, interest or other obligations
with respect to any Designated Senior Indebtedness occurs and is continuing
beyond any applicable grace period (whether upon maturity, as a result of
acceleration or otherwise) or (b) any other default occurs and is continuing
with respect to any Designated Senior Indebtedness that permits holders of such
Designated Senior Indebtedness to accelerate its maturity, and the Company and
the Trustee receive a notice of such default (a "Payment Blockage Notice") from
the holders, or from the trustee, agent or other representative of the holders,
of any such Designated Senior Indebtedness. Payments on the Exchange Debentures
may and shall be resumed upon the earlier of (i) the date upon which the default
is cured or waived or (ii) in the case of a default referred to in clause (b)
above, 179 days after the date on which the applicable Payment Blockage Notice
is received, unless the maturity of any Designated Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced within 360 days
after the receipt by the Trustee of any prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice unless such default shall have been cured or
waived for a period of not less than 180 days.
The Exchange Debenture Indenture will further require that the Company
promptly notify holders of Senior Indebtedness if payment on the Exchange
Debentures is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of the Exchange Debentures may recover less
ratably than other creditors of the Company. The Company is expected to incur
substantial amounts of additional indebtedness in the future.
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OPTIONAL REDEMPTION
The Exchange Debentures will be redeemable at any time on or after January
15, 2003, at the Company's option, in whole or in part, upon not less than 30
nor more than 60 days' prior written notice mailed by first-class mail to each
holder's last address as it appears in the Security Register, at the redemption
prices (expressed as a percentage of the principal amount thereof) set forth
below, plus accrued and unpaid interest thereon to the redemption date (subject
to the right of holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the redemption
date), if redeemed during the 12-month period beginning January 15 of each of
the years set forth below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 106.125%
2004.............................................................................. 104.084%
2005.............................................................................. 102.042%
2006 and thereafter............................................................... 100.000%
</TABLE>
In addition, on or prior to January 15, 2001, the Company may redeem
Exchange Debentures having an aggregate principal amount of up to 35% of the
aggregate liquidation preference of the Preferred Stock originally issued at a
redemption price equal to 112.250% of the principal amount thereof, plus accrued
and unpaid interest to the redemption date, with the proceeds of any sale of its
common stock, PROVIDED that such redemption occurs within 180 days after
consummation of such sale and at least 65% aggregate principal amount of
Exchange Debentures originally issued remains outstanding after each such
redemption.
The Company will agree it will not exercise its optional redemption rights
with respect to the Senior Exchange Debentures unless it contemporaneously
redeems the Exchange Debentures pro rata.
In the case of any partial redemption, selection of the Exchange Debentures
for redemption will be made by the Trustee in compliance with the requirements
of the principal national securities exchange, if any, on which the Exchange
Debentures are listed or, if the Exchange Debentures are not listed on a
national securities exchange, on a PRO RATA basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; PROVIDED that no Exchange Debenture of $1,000 in principal amount
or less shall be redeemed in part. If any Exchange Debenture is to be redeemed
in part only, the notice of redemption relating to such Exchange Debenture shall
state the portion of the principal amount thereof to be redeemed. A new Exchange
Debenture in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Exchange Debenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Exchange Debenture Indenture. Reference is
made to the Exchange Debenture Indenture for the full definitions of all such
terms as well as any other capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; PROVIDED that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
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"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has a joint interest and the net income of any
Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person or such Unrestricted Subsidiary during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) except in the case of any restriction or encumbrance
permitted under clause (vi) of the "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Shares of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses, net of tax.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than FCC
license acquisition costs), all as set forth on the most recent quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the Commission
pursuant to the "Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
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"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
described under "Consolidation, Merger and Sale of Assets"; PROVIDED that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales or other dispositions of assets
for consideration at least equal to the fair market value of the assets sold or
disposed of, PROVIDED that the consideration received consists of property or
assets (other than current assets) of a nature or type or that are used in a
business (or a company having property or assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or business of, the Company and its Restricted Subsidiaries existing
on the date of such sale or other disposition or (c) sales, transfers or other
dispositions of assets constituting a Restricted Payment permitted to be made
under the "Limitation on Restricted Payments" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, including, without limitation,
all Common Stock and Preferred Shares.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders and their
Affiliates on such date; or (ii) individuals who on the Closing Date constituted
the Board of Directors (together with any new directors whose election by the
Board of Directors or whose nomination for election by the Company's
stockholders was approved by a vote of at least a majority of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
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"Class A Common Stock" means the Class A Common Stock, par value $.001 per
share, of the Company.
"Class A Preferred Stock" means the Class A Non-Voting, Non-Convertible
Preferred Stock, par value $1.00 per share, of the Company.
"Class D Preferred Stock" means the Class D 15% Convertible Preferred Stock,
par value $1.00 per share, of the Company.
"Class E Preferred Stock" means the Class E Preferred Stock, par value $1.00
per share, of the Company.
"Class F Preferred Stock" means the Class F 16% Preferred Stock, par value
$1.00 per share, of the Company.
"Class G Preferred Stock" means the Class G 16% Convertible Preferred Stock,
par value $1.00 per share, of the Company.
"Class H Preferred Stock" means the Class H Preferred Stock, par value $1.00
per share, of the Company.
"Closing Date" means January 22, 1998.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Shares of
such Person, whether now outstanding or issued after the Closing Date, including
without limitation, all series and classes of such Common Stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets), (iii) depreciation expense, (iv) amortization expense, and (v) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the quotient of (1) the number of shares of outstanding Common Stock of such
Restricted Subsidiary not owned on the last day of such period by the Company or
any of its Restricted Subsidiaries divided by (2) the total number of shares of
outstanding Common Stock of such Restricted Subsidiary on the last day of such
period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii)
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of the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Senior
Notes and the Senior Preferred Stock, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission (such four fiscal quarter period being the "Four Quarter
Period"); PROVIDED that (A) PRO FORMA effect shall be given to any Indebtedness
that is to be Incurred or repaid on the Transaction Date as if such Incurrence
or repayment had occurred on the first day of such Four Quarter Period; (B) PRO
FORMA effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving PRO FORMA effect to the application of proceeds of any Asset
Disposition) that occur during the period beginning on the first day of the Four
Quarter Period and ending on the Transaction Date (the "Reference Period") as if
they had occurred and such proceeds had been applied on the first day of such
Reference Period; and (C) PRO FORMA effect shall be given to asset dispositions
and asset acquisitions (including giving PRO FORMA effect to the application of
proceeds of any asset disposition) that have been made by any Person that has
become a Restricted Subsidiary or has been merged with or into the Company or
any Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; PROVIDED that to the
extent that clause (B) or (C) of this sentence requires that PRO FORMA effect be
given to an Asset Acquisition or Asset Disposition, such PRO FORMA calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed of for which financial information is available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Facilities" means the DOC Bank Facility and the DCOC Facility.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"DCOC" means Dobson Cellular Operations Company.
"DCOC Facility" means the $120.0 million and $80.0 million credit facilities
created and established by the DCOC Facility Agreement.
"DCOC Facility Agreement" means the agreement among DCOC, NationsBank of
Texas, N.A., First Union National Bank and Toronto Dominion (Texas), Inc., each
dated as of March 25, 1998, establishing the DCOC Facility, together with all
other agreements, instruments, and documents executed or delivered pursuant
thereto or in connection therewith, in each cash as such agreement, other
agreements, instruments or documents may be amended, supplemented, extended,
renewed, replaced or otherwise modified from time to time.
"Dobson/Sygnet" means Dobson/Sygnet Communications Company.
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"Dobson/Sygnet Indenture" means the Indenture dated as of December 23, 1998
between Dobson/ Sygnet and United States Trust Company of New York, relating to
the Dobson/Sygnet Notes, as such indenture may be amended, supplemented,
extended, renewed, replaced or otherwise modified from time to time.
"Dobson/Sygnet Notes" means the 12 1/4% Senior Notes due 2008 to be issued
by Dobson/Sygnet under the Dobson/Sygnet Indenture.
"DOC Facility" means that certain credit facility created and established by
the DOC Facility Agreement.
"DOC Facility Agreement" means the Third Amended and Restated Credit
Agreement among Dobson Operating Company, Corestates Bank, N.A., Toronto
Dominion (Texas), Inc. and NationsBank of Texas, N.A. dated as of March 25,
1998, together with all other agreements, instruments and documents executed or
delivered pursuant thereto or in connection therewith, in each case as such
agreements, instruments or documents may be amended, supplemented, extended,
renewed, replaced or otherwise modified from time to time.
"Existing Stockholders" means Everett R. Dobson.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property received by
the Company exceeds $10 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth in
their written opinion which shall be delivered to the Transfer Agent.
"FCC" means the Federal Communications Commission.
"Fleet Investors" means Fleet Venture Resources, Inc., Fleet Equity Partners
VI, L.P. and Kennedy Plaza Partners and their Affiliates.
"Fleet Investors Preferred Stock" means the Class B Preferred Stock and the
Class C Preferred Stock.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Exchange Debenture Indenture shall be computed in conformity with GAAP
applied on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other provisions
of the Exchange Debenture Indenture shall be made without giving effect to (i)
the amortization of any expenses incurred in connection with the offering of the
Senior Notes and the Senior Preferred Stock and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to
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keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); PROVIDED that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; PROVIDED that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date (or in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, PROVIDED (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) money borrowed at the time
of the Incurrence of any Indebtedness in order to pre-fund the payment of
interest on such Indebtedness shall be deemed not to be "Indebtedness" and (C)
that Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or
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other similar instruments issued by, such Person and shall include (i) the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii)
the fair market value of the Capital Stock (or any other Investment), held by
the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary (other than as a result of being
designated as an Unrestricted Subsidiary under clause (i) above), including
without limitation, by reason of any transaction permitted by clause (iii) of
the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
below, (i) "Investment" shall include the fair market value of the assets (net
of liabilities (other than liabilities to the Company or any of its
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value
of the assets (net of liabilities (other than liabilities to the Company or any
of its Subsidiaries)) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary shall be
considered a reduction in outstanding Investments and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer.
"Issue Date" means the date on which the Preferred Stock was originally
issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Logix" means Logix Communications Enterprises, Inc., formerly named Dobson
Wireline Company.
"Logix Notes" means the 12 1/4% Senior Notes due 2008 issued by Logix under
the Logix Indenture.
"Logix Indenture" means the Indenture dated as of June 12, 1998 between
Logix and United States Trust Company of New York, relating to the Logix Notes,
as such indenture may be amended, supplemented, extended, renewed, replaced or
otherwise modified from time to time.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary of the Company as a reserve against any
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorney's fees, accountants' fees,
underwriters' or placement agents' fees, discounts or
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commissions and brokerage, consultant and other fees incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"New DCOC Facility Commitment Letter" means the commitment letter (including
the Summary of Terms and Conditions attached thereto) dated January 7, 1998
among Dobson Communications Corporation, Dobson Cellular Operations Company,
NationsBank of Texas, N.A. and NationsBanc Montgomery Securities LLC.
"New DOC Facility Agreement" means the credit agreement established pursuant
to the New DOC Facility Commitment Letter, together with all other agreements,
instruments and documents executed or delivered pursuant thereto or in
connection therewith, in each case as such credit agreement, other agreements,
instruments, or documents may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time.
"New DOC Facility Commitment Letter" means the commitment letter (including
the Summary of Terms and Conditions attached thereto) dated January 7, 1998
among Dobson Communications Corporation, Dobson Operating Company, NationsBank
of Texas, N.A. and NationsBanc Montgomery Securities LLC.
"Offer to Purchase" means an offer by the Company to purchase Exchange
Debentures from the Holders commenced by mailing a notice to the Transfer Agent
and each Holder stating: (i) the covenant pursuant to which the offer is being
made and that all Exchange Debentures validly tendered will be accepted for
payment on a PRO RATA basis; (ii) the purchase price and the date of purchase
(which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed) (the "Payment Date"); (iii) that any
Exchange Debentures not tendered will continue to accrue dividends pursuant to
its terms; (iv) that, unless the Company defaults in the payment of the purchase
price, any Exchange Debentures accepted for payment pursuant to the Offer to
Purchase shall cease to accrue dividends on and after the Payment Date; (v) that
Holders electing to have Exchange Debentures purchased pursuant to the Offer to
Purchase will be required to surrender the Exchange Debentures, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Exchange Debentures completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Exchange Debentures delivered for purchase and a
statement that such Holder is withdrawing its election to have such Exchange
Debentures purchased; and (vii) that Holders whose Exchange Debentures are being
purchased only in part will be issued new Exchange Debentures equal in principal
amount to the unpurchased portion of the Exchange Debentures surrendered;
PROVIDED that each Exchange Debenture purchased and each new Exchange Debenture
issued shall be in a principal amount of $1,000 or integral multiples thereof.
On the Payment Date, the Company shall (i) accept for payment on a PRO RATA
basis Exchange Debentures or portions thereof validly tendered pursuant to an
Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay
the purchase price of all Exchange Debentures or portions thereof so accepted;
and (iii) deliver, or cause to be delivered, to the Trustee all Exchange
Debentures or portions thereof so accepted together with an Officers'
Certificate specifying the Exchange Debentures or portions thereof accepted for
payment by the Company. The Paying Agent shall promptly mail to the Holders of
Exchange Debentures so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new Exchange Debenture equal in principal amount to any unpurchased portion of
the Exchange Debentures surrendered; PROVIDED that each Exchange Debenture
purchased and each new Exchange Debenture issued shall be in a principal amount
of $1,000 or integral multiples thereof. The Company will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities laws
and
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regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Exchange Debentures
pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; and (iv) stock, obligations or securities received in
satisfaction of judgments.
"Preferred Shares" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity including,
without limitation, all series and classes of such preferred stock or preference
stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Senior Exchange Debentures" means the Company's 12 1/4% Senior Subordinated
Debentures due 2008 which may be issued by the Company in exchange for Senior
Preferred Stock.
"Senior Indebtedness" means (i) Indebtedness of the Company under the Senior
Notes, the Senior Note Indenture, the DOC Facility Agreement and the DCOC
Facility Agreement and all fees, expenses and indemnities payable in connection
with any of the foregoing and (ii) all other Indebtedness of the Company (other
than the Exchange Debentures), including principal and interest on such
Indebtedness, unless such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, would be
PARI PASSU with, or subordinated in right of payment to, the Exchange
Debentures; PROVIDED that the term "Senior Indebtedness" shall not include (a)
any Indebtedness of the Company that, when Incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code, was without
recourse to the Company, (b) any Indebtedness of the Company to a Subsidiary of
the Company or to a joint venture in which the Company has an interest, (c) any
Indebtedness of the Company, to the extent not permitted by the "Limitation on
Indebtedness" or the "Senior Subordinated Indebtedness" covenants described
below, (d) any repurchase, redemption or other obligation in respect of
Disqualified Stock, (e) any Indebtedness to any employee of the Company or any
of its Subsidiaries, (f) any liability for federal, state, local or other taxes
owed or owing by the Company or (g) any Trade Payables. Senior Indebtedness will
also include interest accruing subsequent to events of bankruptcy of the Company
at the rate provided for in the document governing such Senior Indebtedness,
whether or not such interest is an allowed claim enforceable against the debtor
in a bankruptcy case under federal bankruptcy law.
"Senior Note Indenture" means the Indenture dated as of February 28, 1997
between the Company and United States Trust Company of New York, relating to the
Senior Notes, as such indenture may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time.
"Senior Notes" means the 11 3/4% Senior Notes due 2007 issued by the Company
under the Senior Note Indenture.
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"Senior Preferred Stock" means the Company's 12 1/4% Senior Exchangeable
Preferred Stock Mandatorily Redeemable 2008 issued by the Company on January 22,
1998.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
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"Unrestricted Subsidiary" means (i) Logix, Dobson/Sygnet, Dobson Tower
Company or any other Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Restricted Subsidiary (including any newly
acquired or newly formed Subsidiary of the Company) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any Restricted Subsidiary; PROVIDED
that (A) any Guarantee by the Company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by the Company or such
Restricted Subsidiary (or both, if applicable) at the time of such designation;
(B) either (I) the Subsidiary to be so designated has total assets of $1,000 or
less or (II) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under the "Limitation on Restricted Payments" covenant
described below; and (C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted under
the "Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately after giving
effect to such designation (x) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be incurred for all purposes of the Indenture
and (y) no Default or Event of Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly providing the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Exchange Debenture Indenture will contain, among others, the following
covenants:
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Exchange Debentures, the
Senior Exchange Debentures and Indebtedness existing on the Closing Date);
PROVIDED that the Company and any Restricted Subsidiary may Incur Indebtedness,
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be less than 8 to 1, for Indebtedness Incurred on or prior to December 31, 1998,
or 7 to 1, for Indebtedness Incurred thereafter.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $250 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to the Company evidenced by a promissory note or (B) to any of
its Restricted Subsidiaries; PROVIDED that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this
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clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness, other than
Indebtedness Incurred under clause (i), (ii), (iv), (vi) or (ix) of this
paragraph, and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and expenses);
PROVIDED that Indebtedness the proceeds of which are used to refinance or refund
the Exchange Debentures or Indebtedness that is PARI PASSU with, or subordinated
in right of payment to, the Exchange Debentures shall only be permitted under
this clause (iii) if (A) in case the Exchange Debentures are refinanced in part
or the Indebtedness to be refinanced is PARI PASSU with the Exchange Debentures,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding, is expressly
made PARI PASSU with, or subordinate in right of payment to, the remaining
Exchange Debentures, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Exchange Debentures, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Exchange Debentures at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Exchange Debentures and (C) such new Indebtedness, determined as of the date
of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no event
may Indebtedness of the Company be refinanced by means of any Indebtedness of
any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A)
in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
PROVIDED that such agreements (a) are designed solely to protect the Company or
its Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, or (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary of the Company (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in an amount not to exceed the gross proceeds
actually received by the Company or any Restricted Subsidiary in connection with
such disposition; (v) Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase Exchange Debentures tendered
in an Offer to Purchase made as a result of a Change in Control or (B) deposited
to defease the Senior Notes or to defease the Exchange Debentures as described
below under "Defeasance"; (vi) Guarantees of the Exchange Debentures and
Guarantees of Indebtedness of the Company by any Restricted Subsidiary provided
the Guarantee of such Indebtedness is permitted by and made in accordance with
the "Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant
described below; (vii) Indebtedness Incurred to finance the cost (including the
cost of design, development, construction, installation or integration) of
telecommunications network assets, equipment or inventory acquired by the
Company or a Restricted Subsidiary after the Closing Date; (viii) Indebtedness
of the Company not to exceed, at any one time outstanding, two times the sum of
(x) the Net Cash Proceeds received by the Company on or after the Closing Date
from the issuance and sale of its Capital Stock (other than Disqualified Stock),
including the Preferred Stock, to a Person that is not a Subsidiary of the
Company to the extent such Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph, or clause (xi) of the second paragraph, of
the "Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (y) 80% of the fair market value of property other than
cash received by the Company after the Closing Date from the issuance and sale
of its Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of
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the Company; PROVIDED that such Indebtedness does not mature prior to the Stated
Maturity of the Exchange Debentures and has an Average Life longer than the
Exchange Debentures; and (ix) Indebtedness outstanding at any time in an
aggregate principal amount not to exceed $25 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS
The Company shall not Incur any Indebtedness that is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness is PARI PASSU with,
or subordinated in right of payment to, the Exchange Debentures; PROVIDED that
the foregoing limitation shall not apply to distinctions between categories of
Senior Indebtedness of the Company that exist by reason of any Liens or
Guarantees arising or created in respect of some but not all such Senior
Indebtedness.
LIMITATION ON LIENS
The Company shall not Incur any Indebtedness secured by a Lien ("Secured
Indebtedness") which is not Senior Indebtedness unless effective provision is
made to have the Exchange Debentures secured equally and ratably with (or, if
the Secured Indebtedness is subordinated in right of payment to the Exchange
Debentures, prior to) such Secured Indebtedness for so long as such Secured
Indebtedness is secured by a Lien.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, PROVIDED that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by Persons
other than the Company or any of its Restricted Subsidiaries, (ii) purchase,
redeem, retire or otherwise acquire for value any shares of Capital Stock of (A)
the Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of
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the Company, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Exchange Debentures or (iv) make any Investment, other
than a Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) made after the Closing Date shall exceed the
sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss) (determined by excluding income resulting from transfers of assets
by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Closing Date and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to the "Commission
Reports and Reports to Holders" covenant PLUS (2) the aggregate Net Cash
Proceeds received by the Company after the Closing Date from the issuance and
sale permitted by the Exchange Debenture Indenture of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the Company
(except to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the "Limitation on Indebtedness" covenant) or
from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Exchange Debentures) PLUS (3) an
amount equal to the net reduction in Investments (other than reductions in
Permitted Investments and reductions in Investments made pursuant to clause (xi)
of the second paragraph of this "Limitation on Restricted Payments" covenant) in
any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Exchange Debentures including premium, if any, and accrued and unpaid interest,
with the proceeds of, or in exchange for, Indebtedness Incurred under clause
(iii) of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital Stock
of the Company (or options, warrants or other rights to acquire such Capital
Stock) in exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of Capital Stock (other than Disqualified Stock) of the
Company; (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company which is subordinated in right of payment to the Exchange Debentures in
exchange for, or out of the proceeds of, a substantially concurrent offering of,
shares of the Capital Stock of the Company (other than Disqualified Stock); (v)
the declaration or payment of dividends on the Common Stock of the Company
following a Public Equity Offering of such
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Common Stock, of up to 6% per annum of the Net Cash Proceeds received by the
Company in such Public Equity Offering; (vi) payments or distributions, to
dissenting stockholders pursuant to applicable law, pursuant to or in connection
with a consolidation, merger or transfer of assets that complies with the
provisions of the Exchange Debenture Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vii) the purchase, redemption, acquisition, cancellation
or other retirement for value of shares of Capital Stock of the Company to the
extent necessary in the good faith judgment of the Board of Directors of the
Company, to prevent the loss or secure the renewal or reinstatement of any
license or franchise held by the Company or any Restricted Subsidiary from any
governmental agency; (viii) the purchase of shares of Fleet Investors Preferred
Stock of the Company (or the Class A Common Stock into which the Class B
Preferred Stock may be converted) pursuant to the exercise of the put rights
granted to the Fleet Investors under the Shareholders' Agreement or any
mandatory redemption provisions, in each case as in effect on the Closing Date;
PROVIDED (a) after giving pro forma effect to any such purchase the Consolidated
Leverage Ratio would be less than 7.5 to 1, and (b) if the event triggering the
exercisability of the put rights constitutes an Asset Sale or Change of Control,
no such repurchase shall be made prior to the Company's repurchase of such
Exchange Debentures as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Exchange Debentures upon a Change
of Control" covenants described below; (ix) the declaration or payment of
dividends on the Fleet Investors Preferred Stock (I) if after giving pro forma
effect to any such dividend, the Consolidated Leverage Ratio would be less than
6 to 1 or (II) following a Public Equity Offering of Capital Stock; PROVIDED (A)
the Net Cash Proceeds received by the Company in such Public Equity Offering is
at least equal to $90 million and (B) the aggregate amount of dividends
permitted to be made in any fiscal year of the Company under clause (v) and this
clause (ix) shall not exceed 6% of the Net Cash Proceeds received by the Company
in the Public Equity Offering; (x) the purchase, redemption, retirement or other
acquisition for value of Capital Stock of the Company, or options to purchase
such shares, held by directors, employees or former directors or employees of
the Company or any Restricted Subsidiary (or their estates or beneficiaries
under their estates) upon death, disability, retirement, termination of
employment or pursuant to the terms of any agreement under which such shares of
Capital Stock or options were issued; PROVIDED that the aggregate consideration
paid for such purchase, redemption, acquisition, cancellation or other
retirement of such shares of Capital Stock or options after the Closing Date
does not exceed $500,000 in any calendar year, or $1.5 million in the aggregate;
or (xi) Investments in any Person or Persons, the primary business of which is
related, ancillary or complementary to the business of the Company and its
Restricted Subsidiaries on the date of such Investments, in an aggregate amount
not to exceed $30 million plus an amount not to exceed the Net Cash Proceeds
received by the Company after the Closing Date from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds are used
to Incur Indebtedness outstanding pursuant to clause (viii) of the "Limitation
on Indebtedness" covenant or to make Restricted Payments pursuant to clause
(C)(2) of the first paragraph, or clause (ii) or (iii) of this paragraph, of the
"Limitation on Restricted Payments" covenant; or (xii) the distribution on or
with respect to the holders of the Company's Capital Stock of the Capital Stock
of Logix; PROVIDED that, except in the case of clauses (i) and (iii), no Default
or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof and an exchange
of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii)
or (iv) thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii), (iv), and (xi) shall be included in calculating
whether the conditions of clause (C) of the first paragraph of this "Limitation
on Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of
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Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Exchange Debentures, or Indebtedness that is PARI PASSU with
the Exchange Debentures, then the Net Cash Proceeds of such issuance shall be
included in clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant only to the extent such proceeds are not used for such
redemption, repurchase or other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Bank Facility Agreement,
the Senior Note Indenture, or any other agreements in effect on the Closing
Date, and any amendments, extensions, refinancings, renewals or replacements of
such agreements; PROVIDED that, other than as contemplated in clause (vi) below,
the encumbrances and restrictions in any such amendments, extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed or replaced; (ii)
existing under or by reason of applicable law; (iii) existing with respect to
any Person or the property or assets of such Person acquired by the Company or
any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement
that has been entered into for the sale or disposition of all or substantially
all of the Capital Stock of, or property and assets of, such Restricted
Subsidiary; or (vi) contained in the terms of (A) the DOC Facility Agreement or
the DCOC Facility Agreement, PROVIDED any encumbrance or restriction that would
prevent payments of dividends or other distributions to the Company to pay cash
interest on the Exchange Debentures applies on or prior to January 15, 2003, or
applies thereafter only in the event of an event of default (other than an event
of default resulting solely from a breach of a representation or warranty) under
the DOC Facility Agreement or the DCOC Facility Agreement, respectively;
PROVIDED (x) with respect to any event of default (other than a payment default
(including by way of acceleration), bankruptcy default or a loss of a material
license or cellular system), such restriction will terminate 180 days after the
occurrence of such event of default and (y) the financial covenants which create
such encumbrance or restriction on dividends or other distributions in the DOC
Facility Agreement or the DCOC Facility Agreement are no less favorable to the
Company or its Subsidiaries than the financial covenants set forth in the New
DOC Facility Commitment Letter or the New DCOC Facility Commitment Letter,
respectively; or (B) any Indebtedness of a Restricted Subsidiary, or any
agreement pursuant to
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which such Indebtedness was issued, if the encumbrance or restriction applies
only in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, if the encumbrance or
restriction is not materially more disadvantageous to the Holders of the
Exchange Debentures than is customary in comparable financings (as determined by
the Company) and if the Company determines that any such encumbrance or
restriction will not materially affect the Company's ability to make principal
or interest payments on the Exchange Debentures. Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary, PROVIDED any Investment in such
Person remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant, if
made on the date of such issuance or sale; and (iv) sales of Common Stock of a
Restricted Subsidiary; PROVIDED that the assets of such Restricted Subsidiary
consist solely of assets relating to the Company's PCS or resale business and
the Net Cash Proceeds, if any, of such sale are applied in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Exchange Debentures ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Exchange Debenture Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Exchange
Debentures by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives, and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Company or any other Restricted Subsidiary as a result of any
payment by such Restricted Subsidiary under its Subsidiary Guarantee; PROVIDED
that this paragraph shall not be applicable to any Guarantee of any Restricted
Subsidiary that existed at the time such Person became a Restricted Subsidiary
and was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) PARI
PASSU with the Exchange Debentures, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated to the Exchange Debentures, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Exchange Debentures.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Exchange Debenture Indenture) or (ii) the
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release or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of payment
under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction covered by the first paragraph of this
"Limitation on Transactions with Stockholders and Affiliates" covenant and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $2 million in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Company and its
subsidiaries has been filed pursuant to the "Commission Reports and Reports to
Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Senior
Indebtedness of the Company or any Restricted Subsidiary providing a Subsidiary
Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than the Company or any of its
Restricted Subsidiaries or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive agreement committing
to so invest within 12 months after the date of such agreement), in property or
assets (other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
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and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such twelve-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Exchange Debentures equal to the Excess Proceeds
on such date, at a purchase price equal to 101% of the principal amount thereof,
plus, in each case, accrued interest (if any) to the Payment Date.
LIMITATIONS ON SENIOR EXCHANGE DEBENTURES
The Company will not (a) pay interest in cash on the Senior Exchange
Debentures unless it will contemporaneously pay interest in cash on the Exchange
Debentures or (b) redeem any Senior Exchange Debentures unless it will
contemporaneously redeem a pro rata portion of the Exchange Debentures.
REPURCHASE OF EXCHANGE DEBENTURES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Exchange Debentures then
outstanding, at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Exchange Debentures) required by the foregoing
covenant (as well as may be contained in other securities of the Company which
might be outstanding at the time). The above covenant requiring the Company to
repurchase the Exchange Debentures will, unless consents are obtained, require
the Company to repay all indebtedness then outstanding which by its terms would
prohibit such Exchange Debenture repurchase, either prior to or concurrently
with such Exchange Debenture repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the Commission,
for so long as any Exchange Debentures are outstanding, the Company will file
with the Commission all such reports and other information as it would be
required to file with the Commission by Sections 13(a) or 15(d) under the
Securities Exchange Act of 1934 if it were subject thereto. The Company shall
supply the Trustee and each Holder or shall supply to the Trustee for forwarding
to each such Holder, without cost to such Holder, copies of such reports and
other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the Exchange
Debenture Indenture: (a) default in the payment of principal of (or premium, if
any, on) any Exchange Debenture when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise, whether or not such
payment is prohibited by the provisions described above under "--Ranking"; (b)
default in the payment of interest on any Exchange Debenture when the same
becomes due and payable, and such default continues for a period of 30 days,
whether or not such payment is prohibited by the provisions described above
under
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"--Ranking"; (c) default in the performance or breach of the provisions of the
Exchange Debenture Indenture applicable to mergers, consolidations and transfers
of all or substantially all of the assets of the Company or the failure to make
or consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or "Repurchase of Exchange Debentures upon a Change of Control" covenant;
(d) the Company defaults in the performance of or breaches any other covenant or
agreement of the Company in the Exchange Debenture Indenture or under the
Exchange Debentures (other than a default specified in clause (a), (b) or (c)
above) and such default or breach continues for a period of 30 consecutive days
after written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Exchange Debentures; (e) there occurs with respect to
any issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $10 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists or
shall hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its Stated
Maturity and such Indebtedness has not been discharged in full or such
acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $10 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Exchange Debenture Indenture, the Trustee or the Holders of
at least 25% in aggregate principal amount of the Exchange Debentures, then
outstanding, by written notice to the Company (and to the Trustee if such notice
is given by the Holders), may, and the Trustee at the request of such Holders
shall, declare the principal of, premium, if any, and accrued interest on the
Exchange Debentures to be immediately due and payable. Upon a declaration of
acceleration, such principal of, premium, if any, and accrued interest shall be
immediately due and payable PROVIDED that so long as the DOC Facility Agreement
and the DCOC Facility Agreement are in effect, such declaration shall not become
effective until the earlier of (i) five Business Days after the receipt of the
acceleration notice by the agents thereunder and the Company and (ii)
acceleration of the Indebtedness under either the DOC Facility Agreement or the
DCOC Facility Agreement. In the event of a declaration of acceleration because
an Event of Default set forth in clause (e) above has occurred and is
continuing,
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such declaration of acceleration shall be automatically rescinded and annulled
if the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied or cured by the Company or the relevant Significant Subsidiary
or waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
principal of, premium, if any, and accrued interest on the Exchange Debentures
then outstanding shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
At any time after declaration of acceleration, but before a judgment or decree
for the payment of the money due has been obtained by the Trustee, the Holders
of at least a majority in principal amount of the outstanding Exchange
Debentures by written notice to the Company and to the Trustee, may waive all
past defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Exchange Debentures that
have become due solely by such declaration of acceleration, have been cured or
waived and (ii) the rescission would not conflict with any judgment or decree of
a court of competent jurisdiction. For information as to the waiver of defaults,
see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Exchange Debentures may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the Exchange Debenture
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of Exchange Debentures not joining in the giving of such direction and
may take any other action it deems proper that is not inconsistent with any such
direction received from Holders of Exchange Debentures. A Holder may not pursue
any remedy with respect to the Exchange Debenture Indenture or the Exchange
Debentures unless: (i) the Holder gives the Trustee written notice of a
continuing Event of Default; (ii) the Holders of at least 25% in aggregate
principal amount of outstanding Exchange Debentures make a written request to
the Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee
indemnity satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60 days after receipt
of the request and the offer of indemnity; and (v) during such 60-day period,
the Holders of a majority in aggregate principal amount of the outstanding
Exchange Debentures do not give the Trustee a direction that is inconsistent
with the request. However, such limitations do not apply to the right of any
Holder of a Exchange Debenture to receive payment of the principal of, premium,
if any, or interest on, such Exchange Debenture or to bring suit for the
enforcement of any such payment, on or after the due date expressed in the
Exchange Debentures, which right shall not be impaired or affected without the
consent of the Holder.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Exchange Debentures, the claim of a
holder with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial price of the Exchange Debentures and (ii)
that portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the U.S. Bankruptcy Code. Any original
issue discount that was not amortized as of any such bankruptcy filing would
constitute "unmatured interest."
The Exchange Debenture Indenture requires certain officers of the Company to
certify, on or before a date not more than 90 days after the end of each fiscal
year, that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under the Exchange Debenture Indenture and that the Company has
fulfilled all obligations thereunder, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default and the nature
and status thereof. The Company will also be obligated to notify the Trustee of
any default or defaults in the performance of any covenants or agreements under
the Exchange Debenture Indenture.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Exchange Debentures
and under the Exchange Debenture Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company or any Person becoming the successor obligor of the
Exchange Debentures shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a pro forma basis
the Company, or any Person becoming the successor obligor of the Exchange
Debentures, as the case may be, could Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
this clause (iv) shall not apply to a consolidation or merger with or into a
Wholly Owned Restricted Subsidiary with a positive net worth; PROVIDED that, in
connection with any such merger or consolidation, no consideration (other than
Common Stock in the surviving Person or the Company) shall be issued or
distributed to the stockholders of the Company; and (v) the Company delivers to
the Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv)) and Opinion of Counsel, in
each case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent PROVIDED for herein relating to such transaction have been complied
with; PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company and any
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Exchange Debenture Indenture provides that
the Company will be deemed to have paid and will be discharged from any and all
obligations in respect of the Exchange Debentures on the 123rd day after the
deposit referred to below, and the provisions of the Exchange Debenture
Indenture will no longer be in effect with respect to the Exchange Debentures
(except for, among other matters, certain obligations to register the transfer
or exchange of the Exchange Debentures, to replace stolen, lost or mutilated
Exchange Debentures, to maintain paying agencies and to hold monies for payment
in trust) if, among other things, (A) the Company has deposited with the
Trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Exchange Debentures on the Stated
Maturity of such payments in accordance with the terms of the Exchange Debenture
Indenture and the Exchange Debentures, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
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effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit (except with respect to any trust funds for the account of any Holder
who may be deemed an "insider" for purposes of the United States Bankruptcy
Code, after one year following the deposit); the trust funds will not be subject
to the effect of Section 547 of the United States Bankruptcy Code or Section 15
of the New York Debtor and Creditor Law, (C) immediately after giving effect to
such deposit on a pro forma basis, no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or during the period
ending on the 123rd day after the date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound, (D) the
Company is not prohibited from making payments in respect of the Exchange
Debentures by the provisions described above under "--Ranking" and (E) if at
such time the Exchange Debentures are listed on a national securities exchange,
the Company has delivered to the Trustee an Opinion of Counsel to the effect
that the Exchange Debentures will not be delisted as a result of such deposit,
defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The Exchange
Debenture Indenture further provides that the provisions of the Exchange
Debenture Indenture will no longer be in effect with respect to clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets" and all the covenants
described herein under "Covenants," clauses (c) and (d) under "Events of
Default" with respect to such clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and such covenants and clauses (e) and (f) under
"Events of Default" shall be deemed not to be Events of Default, upon, among
other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Exchange Debentures on the Stated Maturity of such payments in accordance with
the terms of the Exchange Debenture Indenture and the Exchange Debentures, the
satisfaction of the provisions described in clauses (B)(ii), (C), (D) and (E) of
the preceding paragraph and the delivery by the Company to the Trustee of an
Opinion of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Exchange Debenture Indenture with respect to the Exchange Debentures as
described in the immediately preceding paragraphs and the Exchange Debentures
are declared due and payable because of the occurrence of an Event of Default
that remains applicable, the amount of money and/or U.S. Government Obligations
on deposit with the Trustee will be sufficient to pay amounts due on the
Exchange Debentures at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Exchange Debentures at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Debenture Indenture may be made
by the Company and the Trustee with the consent of the holders of not less than
a majority in aggregate principal amount of the outstanding Exchange Debentures;
PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of each holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Exchange Debenture, (ii)
reduce the principal amount of, premium, if any, or interest on, any Exchange
Debenture, (iii) change the place or currency of payment of principal of
premium, if any, or interest on, any Exchange Debenture, (iv) impair the right
to institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after
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the Redemption Date) of any Exchange Debenture, (v) modify the subordination
provisions in a manner adverse to the holders in any material respect, (vi)
reduce the above-stated percentage of outstanding Exchange Debentures the
consent of whose holders is necessary to modify or amend the Exchange Debenture
Indenture, (vii) waive a default in the payment of principal of, premium, if
any, or interest on, the Exchange Debentures, (viii) modify any of the
provisions of the Exchange Debenture Indenture described under "--Ranking" in a
manner adverse to the Holders, or (ix) reduce the percentage of aggregate
principal amount of outstanding Exchange Debentures the consent of whose holders
is necessary for waiver of compliance with certain provisions of the Exchange
Debenture Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Exchange Debenture Indenture will provide that no recourse for the
payment of the principal of, premium, if any, or interest on, any of the
Exchange Debentures, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company contained in the exchange Indenture or in any of the Exchange
Debentures, or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator or past, present or future shareholder,
officer, director, employee or controlling person of the Company. Each holder,
by accepting such Exchange Debenture, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Exchange Debenture Indenture provides that, except during the
continuance of an Event of Default, the Trustee will perform only such duties as
are specifically set forth in the Exchange Debenture Indenture. If an Event of
Default has occurred and is continuing, the Trustee will exercise those rights
and powers vested in it under such Exchange Debenture Indenture and use the same
degree of care and skill in its exercise of such rights and powers as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Exchange Debenture Indenture and provisions of the Trust Indenture Act
of 1939, as amended, incorporated by reference in the Exchange Debenture
Indenture, contain limitations on the rights of the Trustee thereunder, should
it become a creditor of the Company, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claims, as security or otherwise. The Trustee is permitted to engaged in other
transactions; PROVIDED, HOWEVER, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITIES
The New Credit Facilities provided by NationsBank, as Agent, include a $50.0
million senior secured, reducing revolving credit facility (the "Revolving
Credit Facility") and a series of three term loans aggregating $400.0 million
("Term Loan Facilities") to be used for permitted acquisitions, restricted
payments, the Sygnet Acquisition, to refinance Sygnet's existing indebtedness
and to fund, capital expenditures, permitted investments, working capital and
other corporate purposes.
The following summary of the material provisions of the New Credit
Facilities does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the definitive loan documentation. Capitalized
terms that are used but not defined in this section have the meanings that are
given such terms in the Commitment Letter.
The New Credit Facilities aggregate $430.0 million and include (a) a $50.0
million, 7 3/4 year reducing 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").
Borrowings under the Revolving Credit Facility and Term Loans A and B bear
interest payable at least quarterly, at Sygnet's option, at (a) the "Applicable
Margin" plus the greater of (i) the Federal Funds Effective Rate plus 0.5% and
(ii) the prime rate (the "Base Rate"), or (b) the "Applicable Margin" plus
Reserve Adjusted LIBOR ("LIBOR") for interest periods of 1, 2, 3 or 6 months.
The "Applicable Margin" for the Revolving Credit Facility and Term Loan A
fluctuates based on Sygnet's leverage and is the Base Rate plus 0.75% to 2.00%
or LIBOR plus 1.75% to 3.00%. For Term Loan B, the "Applicable Margin"
fluctuates based on Sygnet's leverage and is the Base Rate plus 1.75% to 2.25%
or LIBOR plus 2.75% to 3.25%. Term Loan C bears interest at LIBOR plus 3.75% for
interest periods of 1, 2, 3 or 6 months.
Commencing with the quarter ending December 31, 2000, the borrowing
commitment 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, 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>
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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>
The commitments under the New Credit Facilities will be permanently reduced
by an amount equal to 100% of the net cash proceeds from sales of assets in
excess of $5.0 million, to the extent not reinvested within 12 months, by an
amount equal to 100% of the net cash proceeds received from certain equity or
debt issuances and by 75% or 50% of excess cash flow, depending on Sygnet's
leverage. In addition, to the extent amounts have been borrowed in respect of
the Tower Sale Leaseback, such amounts shall be repaid with the net proceeds
therefrom and the commitments under each of Term Loan A and Term Loan B will
decrease by $10.0 million.
Sygnet may, without premium or penalty, prepay advances bearing interest
based on the Base Rate at any time and may, without premium or penalty, prepay
advances bearing interest based on the LIBOR rate at the end of an applicable
interest period. Term Loan C may be redeemed in whole or in part at 102% of the
principal amount through December 31, 1999, 101% of the principal amount through
December 31, 2001 and thereafter at 100%.
The New Credit Facilities contain a number of covenants including, among
others, covenants limiting the ability of Sygnet and each of its subsidiaries to
incur debt, make loans, create liens, make guarantees and investments, change
their business, engage in transactions with affiliates, sell assets, enter into
restrictive agreements, engage in sale leaseback transactions or new business
and engage in mergers and acquisitions. The New Credit Facilities will contain
other usual and customary negative and affirmative covenants, including Year
2000 compliance.
The New Credit Facilities restrict Sygnet and Sygnet Communications from
declaring and paying distributions or making restrictive payments. However,
Sygnet will be permitted to pay dividends to pay (i) scheduled interest on the
Dobson/Sygnet Notes commencing after the first six interest payments on the
Dobson/Sygnet Notes and (ii) regularly scheduled payments on up to $120,000,000
in liquidation preference value of Dobson's preferred stock, commencing January
15, 2003, in each case unless if at the time of such dividend or distribution an
event of default (other than an event of default resulting solely from the
breach of a representation or warranty) exists or would be caused by such
dividend or distribution; provided that, with respect to any event of default
(other than a payment default (including by way of acceleration), a bankruptcy
event with respect to Sygnet or Sygnet Communications or the Company or any of
its restricted subsidiaries or the loss of a material license or cellular
system), Sygnet Communications will not be prohibited from paying dividends to
Sygnet to pay scheduled interest on the Dobson/ Sygnet Notes for more than 180
days.
Sygnet will be required to maintain certain financial ratios, including,
among others, a ratio of total debt to cash flow, a ratio of operating cash flow
to pro forma debt service, a ratio of operating cash flow to cash interest
expense and a fixed charge coverage ratio. In addition, the Company and Sygnet
will be required to maintain a ratio of debt to operating cash flow.
Failure to satisfy any of the financial covenants will constitute an Event
of Default under the New Credit Facilities, permitting the lenders, after
notice, to terminate the commitment and/or accelerate payment of outstanding
indebtedness notwithstanding the ability of Sygnet to meet its debt service
obligations. The New Credit Facilities will include other customary events of
default including, without limitation, loss of franchise or any material
license; breach of representations, warranties and covenants; insolvency or
bankruptcy of Sygnet or any of its subsidiaries or of the Company or any of its
subsidiaries; cross default to other material indebtedness, leases, contracts of
Sygnet, its subsidiaries, or of the Company and its subsidiaries (excluding
Logix); any material adverse change; dissolution or termination of Sygnet or any
of its subsidiaries or of the Company; if the Company fails to maintain direct
voting and economic
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control of Sygnet and its subsidiaries; and if less than two-thirds of the
existing executive management team of the Company continue to hold executive
positions with the Company.
Sygnet's obligations under the New Credit Facilities will be guaranteed by
its subsidiaries. Borrowings under the New Credit Facilities will be secured by
a first perfected security interest in all assets of Sygnet and its present and
future subsidiaries including a pledge of all intercompany notes.
TOWER CREDIT FACILITY
Dobson Tower obtained a $17.5 million term loan (the "Tower Credit
Facility"), which is secured by all assets of Dobson Tower, mature on December
22, 1999 364 days after closing and bears interest at a fixed rate of 8.0% per
annum.
The credit agreement governing the Tower Credit Facility requires, among
other things, that Dobson Tower provide to the lender an executed contract with
a third party acceptable to the lenders providing for the sale of the towers by
June 23, 1999.
THE DOC FACILITY
The Company's DOC Facility is a $250.0 million senior secured revolving
credit facility with NationsBank and certain other lenders. The following
summary of the material provisions of the DOC Facility does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the DOC Facility. Capitalized terms that are used but not defined in this
section have the meanings that are given such terms in the DOC loan agreement.
The DOC Facility matures on June 30, 2006. Borrowings under the DOC Facility
bear interest, payable at least quarterly, at DOC's option, at an annual rate
equal to either (i) the greater of (x) the federal funds rate plus 1/2% and (y)
the prime rate of NationsBank, plus in each case a percentage per annum ranging
from 0% to 1(1)%, or (ii) a LIBOR-based rate plus a percentage per annum ranging
from 1% to 2 1/4%. The amount of additional interest applicable to either option
is based on the Company's quarterly Total Leverage Ratio. In the event DOC's
Senior Leverage Ratio is greater than 5.0 to 1, the additional interest
applicable to either option will be increased by .125%
Commencing with the quarter ending June 30, 2000, the borrowing commitment
under the DOC Facility will reduce quarterly in percentage increments of 3.33%
for the three quarters ending December 31, 2000, 3.75% for the eight quarters
ending December 31, 2002, 4.375% for the eight quarters ending December 31,
2004, 3.75% for the four quarters ending December 31, 2005 and 5% for the two
quarters ending June 30, 2006. A mandatory prepayment and reduction of the
borrowing commitment will be required at the time of, and in an amount equal to
100% of the net proceeds from, certain sales of material assets of DOC and its
Restricted Subsidiaries and in connection with the incurrence of certain
indebtedness by DOC. In addition, if DOC's Senior Leverage Ratio is greater than
5.5 to 1, the proceeds from any issuance of unsecured indebtedness by the
Company must be used to repay borrowings under the DOC Facility and reduce the
borrowing commitment thereunder.
The DOC Facility contains a number of covenants including, among others,
covenants limiting the ability of the Company, DOC and DOC's Restricted
Subsidiaries to incur debt, make loans or guarantees, create liens, pay
dividends, make distributions or stock repurchases, make investments, enter into
sale and lease-back transactions, change their business, sell assets, engage in
mergers and acquisitions and enter into transactions with affiliates.
Acquisitions must be limited to the domestic cellular industry and approval of
the lenders is required for any acquisition in excess of $75.0 million, if the
Total Leverage Ratio of the Company (including Restricted and Unrestricted
Subsidiaries) is greater than 8.5 to 1 (giving pro forma effect to the
acquisition). The DOC Facility contains other customary affirmative covenants.
The DOC Facility restricts DOC from declaring and paying dividends or
distributions, including dividends to pay cash dividends on the Senior Preferred
Stock and the Preferred Stock and to pay
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scheduled interest on the Senior Notes and, if issued, the Exchange Debentures
and the Senior Exchange Debentures. However, DOC is permitted to pay dividends
or distributions to the Company to pay cash dividends on the Senior Preferred
Stock (or interest on the Senior Exchange Debentures and the Exchange
Debentures, if issued) after January 15, 2003, and scheduled interest on the
Senior Notes commencing after the first four interest payments on the Senior
Notes, unless at the time of such dividend or distribution an event of default
(other than an event of default resulting solely from the breach of a
representation or warranty) exists or would be caused by such dividend or
distribution; PROVIDED that, with respect to any event of default (other than a
payment default (including by way of acceleration), a bankruptcy event with
respect to the Company or DOC or the loss of a material license or cellular
system), DOC will not be prohibited from paying dividends to the Company to pay
scheduled interest on the Senior Notes or Senior Exchange Debentures if issued,
or dividends on the Senior Preferred Stock for more than 180 days. In addition,
DOC may pay dividends to the Company of up to $7.5 million per year, not to
exceed $25.0 million in the aggregate when DOC's Senior Leverage Ratio is less
than 6.5 to 1 (giving pro forma effect to the payment); PROVIDED, however, to
the extent funds are contributed to DOC in the form of equity or unsecured
subordinated loans, the amount of dividends DOC may pay to the Company may be
increased by the amount so contributed, but in no event not to exceed $25
million per year and $50 million in the aggregate, without regard to DOC's
Senior Leverage Ratio.
The Company is required to comply with certain financial tests and maintain
certain financial ratios, including, among others, a requirement that (i) DOC's
Senior Leverage Ratio not exceed 6.5 to 1 from July 1 to December 31, 1998, 6.25
to 1 from January 1 to June 30, 1999, 6.0 to 1 from July 1 to December 31, 1999,
5.5 to 1 from January 1 to June 30, 2000, 5.0 to 1 from July 1 to December 31,
2000 and 4.5 to 1 from January 1, 2001 and thereafter, (ii) the ratio of DOC's
Operating Cash Flow to its Pro Forma Debt Service exceed 1.15 to 1; (iii) the
ratio of DOC's Operating Cash Flow to its Cash Interest Expense (with an
add-back for escrowed interest payments on the Senior Notes) for the most
recently ended four quarters exceed 2.0 to 1; (iv) DOC's Fixed Charge Coverage
Ratio be greater than 1.0 to 1; (v) the Company's Total Leverage Ratio not
exceed 9.5 to 1 through June 30, 1998, 9.0 to 1 from July 1 to December 31,
1998, 8.5 to 1 from January 1 to June 30, 1999, 8.0 to 1 from July 1 to December
31, 1999, 7.0 to 1 from January 1 to June 30, 2000, 6.0 to 1 from July 1 to
December 31, 2000 and 5.0 to 1 from January 1, 2001 and thereafter; and (vi) the
Company's Consolidated Operating Cash Flow to its Consolidated Interest Expense
for the most recently ended four quarters exceed 1.25 to 1.
For purposes of the financial covenants, "Operating Cash Flow" for DOC is
defined as Operating Cash Flow of DOC and its Restricted Subsidiaries, including
certain cash flow of the "Cellular Operating Partnerships" (defined as Oklahoma
RSA 5 Limited Partnership, Oklahoma RSA 7 Limited Partnership, Texas RSA No. 2
Limited Partnership, Gila River Cellular General Partnership and any other
entity in which DOC or one of its Restricted Subsidiaries owns a partnership
interest and serves as the managing general partner) multiplied by DOC's
ownership interest in the partnerships, except if DOC provides financing to any
of the Cellular Operating Partnerships that are not 100% owned by DOC, 100% of
the Operating Cash Flow of the partnership will be included in the definition of
DOC's Operating Cash Flow, and for the Company is defined as Operating Cash Flow
of the Company and its Restricted Subsidiaries, in each case for the four most
recently completed quarters. "Operating Cash Flow" for any period is defined as
the (i) sum of pre-tax income, without giving effect to extraordinary losses or
gains, interest, depreciation and amortization expenses and non-cash charges,
minus (ii) interest and dividend income, reductions in deferred taxes and other
non-cash components of income. "Total Debt" of DOC and its Restricted
Subsidiaries is defined as the sum of all obligations for borrowed money, all
payments required under non-compete agreements, capital lease obligations,
amounts required under installment sale purchases, all financial obligations of
others guaranteed by DOC, and any amounts for which DOC is contingently liable
to provide as equity or debt advances to other parties, but does not include
intercompany subordinated debt owed by DOC to the Company or any subsidiary of
the Company not owned by DOC. "Total Debt" of the Company and its Restricted
Subsidiaries is defined as the sum of all obligations for borrowed money (less
the amount escrowed for interest payments on the Senior Notes), all payments
required under
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noncompete agreements, capital lease obligations, amounts required under
installment sale purchases, all financial obligations of others guaranteed and
any amounts for which the Company and any of its direct or indirect Restricted
Subsidiaries are contingently liable to provide as equity or debt advances to
other parties. At such time as the Senior Preferred Stock is exchanged for
Senior Exchange Debentures, the obligations under the Senior Exchange Debentures
will be included in the calculation of Total Debt. "Pro Forma Debt Service" is
defined as the sum of Pro Forma Interest Expense and payments scheduled to be
made on Total Debt for the succeeding twelve months. "Pro Forma Interest
Expense" is the result obtained by multiplying the average debt outstanding
during the period (the sum of (a) Total Debt at the beginning of the period plus
(b) such Total Debt minus payments scheduled to be made during the period,
divided by two) by the interest rate in effect at the time of calculation.
"Fixed Charge Coverage Ratio" is defined as the ratio of (i) the Operating Cash
Flow of DOC for the most recently ended four quarters to (ii) the sum of all
payments of DOC's Total Debt required to be paid, cash interest expense and
capital expenditures of DOC, cash taxes, and distributions and dividends paid by
DOC, in each case for the most recently ended four quarters. DOC's "Senior
Leverage Ratio" is defined as the ratio of Total Debt of DOC and its Restricted
Subsidiaries to Operating Cash Flow of DOC and its Restricted Subsidiaries. The
Company's "Total Leverage Ratio" is defined as the ratio of its Total Debt to
its Operating Cash Flow. "Restricted Subsidiaries" is defined as Dobson Cellular
of Arizona, Inc., Dobson Cellular of Enid, Inc., Dobson Cellular of
Kansas/Missouri, Inc., Dobson Cellular of Maryland, Inc., Dobson Cellular of
Woodward, Inc. and Dobson Cellular Systems, Inc. and its subsidiaries.
Failure to satisfy any of the financial covenants will constitute an Event
of Default under the DOC Facility, permitting the lenders, after notice, to
terminate this commitment and/or accelerate payment of outstanding indebtedness
notwithstanding the ability of the Company to meet its debt service obligations.
The DOC Facility also includes other customary events of default, including,
without limitation, a cross-default to other indebtedness, loss of any material
license, material adverse change, bankruptcy and change of control. In addition,
the definition of events of default includes the loss of Everett Dobson as part
of the senior management team.
DOC's obligations under the DOC Facility are guaranteed by the Company and
DOC's Restricted Subsidiaries. Borrowings under the DOC Facility are secured by
all assets of DOC and its present and future subsidiaries, and by a pledge of
the stock of DOC and the stock of and partnership interests in its Restricted
Subsidiaries.
THE DCOC FACILITY
The DCOC Facility is a $200.0 million senior secured revolving credit
facility with NationsBank and certain other lenders, under which such lenders
provided funds to DCOC to finance the Texas 16 and California 4 Acquisitions and
have agreed to provide additional funds to finance other acquisitions, capital
expenditures, permitted investments and restricted payments and for general
corporate purposes of DCOC and its subsidiaries. The following summary of the
material provisions of the DCOC Facility does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the DCOC Facility
loan agreement. Capitalized terms that are used but not defined in this section
have the meanings that are given such terms in the DCOC Facility loan agreement.
The DCOC Facility includes (a) a $120 million eight and one-half year
reducing revolving credit facility and (b) an $80 million 364-day revolving
credit facility which, at DCOC's option, may be converted into a term loan
maturing no later than eight and one-half years from the closing date of the New
Credit Facilities or, with the consent of the lenders, may be renewed for an
additional 364-day period. In addition, the DCOC Facility loan agreement
contemplates an additional $75 million revolving credit facility may be
established in the future, although the lenders will have no obligation to
provide such additional financing. The uncommitted acquisition revolver facility
may not be established unless two-thirds of the commitment amount under the
committed facilities is outstanding.
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The facilities comprising the DCOC Facility will mature on June 30, 2006.
Borrowings under the DCOC Facility bear interest, payable at least quarterly, at
DCOC's option, at an annual rate equal to either (i) the greater of (x) the
federal funds rate plus 1/2% and (y) the prime rate of NationsBank, plus in each
case a percentage per annum ranging from 1/8% to 1 3/8%, or (ii) a LIBOR-based
rate plus a percentage per annum ranging from 1 1/8% to 2 3/8%. The amount of
additional interest applicable to either option is based on DCOC's Leverage
Ratio.
Commencing with the quarter ending June 30, 2000, the borrowing commitment
under the DCOC Facility will reduce quarterly in percentage increments of 3.33%
for the three quarters ending December 31, 2000, 3.75% for the eight quarters
ending December 31, 2002, 4.375% for the eight quarters ending December 31,
2004, 3.75% for the four quarters ending December 31, 2005 and 5% for the two
quarters ending June 30, 2006. A mandatory prepayment and reduction of the
borrowing commitment will be required at the time, and in an amount equal to
100% of the net proceeds from certain sales of material assets of DCOC and its
subsidiaries and the issuance of certain indebtedness by DCOC.
The DCOC Facility contains a number of covenants including, among others,
covenants limiting the ability of DCOC and its subsidiaries to incur debt, make
loans or guarantees, create liens, pay dividends, make distributions or stock
repurchases, make investments, enter into sale and lease-back transactions,
change their business, sell, exchange, lease or otherwise dispose of assets,
engage in mergers, make acquisitions and enter into transactions with
affiliates. Approval of the lenders is required for any acquisition in excess of
$75 million when the Company's Total Leverage Ratio (including Restricted and
Unrestricted Subsidiaries) is greater than 8.5 to 1 (giving pro forma effect to
the acquisition). For 1998, DCOC's capital expenditures will be limited to 110%
of its capital expenditures budget for such period. The DCOC Facility contains
other covenants customary for similar credit facilities.
The DCOC Facility prohibits distributions or restricted payments, except
that, after giving pro forma effect to any such distribution or payment, when
DCOC's Leverage Ratio is less than 5.0 to 1, payments may be made with up to
100% of Free Cash Flow and when DCOC's Leverage Ratio is greater than or equal
to 5.0 to 1, payments may be made with up to 50% of Free Cash Flow. In addition,
the DCOC Facility restricts DCOC from declaring and paying dividends or
distributions, including dividends to pay cash dividends on the Senior Preferred
Stock and the Preferred Stock and to pay scheduled interest on the Senior Notes
and, if issued, the Senior Exchange Debentures and the Exchange Debentures.
However, after January 15, 2003 DCOC will be permitted to pay dividends or
distributions to the Company to pay cash dividends on the Senior Preferred Stock
and the Preferred Stock and scheduled interest on the Senior Exchange Debentures
and the Exchange Debentures, if issued, unless at the time of such dividend or
distribution an event of default (other than an event of default resulting
solely from the breach of a representation or warranty) exists or would be
caused by such dividend or distribution; PROVIDED that, with respect to any
event of default (other than a payment default (including by way of
acceleration), a bankruptcy event with respect to the Company or DCOC or the
loss of a material license or cellular system), DCOC will not be prohibited from
paying dividends to the Company to pay dividends on the Senior Preferred Stock
and the Preferred Stock or scheduled interest on the Senior Exchange Debentures
and the Exchange Debentures, if issued, for more than 180 days.
DCOC is required to comply with certain financial tests and maintain certain
financial ratios, including, among others, a requirement that (i) DCOC's
Leverage Ratio not exceed 7.5 to 1 through September 30, 1998, 7.0 to 1 from
October 1, 1998 to June 30, 1999, 6.5 to 1 from July 1 to December 31, 1999, 5.5
to 1 from January 1 to December 31, 2000, and 4.5 to 1 from January 1, 2001 and
thereafter, PROVIDED that when Operating Cash Flow for the most recently ended
four quarters exceeds $20.0 million, the applicable ratios range from 8.0 to 1
for the first period to 5.0 to 1 for the last period and when Operating Cash
Flow for the most recently ended four quarters exceeds $25 million, the
applicable ratios range from 8.5 to 1 for the first period to 5.5 to 1 for the
last period; (ii) the ratio of DCOC's Operating Cash Flow to its Pro Forma Debt
Service shall exceed 1.25 to 1; (iii) the ratio of DCOC's Operating Cash Flow to
its Cash Interest Expense for the most recently ended four quarters exceed 1.75
to 1 until
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December 31, 1998 and 2.0 to 1 thereafter; and (iv) the Fixed Charge Coverage
Ratio be greater than 1.0 to 1.
For purposes of the financial covenants, "Operating Cash Flow" for DCOC
includes the Operating Cash Flow of any "Cellular Operating Partnership"
(defined as any entity in which DCOC or one of its subsidiaries owns a
partnership interest or serves as the managing general partner) multiplied by
DCOC's ownership interest in the partnership, except if DCOC provides financing
to any of the Cellular Operating Partnerships that are not 100% owned by DCOC,
100% of the Operating Cash Flow of the partnership will be included in the
definition of DCOC's Operating Cash Flow. Operating Cash Flow for the Company
includes the Operating Cash Flow of the Company and its Restricted Subsidiaries.
"Operating Cash Flow" for any period is defined as the (i) sum of pre-tax
income, without giving effect to any extraordinary losses or gains, interest,
depreciation and amortization expenses and non-cash charges, minus (ii) interest
and dividend income, reductions in deferred taxes and other non-cash components
of income. "Total Debt" of DCOC is defined as the sum of all obligations of DCOC
and its subsidiaries for borrowed money, all payments required under non-compete
agreements, capital lease obligations, amounts required under installment sale
purchases, all financial obligations of others guaranteed by DCOC, and any
amounts for which DCOC is contingently liable to provide as equity or debt
advances to other parties, but does not include intercompany subordinated debt
owed by DCOC to the Company. "Total Debt" of the Company and its Restricted
Subsidiaries is defined as the sum of all obligations for borrowed money (less
the amount escrowed for interest payments on the Senior Notes), all payments
required under noncompete agreements, capital lease obligations, amounts
required under installment sale purchases, all financial obligations of others
guaranteed and any amounts for which the Company and any of its direct or
indirect Restricted Subsidiaries are contingently liable to provide as equity or
debt advances to other parties. At such time as the Senior Preferred Stock and
the Preferred Stock is exchanged for the Senior Exchange Debentures and the
Exchange Debentures, the obligations under the Exchange Debentures will be
included in the calculation of Total Debt. "Pro Forma Debt Service" is defined
as the sum of Pro Forma Interest Expense and payments scheduled to be made on
DCOC's Total Debt for the succeeding twelve months. "Pro Forma Interest Expense"
is the result obtained by multiplying (x) the sum of (a) DCOC's Total Debt at
the beginning of the period plus (b) such Total Debt minus payments scheduled to
be made thereon during the period, divided by two) by (y) the interest rate in
effect at the time of calculation. "Fixed Charge Coverage Ratio" is defined as
the ratio of (i) DCOC's Operating Cash Flow for the most recently ended four
quarters to (ii) the sum of all payments on DCOC's Total Debt required to be
paid, its cash interest expense, capital expenditures, and cash taxes, and
distributions and dividends paid by DCOC, in each case for the most recently
ended four quarters. "Free Cash Flow" is defined as the Operating Cash Flow for
any fiscal year less cash taxes, required principal and interest payments on all
debt for such fiscal year, capital expenditures and $2.5 million. DCOC's
"Leverage Ratio" is defined as the ratio of its Total Debt to its Operating Cash
Flow. The Company's "Total Leverage Ratio" is defined as the ratio of its Total
Debt to its Operating Cash Flow.
Failure to satisfy any of the financial covenants will constitute an Event
of Default under the DCOC Facility, permitting the lenders, after notice, to
terminate the commitment and/or accelerate payment of outstanding indebtedness
notwithstanding the ability of the Company to meet its debt service obligations.
The DCOC Facility includes other customary events of default, including, without
limitation, a cross-default to other material indebtedness, loss of any material
license, material adverse change, bankruptcy, change of control and a change of
management resulting in less than two-thirds of existing management being in
control of DCOC.
DCOC's obligations under the DCOC Facility will be guaranteed by all of
DCOC's subsidiaries. Borrowings under the New Credit Facilities are secured by
all assets of DCOC and its present and future subsidiaries, and by a pledge of
the stock of and partnership interests in DCOC's subsidiaries.
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THE SENIOR NOTES
GENERAL. The Company has outstanding $160.0 million in aggregate principal
amount of Senior Notes which mature in April 2007. The Senior Notes were issued
under the Senior Note Indenture between the Company and United States Trust
Company of New York, as Trustee. The Senior Notes bear interest at an annual
rate of 11 3/4%, payable semi-annually on each April 15 and October 15.
Capitalized terms hereafter used in this summary have the meanings set forth in
the Senior Note Indenture.
RANKING. The Senior Notes are unsubordinated indebtedness of the Company,
ranking PARI PASSU in right of payment with all other unsubordinated
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company.
OPTIONAL REDEMPTION. The Company may, at its option, redeem all or any
portion of the Senior Notes at the redemption prices (expressed as percentages
of the principal amount of the Senior Notes) set forth below, plus, in each
case, accrued interest thereon to the applicable redemption date, if redeemed
during the 12-month period beginning April 15 of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 105.8750%
2003.............................................................................. 102.9375%
2004 and thereafter............................................................... 100.0000%
</TABLE>
CHANGE OF CONTROL. The Senior Note Indenture provides that, following the
occurrence of any Change of Control (as defined therein), the Company must offer
to purchase all outstanding Senior Notes at a purchase price equal to 101% of
their principal amount, plus accrued interest to the date of purchase.
RESTRICTIVE COVENANTS. The Senior Note Indenture contains certain
restrictive covenants which, among other things, limit the ability of the
Company and its Restricted Subsidiaries to incur additional indebtedness, create
liens, engage in sale-leaseback transactions, pay dividends or make
distributions in respect of their capital stock (including the Senior Preferred
Stock), make investments or certain other restricted payments, sell assets,
issue or sell stock of Restricted Subsidiaries, enter into transactions with
stockholders or affiliates or effect a consolidation or merger. Logix, DCOC and
Dobson/Sygnet, and their respective subsidiaries, are Unrestricted Subsidiaries
with respect to the Senior Notes.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
At December 31, 1998, the authorized capital stock of the Company consisted
of 1,500,000 shares of Common Stock, par value $.001 per share ("Common Stock"),
consisting of 1,438,000 shares of Class A Common Stock, 31,000 shares of Class B
Non-Voting Common Stock ("Class B Common Stock"), 31,000 shares of Class C
Common Stock; and 2,500,000 shares of preferred stock, par value of $1.00 per
share, including 550,000 shares of Senior Preferred Stock, 184,000 shares of
Preferred Stock, 100,000 shares of Class A 5% Non-Cumulative, Non-Voting,
Non-Convertible Preferred Stock ("Class A Preferred Stock"), 100,000 shares of
Class B Convertible Preferred Stock ("Class B Preferred Stock"), 100,000 shares
of Class C 8% Cumulative, Non-Voting, Non-Convertible Preferred Stock ("Class C
Preferred Stock"), 85,000 shares of Class D 15% Convertible Preferred Stock
("Class D Preferred Stock"), 405,000 shares of Class E 15% Preferred Stock
("Class E Preferred Stock"), 205,000 shares of Class F Preferred Stock ("Class F
Preferred Stock"), 62,000 shares of Class G Preferred Stock ("Class G Preferred
Stock") and 62,000 shares of Class H Preferred Stock ("Class H Preferred Stock"
and together with the Class A Preferred Stock, the Class B Preferred Stock, the
Class C Preferred Stock, the Class D Preferred Stock, the Class E Preferred
Stock, the Class F Preferred Stock and the Class G Preferred Stock, the "Other
Preferred Stock"). At September 30, 1998, the issued and outstanding capital
stock of the Company consisted of 179,943 shares of Senior Preferred Stock,
100,000 shares of Class A Preferred Stock, 100,000 shares of Class B Preferred
Stock, 100,000 shares of Class C Preferred Stock, and 473,152 shares of Class A
Common Stock. As part of the Sygnet Financing, all outstanding shares of Class B
Preferred Stock were converted into shares of Class A Common Stock and all
outstanding shares of Class C Preferred Stock were purchased by the Company. The
Company has reserved 13,914 shares of Class A Common Stock for issuance upon
exercise of warrants granted to the purchasers of the Class F Preferred Stock.
See "--Warrants." The Company has reserved 30,166 shares of Class B Common Stock
and 30,166 shares of Class C Common Stock for issuance upon exercise of options
granted and which may be granted under the Company's Stock Option Plan.
The following description of certain matters relating to the capital stock
of the Company is a summary and is qualified in its entirety by the provisions
of the Company's Certificate of Incorporation ("Certificate of Incorporation")
and Bylaws.
COMMON STOCK
The holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders of the Company and, except as
otherwise provided by law, will vote together with holders of Class D Preferred
Stock. Holders of Class B Common Stock have no voting rights except when a class
vote is required by law. Holders of Class C Common Stock have no voting rights
except when a class vote is required by law. Holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor, subject to the payment of
preferential dividends with respect to any outstanding preferred stock and
subject to the terms of the DOC Facility, the Credit Facilities, the Senior Note
Indenture, the certificates of designation for the Senior Preferred Stock and
the Other Preferred Stock, the Certificate of Designation and, if the Exchange
Debentures or Senior Exchange Debentures are issued, the Exchange Debenture
Indenture and the Senior Exchange Debenture Indenture, as the case may be
(together, the "Financing Agreements"). The holders of Common Stock do not have
cumulative voting rights or preemptive or other rights to acquire or subscribe
for additional, unissued or treasury shares.
SENIOR PREFERRED STOCK
The Senior Preferred Stock and the Senior Exchange Debentures are
substantially similar to the terms of the Preferred Stock and the Exchange
Debentures, respectively.
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OTHER PREFERRED STOCK
The Other Preferred Stock will rank junior to the Senior Preferred Stock and
the Preferred Stock with respect to the payment of dividends and upon
liquidation. The Class D and Class E Preferred Stock will rank junior to the
Class F Preferred Stock, PARI PASSU with the Class A Preferred Stock and, except
with respect to liquidation, the Class G and Class H Preferred Stock, and senior
to the Class G and Class H Preferred Stock as to liquidation. The Class G and
Class H Preferred Stock will rank junior to the Class A Preferred Stock and
Class F Preferred Stock and, as to liquidation, the Class D Preferred Stock and
Class E Preferred Stock and PARI PASSU with the Class D Preferred Stock and
Class E Preferred Stock, except as to liquidation.
CLASS A PREFERRED STOCK
The Company's subsidiary, DOC, holds 100,000 shares of Class A Preferred
Stock. A certificate of designation for the Class A Preferred Stock provides for
the following rights, preferences and powers:
VOTING RIGHTS. Except as otherwise required by law, the holders of shares
of Class A Preferred Stock have no voting rights.
DIVIDENDS. The holders of Class A Preferred Stock are entitled to receive
non-cumulative dividends at the annual rate of 5% of the $70 per share
liquidation value, if and when declared by the Board of Directors. The terms of
the Financing Agreements limit and, for the foreseeable future effectively
prohibit, the payment of cash dividends on the Class A Preferred Stock.
CONVERSION. The Class A Preferred Stock is not convertible.
REDEMPTION. At any time and from time to time, the Class A Preferred Stock
may be redeemed, in whole or in part, at the option of the Company at the
liquidation value thereof.
CLASS B AND CLASS C PREFERRED STOCK
As part of the Sygnet Financing, all of the outstanding shares of Class B
Preferred Stock will be converted to Class A Common Stock and all of the
outstanding shares of Class C Preferred Stock will be redeemed by the Company.
CLASS D PREFERRED STOCK AND CLASS E PREFERRED STOCK
On December 23, 1998, Childs and the Dobson Partnership purchased 75,094
shares of Class D Preferred Stock from DCC for $85.0 million pursuant to an
investment and transaction agreement (the "Class D Purchase Agreement") and
entered into a stockholder and investor rights agreement (the "Investors
Agreement") with certain other shareholders of the Company, excluding the
holders of the Class F Preferred Stock (collectively, the "Shareholders"), DOC
and the Company. The Dobson Partnership purchased $4.0 million of Class D
Preferred Stock and Childs purchased substantially all of the remaining $81.0
million of Class D Preferred Stock. Each share of Class D Preferred Stock is
convertible into one share of Class A Common Stock and one share of Class E
Preferred Stock. The following summary of the Class D Preferred Stock, the Class
E Preferred Stock, the Class D Purchase Agreement and the Investors Agreement
does not purport to be complete and is qualified in its entirety by reference to
the applicable certificates of designation and such agreements.
CLASS D PURCHASE AGREEMENT. The Class D Purchase Agreement contains various
covenants which, among other things, give the holders of Class D Preferred Stock
certain preemptive rights with respect to the Company's issuance of equity
securities (including rights, options or warrants with respect to such
securities and other securities convertible into equity securities), restrict
the ability of the Company and its subsidiaries to pay dividends, purchase their
outstanding equity securities, make investments, acquire or dispose of material
amounts of assets, engage in sale and leaseback transactions, or merge,
consolidate or
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dispose of all or substantially all of their assets. In addition, holders of
Class D Preferred Stock will be entitled to participate in the spin-off of
Logix.
CLASS D PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class D Preferred Stock (the "Class D Preferred Stock
Certificate of Designation") provides for the following rights, including voting
rights, preferences and powers:
VOTING RIGHTS. Except as otherwise provided by law, the shares of Class A
Common Stock and Class D Preferred Stock vote together on all matters submitted
to a vote of the shareholders. Each share of Class D Preferred Stock, which is
initially convertible into one share of Class A Common Stock and one share of
Class E Preferred Stock, is entitled to the number of votes that the shares of
Class A Common Stock issuable upon conversion of the Class D Preferred Stock
would have on the record date fixed for any meeting, or the effective date of
action taken by written consent, of shareholders.
Approval of the holders of a majority of the outstanding Class D Preferred
Stock is necessary to (i) authorize or increase the authorized number of shares
of, or issue, any class or a series of capital stock ranking prior to, or on a
parity with, the Class D Preferred Stock other than preferred stock issued to
finance acquisitions and capital projects, (ii) make any change in the Company's
Certificate of Incorporation which would adversely affect the powers,
preferences or rights, including voting rights, of the Class D Preferred Stock,
(iii) authorize or effect the sale of all or substantially all of the assets of
the Company, any merger or consolidation of the Company resulting in the change
of control, or the liquidation, dissolution or winding up of the Company, (iv)
amend the Company's Certificate of Incorporation or Bylaws to change the
authorized number of directors or (v) authorize redemption, repurchase or
payment of dividends on any junior or parity stock, except for scheduled or
mandatory redemptions thereof and repurchases of management stock pursuant to
contractual rights.
DIVIDENDS. Cumulative dividends on each share of Class D Preferred Stock
accrue daily at the annual rate of 15% on the sum of the $1,131.92 per share
liquidation value. In addition, a holder of Class D Preferred Stock will be
entitled to receive additional dividends thereon in the same amounts as such
holder would have received if such shares of Class D Preferred Stock had been
fully converted into Class A Common Stock. All accumulated and unpaid dividends
on the Class D Preferred Stock ("Class D Accrued Dividends") from the date of
issuance, compounded annually, are payable in cash on the liquidation,
dissolution or winding up of the Company, or any redemption of Class D Preferred
Stock or the exercise of any put or call rights in respect thereof. Upon
conversion of Class D Preferred Stock into shares of Class A Common Stock and
Class E Preferred Stock, holders of Class D Preferred Stock will receive Class D
Accrued Dividends in additional shares of Class E Preferred Stock.
The Financing Agreements limit and, if exchange debentures are issued for
the Senior Preferred Stock or the Preferred Stock, each exchange debenture
indenture will limit, and for the foreseeable future effectively prohibit, the
payment of cash dividends on the Class D Preferred Stock.
The Class D Preferred Stock Certificate of Designation prohibits the
declaration or payment of dividends on or redemption or purchase by the Company,
any subsidiary or other affiliate of any junior securities.
CONVERSION. At any time and from time to time, any holder of Class D
Preferred Stock may convert each share of Class D Preferred Stock held into one
share of Class A Common Stock, subject to adjustment to prevent dilution, and
one share of Class E Preferred Stock.
REDEMPTION. All of the Class D Preferred Stock must be redeemed for its
liquidation preference plus Class D Accrued Dividends, subject to the legal
availability of funds therefor, following the vote of the holders of a majority
of the outstanding shares of Class D Preferred Stock and Class E Preferred
Stock, voting together as a single class, at any time after December 23, 2010.
The obligation of the Company to redeem its Class D Preferred Stock is subject
to the terms of the Financing Agreements.
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CLASS E PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class E Preferred Stock provides for the following rights,
preferences and powers:
VOTING RIGHTS. Except as otherwise required by law and as authorized to
vote with the holders of Class D Preferred Stock for redemption, the holders of
shares of Class E Preferred Stock have no voting rights.
DIVIDENDS. Cumulative dividends on each share of Class E Preferred Stock
accrue daily at the annual rate of 15% on the sum of the $1,131.92 per share
liquidation value. All accumulated and unpaid dividends on the Class E Preferred
Stock ("Class E Accrued Dividends") from the date of issuance, compounded
annually, are payable in cash only upon the liquidation, dissolution or winding
up of the Company or on redemption of or exercise of the put and call rights
with respect to the Class E Preferred Stock. The Financing Agreements limit,
and, if exchange debentures are issued for either the Senior Preferred Stock or
the Preferred Stock, each exchange debenture indenture will limit, and for the
foreseeable future effectively prohibit, the payment of cash dividends on the
Class E Preferred Stock.
CONVERSION. The Class E Preferred Stock is not convertible.
REDEMPTION. All of the Class D and Class E Preferred Stock must be redeemed
for its liquidation preference plus Class E Accrued Dividends, subject to legal
availability of funds therefor, following the vote of the holders of a majority
of the outstanding shares of Class D Preferred Stock and the Class E Preferred
Stock, voting together as a single class, at any time after December 23, 2010,
or, with respect to Class E Preferred Stock only, upon completion by the Company
of an initial public offering of its common stock resulting in gross proceeds of
at least $50.0 million. The obligation of the Company to redeem its Class D and
Class E Preferred Stock is subject to the terms of the Financing Agreements.
PUT AND CALL OPTIONS. Upon the earliest to occur of December 23, 2005, a
"Change of Control" (as defined below) or the consummation by the Company of an
initial public offering of its common stock, and if the holders of a majority of
Class E Preferred Stock vote to require the purchase of their stock, each holder
will have the right to require the Company to purchase its Class E Preferred
Stock for its per share liquidation preference plus Class E Accrued Dividends,
subject to the terms of the Financing Agreements. A "Change of Control" means
any transaction that results in the voting power of the Company's voting stock
controlled by Everett R. Dobson and his affiliates being less than 50.1% and the
sale of all or substantially all of the Company's capital stock, business or
assets, but shall not include the sale or redemption by the Dobson Partnership
of up to $25.0 million of the Company's capital stock or an initial public
offering by the Company of its common stock. To the extent the Company has cash
available, the Company must pay cash to purchase the Class E Preferred Stock. To
the extent the Company does not have available cash, the Company is obligated to
issue one or more junior subordinated promissory notes ranking senior to all
preferred stock existing on the Closing Date other than Class F Preferred Stock
and bearing interest at an initial annual rate of 17%, payable quarterly,
subject to the terms of the Financing Agreements. If any quarterly interest
payment is not made, the annual rate increases by 0.5%, up to a maximum annual
rate of 20%. Quarterly payments of interest and principal on the notes are
required to the extent the Company has available cash and subject to the
additional condition that the Company has a ratio of cash flow to interest
expense of at least 1 to 1 for such quarter, after giving effect to the payment
of interest and principal. To the extent unpaid, obligations under the notes
will mature upon the last to occur of (i) termination of the Credit Facilities,
(ii) termination of the Senior Note Indenture, (iii) the repurchase, payment or
defeasance of the Senior Notes and (iv) the redemption of all outstanding Senior
Preferred Stock and Preferred Stock or the elimination of the financial
covenants contained in the certificates of designation for the Senior Preferred
Stock and the Preferred Stock.
In connection with an initial public offering of its common stock, the
Company will have the option to purchase all or any outstanding shares of Class
E Preferred Stock for the liquidation preference thereof, plus Class E
Dividends, payable in cash. Nothwithstanding the foregoing, in the case of a
Change of
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Control in which (i) prior to an initial public offering, Everett R. Dobson and
his affiliates cease to control at least 50.1% of the Company's voting stock or
(ii) following an initial public offering, Everett R. Dobson and his affiliates
cease to control at least 35% of the Company's voting stock, the Company may not
pay the holders subordinated notes in lieu of cash.
INVESTORS AGREEMENT. Under the Investors Agreement, Childs and the Dobson
Partnership shall have certain demand rights for their shares of Class A Common
Stock issuable upon conversion of the Class D Preferred Stock or otherwise held
and all Shareholders shall have "piggy-back" registration rights for their Class
A Common Stock. The Investors Agreement provides that seven directors will
constitute the Company's Board, one designated by Childs, four designated by the
Dobson Partnership, and two selected jointly by Childs and the Dobson
Partnership. So long as Childs beneficially owns at least 35% of the Company
securities held by it upon completion of the Equity Investments, in addition to
the director it may designate, Childs may also designate an observer to attend
each meeting of the Board and each meeting of any committee of the Board.
Notwithstanding the foregoing, an additional two directors may be designated by
the holders of Senior Preferred Stock, an additional two directors may be
designated by the holders of the Preferred Stock and one additional director by
the holders of the Class F Preferred Stock in the event of the non-payment of
dividends for certain periods (a voting rights triggering event).
The Shareholders will have preemptive rights with respect to new common
stock or securities convertible into common stock issued by the Company
(excluding securities issued in a public offering, upon the exercise of employee
stock options, warrants or conversion rights, or in connection with
acquisitions, financing capital projects or the incurrence of indebtedness) and
rights to participate with the Shareholders in a sale of their shares. Childs
generally may not sell its shares except to its affiliates, another shareholder
of the Company or in a public sale. The transfer restrictions in the Investors
Agreement will terminate upon the earliest of an initial public offering by the
Company, a Change of Control or December 23, 2003.
The Shareholders are obligated to sell their shares of the Company's common
stock, Class D Preferred Stock and Class E Preferred Stock to any unaffiliated
party pursuant to an agreement which (i) treats equally, on an "as-if-converted"
basis, the common value of all holders of the Company's common stock, Class D
Preferred Stock and Class E Preferred Stock, (ii) is approved by the board of
directors of the Company as fair to all stockholders and (iii) is approved by
stockholders of the Company holding 50.1% of the Company's outstanding common
stock (calculated on an "as-if-converted" basis). Notwithstanding the foregoing,
the Shareholders will not be obligated to sell any shares of Class D Preferred
Stock or Class E Preferred Stock unless such holder receives cash consideration
at least equal to the liquidation preference of such Class D or Class E
Preferred Stock, and will not be obligated to sell any shares of the Company's
common stock unless all shares of Class D Preferred Stock and Class E Preferred
Stock then held by Childs are also sold in the transaction.
The Shareholders will have the right to participate pro rata in certain
sales of the Company's outstanding common stock, Class D Preferred Stock and
Class E Preferred Stock by any other stockholder, except in the case of (i) the
sale by the Dobson Partnership of the Company's capital stock for $25.0 million
or less, together with accrued but unpaid dividends thereon, (ii) the sale of
any capital stock issued by the Company in connection with the Sygnet Financing,
or (iii) transfers made after an initial public offering. The right to
participate in such sale is pro rata based upon a fraction, the numerator of
which is the value of such shareholder's Class A Common Stock and Class E
Preferred Stock (valued at its liquidation preference), and the denominator of
which is the value of all outstanding Class A Common Stock.
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CLASS F PREFERRED STOCK
As part of the Sygnet Financing, certain shareholders of Sygnet purchased
30,000 shares of the Company's Class F Preferred Stock. The following summary of
the Class F Preferred Stock does not purport to be complete and is qualified in
its entirety by reference to the certificate of designation.
CLASS F PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class F Preferred Stock (the "Class F Preferred Stock
Certificate of Designation") provides for the following rights, including voting
rights, preferences and powers:
VOTING RIGHTS. Except as otherwise provided by law, the shares of Class F
Preferred Stock have no voting rights except to elect a director of the Company
if a voting rights triggering event occurs with respect to the Class F Preferred
Stock.
DIVIDENDS. Dividends on the Class F Preferred Stock are payable in cash or,
at the option of the Company, in additional shares of Class F Preferred Stock.
Cumulative dividends on each share of Class F Preferred Stock accrue at the
annual rate of 16% on the sum of the $1,000 per share liquidation value, and all
accumulated and unpaid dividends ("Class F Accrued Dividends") from the date of
issuance, compounded annually, are payable in cash out of funds legally
available therefor on January 15, April 15, July 15 and October 15, commencing
January 15, 1999.
The Financing Agreements limit, and if the exchange debentures are issued
for the Senior Preferred Stock and if Exchange Debentures are issued for the
Preferred Stock, the respective exchange debenture indentures will limit, and
for the foreseeable future effectively prohibit, the payment of cash dividends
on the Class F Preferred Stock.
The Class F Preferred Stock Certificate of Designation prohibits the
declaration or payment of dividends on redemption or purchase of any junior
securities (by the Company, any subsidiary or other affiliate).
CONVERSION. The Class F Preferred Stock is not convertible.
REDEMPTION. The Class F Preferred Stock must be redeemed on December 31,
2010, subject to the legal availability of funds therefor, at 130% of its
liquidation preference, plus Class F Accrued Dividends.
At any time and from time to time after January 1, 1999, the Class F
Preferred Stock may be redeemed, in whole or in part, at the option of the
Company, at a redemption price expressed as a percentage of the liquidation
preference of the Class F Preferred Stock as set forth below, plus Class F
Accrued Dividends, if such redemption occurs during the 12-month period
beginning January 1 of each of the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -------------
<S> <C>
1999.............................................................................. 100%
2000.............................................................................. 100%
2001.............................................................................. 105%
2002.............................................................................. 115%
2003 and thereafter............................................................... 130%
</TABLE>
CLASS G PREFERRED STOCK AND CLASS H PREFERRED STOCK
As part of the Sygnet Financing, the Dobson Partnership acquired 37,853
shares of the Company's Class G Preferred Stock in exchange for shares of the
Company's Class A Common Stock. Each share of Class G Preferred Stock is
initially convertible into one share of Class H Preferred Stock and shares of
Class A Common Stock. The following summary of the Class G Preferred Stock and
Class H Preferred
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Stock does not purport to be complete and is qualified in its entirety by
reference to the applicable certificates of designation.
CLASS G PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class G Preferred Stock (the "Class G Preferred Stock
Certificate of Designation") provides for the following rights, including voting
rights, preferences and powers:
VOTING RIGHTS. Except as otherwise provided by law, the shares of Class G
Preferred Stock have no voting rights.
DIVIDENDS. Dividends on the Class G Preferred Stock are payable in cash or,
at the option of the Company, in additional shares of Class G Preferred Stock.
Cumulative dividends on each share of Class G Preferred Stock accrue at the
annual rate of 16% on the sum of the $660.40 per share liquidation value, and
all accumulated and unpaid dividends ("Class G Accrued Dividends") from the date
of issuance, compounded annually, are payable out of funds legally available
therefor in cash on the liquidation, dissolution or winding up of the Company or
on redemption.
The Financing Agreements limit, and if exchange debentures are issued for
the Senior Preferred Stock and the Preferred Stock, the respective exchange
debenture indentures will limit, and for the foreseeable future effectively
prohibit, the payment of cash dividends on the Class G Preferred Stock.
The Class G Preferred Stock Certificate of Designation prohibits the
declaration or payment of dividends on or redemption or purchase of any junior
securities (by the Company, any subsidiary or other affiliate).
CONVERSION. Each share of Class G Preferred Stock may be converted at any
time, or from time to time, after the Closing Date until the third anniversary
of the Closing Date. On the third anniversary of the Closing Date, any
outstanding shares of Class G Preferred Stock will automatically be converted.
Each share of Class G Preferred Stock is convertible into one share of Class H
Preferred Stock and shares of Class A Common Stock which, if all shares of Class
G Preferred Stock were fully converted, would represent approximately 1.87% of
the Company's then outstanding common stock, on a fully diluted basis.
REDEMPTION. The Class G Preferred Stock must be redeemed for its
liquidation value, plus Class G Accrued Dividends, within 90 days following the
vote of its holders following an initial public offering by the Company of its
common stock resulting in gross proceeds of at least $50.0 million, subject to
the legal availability of funds therefor and the terms of the Financing
Agreements.
CLASS H PREFERRED STOCK CERTIFICATE OF DESIGNATION. The certificate of
designation for the Class H Preferred Stock (the "Class H Preferred Stock
Certificate of Designation") provides for the following rights, including voting
rights, preferences and powers:
VOTING RIGHTS. Except as otherwise provided by law, the shares of Class H
Preferred Stock have no voting rights.
DIVIDENDS. Cumulative dividends on each share of the Class H Preferred
Stock accrue daily at the annual rate of 16% on the sum of $660.45 per share
liquidation value. All accumulated and unpaid dividends on the Class H Preferred
Stock (the "Class H Accrued Dividends") from the date of issuance, compounded
annually, are payable only upon the liquidation, dissolution or winding up of
the Company or on redemption. Dividends on the Class H Preferred Stock will
cease to accrue, and will not be payable, with respect to any period commencing
on, and from and after, the third anniversary of the issuance of the Class G
Preferred Stock. The Financing Agreements limit, and for the foreseeable future
effectively prohibit, the payment of cash dividends on the Class H Preferred
Stock.
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The Class H Preferred Stock Certificate of Designation prohibits the
declaration or payment of dividends on or redemption or purchase of any junior
securities (by the Company, any subsidiary or other affiliate).
CONVERSION. The Class H Preferred Stock is not convertible.
REDEMPTION. The Class H Preferred Stock must be redeemed following the vote
of its holders at any time after December 31, 2010 or upon completion of an
initial public offering by the Company of its common stock resulting in gross
proceeds of at least $50.0 million, subject to the legal availability of funds
therefor and the terms of the Financing Agreements, at 130% of its liquidation
preference, plus Class H Accrued Dividends.
WARRANTS
The purchasers of the Class F Preferred Stock also received warrants to
purchase shares of the Company's Class A Common Stock. The warrants are
exercisable at any time and from time to time during a two year period
commencing one year after issuance into a number of shares of Class A Common
Stock which, if all warrants were exercised, would represent a maximum of 2.24%
of the Company's then outstanding common stock on a fully diluted basis. The
initial exercise price of the warrants is $1.00 per share of Class A Common
Stock.
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FEDERAL INCOME TAX CONSIDERATIONS TO U.S. HOLDERS
The following summary describes the anticipated material U.S. federal income
tax consequences of the purchase, ownership and disposition of the Preferred
Stock and Exchange Debentures by U.S. Holders (as defined below). Except where
noted, it deals only with Preferred Stock and Exchange Debentures held as
capital assets within the meaning of Section 1221 of the Code and does not
address all aspects of the U.S. federal income tax consequences that may be
relevant to a particular investor or holders subject to special tax rules, such
as dealers in securities or currencies, financial institutions, tax-exempt
organizations, life insurance companies, persons holding Preferred Stock or
Exchange Debentures as a part of a hedging or conversion transaction or a
straddle, or U.S. Holders whose "functional currency" is not the U.S. dollar.
Furthermore, the summary is based upon the provisions of the Code and Treasury
Regulations, including the OID Regulations, rulings and judicial decisions
thereunder as of the date hereof. Such authorities may be repealed, revoked or
modified, possibly with retroactive effect, so as to result in U.S. federal
income tax consequences different from those discussed below.
Because the Company may pay dividends on the Preferred Stock by distributing
additional shares of Preferred Stock, compliance with U.S. federal withholding
tax rules would be difficult with respect to investors who are not U.S. Holders.
Accordingly, the Company will offer the Preferred Stock only to investors who
are U.S. Holders and the summary does not address the U.S. federal income tax
consequences to investors who are not U.S. Holders. THE COMPANY CONSIDERS THE
PREFERRED STOCK TO BE AN INAPPROPRIATE INVESTMENT FOR ANY PERSON WHO OR WHICH IS
NOT A U.S. HOLDER.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE PREFERRED STOCK AND EXCHANGE DEBENTURES.
CERTAIN DEFINITIONS
"AFR" means the applicable federal rate, as of the relevant time, determined
under Section 1274(d) of the Code and published monthly by the IRS.
"Code" means the U.S. Internal Revenue Code of 1986, as amended and in
effect as of the date hereof.
"IRS" means the U.S. Internal Revenue Service.
"OID" means original issue discount as defined and used in Part V of
Subchapter P of Chapter 1 of the Code (Sections 1271 through 1288) and the
Treasury Regulations thereunder.
"OID Debentures" means any Exchange Debentures issued with original issue
discount.
"OID Regulations" means any final, temporary and proposed Treasury
Regulations published or promulgated under the Code that address debt
obligations issued with OID.
"U.S. Holder" means a beneficial owner of the Preferred Stock or Exchange
Debentures, as applicable, that is a citizen or resident of the United States, a
corporation, limited liability company, partnership (unless Treasury Regulations
provide otherwise) or other entity created or organized in or under the laws of
the U.S. or any political subdivision thereof, an estate the income of which is
subject to U.S. federal income taxation regardless of its source or a trust if
both (i) a court within the U.S. is able to exercise primary supervision over
the administration of such trust and (ii) one or more U.S. persons have the
authority to control all substantial decisions of such trust.
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PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK
DISTRIBUTIONS ON THE PREFERRED STOCK
GENERAL. Distributions of cash or of additional shares of Preferred Stock
on the Preferred Stock will generally be treated as dividends to U.S. Holders,
taxable as ordinary income to the extent of the Company's current and
accumulated earnings and profits as determined under U.S. federal income tax
principles. The amount of a distribution will be either the amount of cash
distributed or, in the case of additional shares of Preferred Stock, the fair
market value of the Preferred Stock distributed on the date of the distribution.
Accordingly, with respect to a distribution of additional shares of Preferred
Stock that is treated as a dividend, the fair market value of the distributed
shares would be taxable currently as ordinary income to a U.S. Holder even
though the U.S. Holder has not received any cash with respect to such
distribution.
However, management of the Company has determined that the Company does not
presently have any current or accumulated earnings and profits and is unlikely
to have current or accumulated earnings and profits in the foreseeable future.
The actual amount of the Company's earnings and profits at any future time will
of course depend upon the actions and financial performance of the Company.
Therefore, assuming the Company will not have any current or accumulated
earnings and profits, a distribution on the Preferred Stock will be treated as a
nontaxable return of capital and will be applied against and reduce the adjusted
tax basis of the Preferred Stock in the hands of each U.S. Holder (but not below
zero), thus increasing the amount of any gain (or reducing the amount of any
loss) which would otherwise be recognized by the U.S. Holder upon the sale or
other taxable disposition of the Preferred Stock. The amount of any such
distribution which exceeds the adjusted tax basis of the Preferred Stock in the
hands of the U.S. Holder will be treated as capital gain and will be either
long-term or short-term capital gain depending on the U.S. Holder's holding
period for the Preferred Stock. The initial tax basis of additional Preferred
Stock distributed to a U.S. Holder will equal the fair market value of such
additional Preferred Stock at the time of distribution. Accordingly, in the case
of distributions of additional Preferred Stock on the Preferred Stock, any basis
reduction or gain recognition will be offset from an overall standpoint by a
corresponding amount of tax basis in the additional Preferred Stock distributed
to the U.S. Holder.
REDEMPTION PREMIUM. The Preferred Stock provides for both a mandatory and
an optional right of redemption by the Company. As the redemption price of the
Preferred Stock is expected to exceed its issue price (by more than a de minimis
amount), the excess, referred to as the "redemption premium," may be taxable as
a constructive distribution of additional Preferred Stock to the U.S. Holder on
the Preferred Stock over a certain period under a constant interest rate method
similar to that applicable to recognizing OID on the Exchange Debentures. See
the discussion of "--Original Issue Discount" under "Ownership and Disposition
of the Exchange Debentures." To the extent the Company has current or
accumulated earnings and profits for a taxable year so that the constructive
distribution attributable to such year is treated as a dividend, the amount of
the constructive distribution will generally be taxable currently as ordinary
income even though the U.S. Holder does not receive any actual distribution and
will increase the U.S. Holder's adjusted tax basis in the Preferred Stock. See
the above discussion of "--Distributions on the Preferred Stock."
Determined with reference to the OID Regulations, the issue price of the
Preferred Stock is equal to the first price to the public (excluding bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers) at which a substantial amount of
the Preferred Stock is sold for money, even if part of the issue is subsequently
sold at a different price. Similarly, the difference between redemption price
and issue price is considered de minimis if such amount is less than the product
of (i) one-quarter of one percent of the redemption price and (ii) the number of
complete years to maturity.
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To the extent the Company lacks current or accumulated earnings and profits
for a taxable year to which a constructive distribution relates, a holder should
not recognize taxable income or gain as a result of the constructive
distribution. Moreover, there should be no net effect on the holder's adjusted
tax basis of the Preferred Stock as a result of the constructive distribution if
the Company has no current or accumulated earnings and profits.
For purposes of determining the amount of the redemption premium, redemption
of the Preferred Stock will be deemed to occur at the mandatory redemption price
unless, based on all of the facts and circumstances, the optional redemption is
more likely than not to occur. Under a Regulatory "safe harbor" rule, the
Company's optional right to redeem the Preferred Stock will not be treated as
more likely than not to occur if (i) the Company and the U.S. Holder are not
related, (ii) there are no plans, arrangements or agreements that effectively
require or are intended to compel the Company to exercise the optional right to
redeem the Preferred Stock (disregarding, for this purpose, a separate mandatory
redemption) and (iii) exercise of the right to redeem will not reduce the yield
of the Preferred Stock. Based on the Treasury Regulations, the Company intends
to take the position that the existence of the Company's optional redemption
right does not result in a constructive distribution to the U.S. Holders, but
that the mandatory redemption obligation of the Company will control the timing
and the amount of the income a U.S. Holder of Preferred Stock will be required
to include in gross income as redemption premium.
Moreover, the Preferred Stock provides for a mandatory redemption at a
redemption price equal to the liquidation value of the Preferred Stock, plus
accrued and unpaid dividends. If at the time of issuance of the Preferred Stock,
there were no intention for dividends to be paid currently, the IRS could treat
the payment of such dividends on redemption as disguised additional redemption
premium subject to the constant yield rules discussed above. However, the
Company intends to pay all dividends currently on the Preferred Stock, either in
cash or, on or prior to January 15, 2003, in additional shares of Preferred
Stock. Thus, while the appropriate treatment of unpaid cumulative dividends has
not yet been addressed in Treasury Regulations and no assurance can be given as
to the outcome of such guidance, the Company intends to take the position that
the terms of the mandatory redemption should not include any accrued and unpaid
dividends in the stated redemption price nor should any such accrued and unpaid
dividends be treated as a constructive distribution to the U.S. Holders prior to
actually being paid.
Finally, in the event that additional Preferred Stock is distributed on the
Preferred Stock issued in this Offering and such additional Preferred Stock has
a fair market value at the time of distribution that is less than its redemption
price, the additional Preferred Stock will have a redemption premium that may be
taxable as a constructive distribution of additional stock to a U.S. Holder
(treated as a dividend to the extent of the Company's current and accumulated
earnings and profits) under the constant yield method over a period of time
commencing with the issuance of such additional Preferred Stock and ending with
the date on which the mandatory redemption is to occur. Such redemption premium
on the additional shares of Preferred Stock may differ from that attributable to
the Preferred Stock issued in this Offering. Therefore, any such additional
shares of Preferred Stock distributed may not be fungible with the shares issued
in this Offering.
DIVIDENDS-RECEIVED DEDUCTION. Subject to certain exceptions and
restrictions, corporate U.S. Holders generally will be entitled to a
dividends-received deduction equal to 70 percent of the amount of any
distribution on the Preferred Stock (whether payable in cash or additional
Preferred Stock) that is treated as a dividend. Distributions on the Preferred
Stock will not be eligible for the dividends-received deduction unless and until
the Company has current or accumulated earnings and profits at the time of the
distribution (i.e., the distribution is treated as a dividend).
In the event a distribution on the Preferred Stock is treated as a dividend,
application of the dividends-received deduction to the distribution nonetheless
may be restricted or may result in other U.S. federal tax consequences to the
corporate U.S. Holder. First, the dividends-received deduction is reduced or
eliminated for a corporate U.S. Holder which has indebtedness "directly
attributable" to its investment in the Preferred Stock or fails to meet special
holding period requirements. Second, if a distribution equals
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or exceeds five percent of a corporate U.S. Holder's adjusted tax basis in the
Preferred Stock, the distribution may constitute an "extraordinary dividend,"
requiring the corporate U.S. Holder to reduce its adjusted tax basis in the
Preferred Stock by the amount excluded from income as a result of the dividends-
received deduction. Finally, 70 percent of the amount excluded from income as a
result of the dividends-received deduction will be included in the computation
of "adjusted current earnings," potentially affecting a corporate U.S. Holder's
liability for alternative minimum tax.
SALE OR OTHER DISPOSITION OF THE PREFERRED STOCK
GENERAL. A U.S. Holder will generally recognize capital gain or loss upon
the sale or other taxable disposition of Preferred Stock based upon the
difference between the amount realized in such sale or other disposition, and
the Holder's adjusted tax basis in the Preferred Stock. A U.S. Holder's adjusted
tax basis in the Preferred Stock will equal the amount paid for such stock plus
the fair market value of any distributions of additional Preferred Stock and any
amount included in gross income as a constructive distribution or redemption
premium, and reduced by the amount of any distribution treated as a nontaxable
return of capital that reduced the adjusted tax basis of the Preferred Stock.
See the above discussion of "--Redemption Premium" and "--Distributions on the
Preferred Stock."
The capital gain or loss will be either long-term or short-term capital gain
depending on the U.S. Holder's holding period for the Preferred Stock at the
time of the sale or other disposition of the Preferred Stock. In the case of a
noncorporate U.S. Holder (including an individual), any capital gain will be
taxable at a preferential rate if the U.S. Holder's holding period for the
Preferred Stock exceeds one year. The deductibility of capital losses is subject
to limitations. Prospective investors should consult their own tax advisors
regarding the taxation of capital gains and capital losses recognized upon a
sale or other disposition of the Preferred Stock.
REDEMPTION OR EXCHANGE OF PREFERRED STOCK FOR EXCHANGE DEBENTURES
GENERAL. A redemption of the Preferred Stock for cash or an exchange of the
Preferred Stock for the Exchange Debentures will be treated, depending on the
facts and circumstances, as (i) a distribution on the Preferred Stock, or (ii) a
taxable exchange of the Preferred Stock. At the outset, any cash paid or
Exchange Debentures issued that are attributable to declared dividends will be
treated in the same manner as a distribution on the Preferred Stock. See the
above discussion of "--Distributions on the Preferred Stock."
A redemption or exchange of the Preferred Stock will be treated as a taxable
exchange of the Preferred Stock if the redemption or exchange results in either
(i) a complete termination, or (ii) a "meaningful reduction" of the U.S.
Holder's stock interest in the Company. For these purposes, a U.S. Holder is
deemed to own any shares of Company stock that are owned, or deemed owned, by
certain related persons and entities, as well as any shares that the Holder, or
a related person or entity, has the right to acquire by exercise of option. If
the redemption or exchange of the Preferred Stock does not result in a complete
termination or meaningful reduction of the U.S. Holder's stock interest in the
Company, the transaction will be treated as a distribution on the Preferred
Stock. See the above discussion of "--Distributions on the Preferred Stock." The
amount of the distribution will be measured by the amount of cash or the "issue
price" of the Exchange Debentures received by the U.S. Holder in consideration
for the Preferred Stock. To the extent the distribution is treated as a
dividend, it will be taxable as ordinary income and may have dividends-received
deduction, extraordinary dividend and/or alternative minimum tax consequences to
a corporate U.S. Holder. See the above discussion in "--Distributions on the
Preferred Stock."
If the redemption or exchange of the Preferred Stock results in a complete
termination or meaningful reduction of the U.S. Holder's stock interest in the
Company, the U.S. Holder will generally recognize capital gain or loss equal to
the difference between the amount realized by the U.S. Holder and the U.S.
Holder's adjusted tax basis in the Preferred Stock surrendered in the
transaction. The capital gain or
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loss will be either long-term or short-term capital gain depending on the U.S.
Holder's holding period for the Preferred Stock at the time of the sale or other
disposition of the Preferred Stock.
In the case of a noncorporate U.S. Holder (including an individual), any
capital gain will be taxable at a preferential rate if the U.S. Holder's holding
period for the Preferred Stock exceeds one year. The deductibility of capital
losses is subject to limitations.
The amount realized by a U.S. Holder will be (i) the amount of cash received
in redemption of the Preferred Stock (other than cash received with respect to
declared dividends), and (ii) an amount equal to the "issue price" of the
Exchange Debentures issued in exchange for the Preferred Stock (other than
Exchange Debentures issued with respect to declared dividends). Determination of
the "issue price" of the Exchange Debentures issued in exchange for the
Preferred Stock will depend on (i) whether the Preferred Stock or the Exchange
Debentures are traded on an established securities market within the meaning of
the OID Regulations during the 60 day period ending 30 days after the exchange
date, or (ii) if they are not so traded, the yield on the Exchange Debentures,
as of the exchange date, equals or exceeds the AFR. See the discussion of
"--Original Issue Discount" under "--Ownership and Disposition of the Exchange
Debentures." It cannot be determined at the present time whether the Preferred
Stock or the Exchange Debentures will be, at the relevant time, traded on an
established securities market within the meaning of the OID Regulations or
whether the yield on the Exchange Debentures will equal or exceed the AFR.
OWNERSHIP AND DISPOSITION OF THE EXCHANGE DEBENTURES
Depending upon a U.S. Holder's particular circumstances, the tax
consequences of holding Exchange Debentures may be less advantageous than the
tax consequences of holding Preferred Stock because, for example, payments of
interest on the Exchange Debentures will not be eligible for the
dividends-received deduction that may be available to corporate U.S. Holders
(subject to the Company having earnings and profits) and because, as discussed
below, the Exchange Debentures may be issued with OID.
The tax consequences of holding the Exchange Debentures will generally turn
on whether the Exchange Debentures are issued with OID. Exchange Debentures
issued within five years after issuance of the Preferred Stock in this Offering
likely will be OID Debentures, i.e., Exchange Debentures treated as having been
issued with OID. Exchange Debentures issued more than five years after issuance
of the Preferred Stock will not be issued with OID unless, as discussed below,
their stated redemption price at maturity exceeds their issue price.
ORIGINAL ISSUE DISCOUNT
GENERAL. The amount of OID, if any, on a debt instrument is the excess of
its "stated redemption price at maturity" over its "issue price" subject to a
statutorily defined de minimis exception. The issue price of a debt instrument
issued for cash is equal to the first price (excluding sales to bond houses and
brokers) at which a substantial amount of such debt instruments were sold. The
"stated redemption price at maturity" of a debt instrument is the sum of its
principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest" (defined generally as stated interest
that is unconditionally payable in cash or in property (other than the debt
instruments of the issuer), at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
Determination of the "issue price" of the Exchange Debentures issued in
exchange for the Preferred Stock will depend on whether, as of the exchange date
(i) the Preferred Stock or the Exchange Debentures are traded on an established
securities market within the meaning of the OID Regulations, or (ii) if they are
not so traded, the yield on the Exchange Debentures equals or exceeds the AFR.
If either the Exchange Debentures or the Preferred Stock are traded on an
established securities market during the 60 day period ending 30 days after the
exchange date, the issue price of the Exchange Debentures will equal the fair
market value of the traded property. If neither the Preferred Stock nor the
Exchange Debentures
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are traded on an established securities market, the issue price of the Exchange
Debentures will be the stated principal amount of the Exchange debentures if the
yield on the Exchange Debentures is equal to or greater that the AFR in effect
at the time the Exchange Debentures are issued. If the yield on the Exchange
Debentures is less than the AFR, their issue price will be equal to the present
value as of the issue date of all payments to be made on the Exchange
Debentures, discounted at the AFR. It cannot be determined at the present time
whether the Preferred Stock or the Exchange Debentures will be, at the relevant
time, traded on an established securities market within the meaning of the OID
Regulations or whether the yield on the Exchange Debentures will equal or exceed
the AFR.
PAYMENT OF INTEREST BY ISSUANCE OF ADDITIONAL EXCHANGE DEBENTURES.
The right to issue additional Exchange Debentures in lieu of paying cash
interest through January 15, 2003 is treated for purposes of the OID provisions
of the Code as an option to defer the interest payments on the Exchange
Debentures. Accordingly, none of the stated interest will be treated as
qualified stated interest unless under special rules for interest holidays the
amount of OID is treated as de minimis. Any additional Exchange Debentures
issued in lieu of cash will not be treated as debt instruments separate from the
Exchange Debentures upon which they were issued, but instead will be aggregated
with such Exchange Debentures for OID purposes.
The OID Regulations provide that in the case of a debt instrument which
provides the issuer with an unconditional option or options exercisable during
the term of the debt instrument which, if exercised, require payments to be made
on the debt instrument under an alternate payment schedule, the yield and
maturity of such debt instrument for purposes of calculating OID will be
determined by assuming the issuer will exercise, or will not exercise the option
in a manner that minimizes the yield on the debt instrument.
If the issue price of the Exchange Debentures is equal to their principal
amount, the yield to maturity of the Exchange Debentures, if the option to pay
interest with additional Exchange Debentures is exercised, will be no less than
the yield to maturity would be if the option were not exercised. Accordingly,
for purposes of calculating OID, it will be assumed that the Company will not
exercise the option because exercise of the option will not minimize the yield.
If the option were in fact subsequently exercised and additional Exchange
Debentures were issued by the Company in lieu of cash, such additional Exchange
Debentures would be aggregated with the Exchange Debentures upon which they were
issued, and OID would be recalculated for the remainder of the term of the
Exchange Debentures based upon a stated redemption price at maturity which
includes the amount of all payments due under the additional Exchange
Debentures. As a result of such exercise, U.S. Holders of Exchange Debentures
would include OID in income in advance of the receipt of cash, regardless of
such U.S. Holders' regular methods of accounting.
If the issue price of the Exchange Debentures is less than their principal
amount, the yield to maturity of the Exchange Debentures, if the option to pay
interest with additional Exchange Debentures is exercised, will be less than the
yield to maturity if the option is not exercised. Accordingly, for purposes of
calculating OID, it would be assumed that the Company will exercise the option
because to do so will minimize the yield. If the Company subsequently makes a
cash payment instead of exercising its option to issue an additional Exchange
Debenture, the cash payment made will be treated as a prepayment of the Exchange
Debentures, partially retiring such Exchange Debentures on a pro rata basis on
the date of such payment. Such retirement would be a taxable exchange to the
Holder of the Exchange Debenture.
If the Exchange Debentures are issued after January 15, 2003, the Company
will not have the option to pay interest with additional Exchange Debentures. In
such event, any Exchange Debenture will be issued with OID only to the extent
its principal amount exceeds its issue price by more than a de minimis amount
because (i) all interest payments on any Exchange Debenture issued will be
qualified stated interest, and (ii) the stated redemption price at maturity of
any Exchange Debenture will be equal to its principal amount.
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REPORTING PAYMENTS OF INTEREST AND OID ON THE EXCHANGE DEBENTURES
NON-OID EXCHANGE DEBENTURES. U.S. Holders of Exchange Debentures that are
not issued with OID will generally report the stated interest under the Exchange
Debentures as ordinary income under their regular method of tax accounting.
OID DEBENTURES. U.S. Holders of OID Debentures must include OID in gross
income for U.S. federal income tax purposes on an annual basis under a constant
yield accrual method, regardless of their method of accounting. As a result,
U.S. Holders will include OID in income in advance of the receipt of cash
attributable to that income. However, U.S. Holders of OID Debentures generally
will not be required to include separately in income cash payments received on
the OID Debentures, even if denominated as interest, to the extent such payments
do not constitute qualified stated interest (as defined above). The Company will
report to U.S. Holders of OID Debentures, on a timely basis, the reportable
amount of OID and interest income based on its understanding of applicable law.
The amount of OID includible in income by the initial U.S. Holder of an OID
Debenture is the sum of the "daily portions" of OID with respect to the OID
Debenture for each day during the taxable year or portion of the taxable year in
which such U.S. Holder held such OID Debenture ("accrued OID"). The daily
portion is determined by allocating to each day in any "accrual period" a pro
rata portion of the OID allocable to that accrual period. The "accrual period"
for an OID Debenture may be of any length and may vary in length over the term
of the OID Debenture, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs on the first day
or the final day of an accrual period. The amount of OID allocable to any
accrual period is an amount equal to the excess, if any, of (a) the product of
the OID Debenture's adjusted issue price at the beginning of such accrual period
and its yield to maturity (the discount rate which, when used in computing the
present value of all principal and interest payments to be made under the OID
Debenture, produces an amount equal to the OID Debenture's issue price) over (b)
the amount of any qualified stated interest allocable to the accrual period. OID
allocable to a final accrual period is the difference between the amount payable
at maturity (other than a payment of qualified stated interest) and the adjusted
issue price at the beginning of the final accrual period. The calculation of OID
for an initial short accrual period may be determined using any reasonable
method. The "adjusted issue price" of an OID Debenture at the beginning of any
accrual period is equal to its issue price increased by the accrued OID for each
prior accrual period (determined without regard to the amortization of any
acquisition premium or bond premium, as described below) and reduced by any
payment made on such OID Debenture (other than qualified stated interest) on or
before the first day of the accrual period.
Exchange Debentures may be redeemed prior to their stated maturity at the
option of the Company. For purposes of computing the yield of OID Debentures,
the Company will be deemed to exercise or not exercise its option to redeem the
OID Debentures in a manner that minimizes the yield on the OID Debentures. It is
not anticipated that the Company's ability to redeem prior to stated maturity
will affect the yield to maturity of such instrument.
In the event of a Change of Control, the Company will be required to offer
to repurchase all of the Exchange Debentures. The right of holders to require
repurchase upon a Change of Control will not affect the yield or maturity date
of the Exchange Debentures unless, based on all the facts and circumstances as
of the issue date, it is more likely than not that such an event giving rise to
the repurchase will occur. The Company does not intend to treat the Change of
Control provisions of the Exchange Debentures as affecting the computation of
the yield to maturity of any Exchange Debentures.
ELECTION TO REPORT INTEREST AS OID. U.S. Holders may elect to treat all
interest on any Exchange Debenture as OID and calculate the amount to be
included in gross income under the constant yield accrual method. For the
purposes of this election, interest includes stated interest, acquisition
discount, OID, de minimis OID, market discount, de minimis market discount and
unstated interest, as adjusted by
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any amortizable bond premium or acquisition premium. The election must be made
for the taxable year in which the U.S. Holder acquired the Exchange Debenture,
and may not be revoked without the consent of the IRS. U.S. Holders should
consult with their own tax advisors about the election to report interest on the
Exchange Debentures as OID using the constant yield method.
MARKET DISCOUNT ON RESALE OF EXCHANGE DEBENTURES
If a U.S. Holder acquires an Exchange Debenture (other than an OID
Debenture) for an amount less than its stated redemption price at maturity or,
in the case of an OID Debenture, for an amount that is less than its adjusted
issue price, the amount of the difference will be treated as "market discount"
for U.S. federal income tax purposes, unless such difference is less than a
specified de minimis amount. Under the market discount rules, a U.S. Holder will
be required to treat any principal payment on an Exchange Debenture, or any gain
on the sale, exchange, retirement or other disposition of an Exchange Debenture,
as ordinary income to the extent of the market discount which has not previously
been included in income and is treated as having accrued on such Exchange
Debenture at the time of such payment or disposition. In addition, the U.S.
Holder may be required to defer, until the maturity of the Exchange Debenture or
its earlier disposition in a taxable transaction, the deduction of all or a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Exchange Debenture.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Exchange Debenture,
unless the U.S. Holder elects to accrue on a constant yield method. A U.S.
Holder of an Exchange Debenture may elect to include market discount in income
currently as it accrues (on either a ratable or constant interest method), in
which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first day of the first taxable year to which the election applies and may not be
revoked without the consent of the IRS.
ACQUISITION PREMIUM
A U.S. Holder that purchases an Exchange Debenture for an amount that is
greater than its adjusted issue price but equal to or less than the sum of all
amounts payable on the Exchange Debenture after the purchase date, other than
qualified stated interest, will be considered to have purchased such Exchange
Debenture at an "acquisition premium." Under the acquisition premium rules, the
amount of OID, if any, which such U.S. Holder must include in its gross income
with respect to such Exchange Debenture for any taxable year will be reduced by
the portion of such acquisition premium properly allocable to such year.
AMORTIZABLE BOND PREMIUM
If immediately after the time the Preferred Stock is exchanged for Exchange
Debentures or immediately after the time a subsequent U.S. Holder acquires
Exchange Debentures, the U.S. Holder's tax basis in any such Exchange Debenture
exceeds the sum of all amounts payable on the Exchange Debenture after the
exchange date or purchase date, other than qualified stated interest, such
excess may constitute "amortizable bond premium" and such U.S. Holder will not
be required to include any OID in income.
A U.S. Holder generally may elect to amortize bond premium over the
remaining term of the Exchange Debenture on a constant yield method (subject to
special rules concerning early call provisions). The amount amortized in any
year will be treated as a reduction of the U.S. Holder's interest income from
the Exchange Debenture. Bond premium on an Exchange Debenture held by a U.S.
Holder that does not make such an election will decrease the gain or increase
the loss otherwise recognized on disposition of the Exchange Debenture. The
election to amortize bond premium on a constant yield method once made applies
to all debt obligations held or subsequently acquired by the electing U.S.
Holder on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
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REDEMPTION, SALE OR DISPOSITION OF EXCHANGE DEBENTURES
Upon the redemption, sale, exchange or retirement of an Exchange Debenture,
a U.S. Holder will recognize gain or loss equal to the difference between the
amount realized upon the redemption, sale, exchange or retirement (less any
accrued qualified stated interest, not previously taken into account, which will
be taxable as such) and the adjusted tax basis of the Exchange Debenture. The
adjusted tax basis of a U.S Holder who receives Exchange Debentures in exchange
for Preferred Stock will, in general, be equal to the issue price of such
Exchange Debentures, increased by OID and market discount previously included in
income by the U.S. Holder and reduced by any amortized premium and any cash
payments on the Exchange Debentures other than qualified stated interest.
Such gain or loss will be capital gain or loss and will be long-term capital
gain of loss if at the time or redemption, sale, exchange or retirement the
Exchange Debenture has been held for more than one year. The deduction of
capital losses is subject to certain limitations. Prospective investors should
consult their own tax advisors regarding the taxation consequences of capital
gains and losses recognized upon a disposition of the Exchange Debentures.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
If the yield-to-maturity on OID Debentures equals or exceeds the sum of (i)
the AFR in effect for the month in which the OID Debentures are issued, and (ii)
five percent, and the OID on such OID Debentures is "significant", the OID
Debentures will be considered "applicable high yield discount obligations"
("AHYDOs") under Section 163(i) of the Code. OID is significant if the aggregate
amount includible in gross income for periods before the close of any accrual
period ending more than five years after the issue date exceeds the sum of the
aggregate amount of interest to be paid before the close of such accrual period
plus the product of the issue price and the yield to maturity. If the OID
Debentures are AHYDOs, the Company will not be allowed to take a deduction for
OID accrued on the OID Debentures for U.S. federal income tax purposes until
such time as the Company actually pays such OID in cash or in other property
(other than stock or debt of the Company or certain related parties).
Moreover, if the yield-to-maturity on the OID Debenture exceeds the sum of
(i) the AFR, and (ii) six percent (such excess shall be referred to hereinafter
as the "Disqualified Yield"), the deduction for OID accrued on the OID
Debentures will be permanently disallowed (regardless of whether the Company
actually pays such OID in cash or in other property) for U.S. federal income tax
purposes to the extent such OID is attributable to the Disqualified Yield on the
OID Debentures ("Dividend-Equivalent Interest"). For purposes of the dividends
received deduction, such Dividend-Equivalent Interest will be treated as a
dividend to the extent it is deemed to have been paid out of the Company's
current or accumulated earnings and profits.
Because the amount of OID, if any, attributable to the Exchange Debentures
will be determined at the time such Exchange Debentures are issued, and the AFR
at such time is not predictable, it is impossible to determine at the present
time whether an OID Debenture will be treated as an AHYDO.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of dividends, principal, interest, OID, and premium and to the proceeds
of sales of Exchange Debentures and Preferred Stock made to U.S. Holders other
than certain exempt recipients (such as corporations). A 31 percent backup
withholding tax will apply to such payments if the U.S. Holder fails to provide
a taxpayer identification number or certification of foreign or other exempt
status or fails to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against the U.S. Holder's U.S. federal income tax liability
provided the required information is timely furnished to the IRS.
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THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF THE PREFERRED STOCK AND
EXCHANGE DEBENTURES IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX
SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES THAT WOULD RESULT FROM THEIR PURCHASE, OWNERSHIP AND DISPOSITION OF
THE PREFERRED STOCK AND EXCHANGE DEBENTURES, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
There has previously been only a limited secondary market and no public
market for the Old Shares. The Company does not intend to apply for the listing
of the Shares on a national securities exchange or for their quotation through
The Nasdaq Stock Market. The Preferred Stock is eligible for trading in the
PORTAL market. The Company has been advised by the Initial Purchaser that the
Initial Purchaser currently intends to make a market in the Preferred Stock;
however, the Initial Purchaser is not obligated to do so and any market making
may be discontinued by any Placement Agent at any time. In addition, such market
making activity may be limited during the Exchange Offer. Therefore, there can
be no assurance that an active market for the Old Shares or the New Shares will
develop. If a trading market does not develop or is not maintained, holders of
Shares may experience difficulty in reselling Shares. If a trading market
develops for the Preferred Stock, future trading prices of such securities will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on such factors, such securities may trade at a discount
from their offering price.
BROKER-DEALERS WHO DID NOT ACQUIRE OLD SHARES AS A RESULT OF MARKET MAKING
ACTIVITIES OR TRADING ACTIVITIES MAY NOT PARTICIPATE IN THE EXCHANGE OFFER.
With respect to resale of New Shares, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third parties,
the Company believes that a holder (other than a person that is an affiliate of
the Company within the meaning of Rule 405 under the Securities Act or a
"broker" or "dealer" registered under the Exchange Act) who exchanges Old Shares
for New Shares in the ordinary course of business and who is not participating,
does not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the New Shares, will be allowed to
resell the New Shares to the public without further registration under the
Securities Act and without delivering to the purchasers of the New Shares a
prospectus that satisfies the requirements of Section 10 thereof. However, if
any holder acquires New Shares in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Shares, such holder
cannot rely on the position of the staff of the Commission enunciated in EXXON
CAPITAL HOLDINGS CORPORATION (available May 13, 1988) or similar no-action
letters or any similar interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available.
As contemplated by the no-action letters mentioned above and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Company in the Letter of Transmittal that (i) the
New Shares are to be acquired by the holder in the ordinary course of business,
(ii) the holder is not engaging and does not intend to engage in the
distribution of the New Shares, and (iii) the holder acknowledges that, if such
holder participates in the Exchange Offer for the purpose of distributing the
New Shares, such holder must comply with the registration and prospectus
delivery requirements of the Securities Act and cannot rely on the above
no-action letters.
Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Old Shares that were acquired for its own account as
a result of market-making activities or other trading activities (other than Old
Shares acquired directly from the Company or an affiliate of the Company) may
exchange such Old Shares for New Shares pursuant to the Exchange Offer; however,
such Broker-Dealer may be deemed an underwriter within the meaning of the
Securities Act and, therefore, must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the New
Shares received by it in the Exchange Offer, which prospectus delivery
requirement may be satisfied by the delivery by such Broker-Dealer of this
Prospectus. The Company has agreed to cause the Exchange Offer Registration
Statement, of which this Prospectus is a part, to remain continuously effective
for a period of 180 days, if required, from the Exchange Date, and to make this
Prospectus, as amended or supplemented, available to any such Broker-Dealer for
use in connection with resales. Any Broker-Dealer participating in
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the Exchange Offer will be required to acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of New Shares received by it in the Exchange Offer. The delivery by a
Broker-Dealer of a prospectus in connection with resales of New Shares shall not
be deemed to be an admission by such Broker-Dealer that it is an underwriter
within the meaning of the Securities Act. The Company will not receive any
proceeds from any sale of New Shares by a Broker-Dealer.
New Shares received by Broker-Dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Shares or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Broker-Dealer and/or the
purchasers of any such New Shares.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Senior Preferred
Stock are being passed upon for the Company by McAfee & Taft A Professional
Corporation, Oklahoma City, Oklahoma.
EXPERTS
Arthur Andersen LLP, independent public accountants, have audited the
following financial statements included in this Prospectus and elsewhere in the
Registration Statement as indicated in their reports with respect thereto as of
the dates indicated:
- The consolidated balance sheets of Dobson Communications Corporation and
subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997.
- The balance sheets of Gila River Cellular General Partnership as of
December 31, 1995 and 1996, and the related statements of operations,
changes in partners' capital and cash flows for each of the three years in
the period ended December 31, 1996.
We have included the above financial statements in reliance upon Arthur
Andersen LLP's authority as experts in giving such reports.
Ernst & Young LLP, independent auditors, have audited the following
financial statements included in this Prospectus and elsewhere in the
Registration Statement as set forth in their reports also included herein. The
financial statements are included herein in reliance on their reports, given on
their authority as experts in accounting and auditing.
- The combined statements of assets and liabilities of The Cellular
Telephone Business of Selected Systems of Horizon Cellular Telephone
Company, L.P. as of December 31, 1995 and 1996, and the related combined
statements of operations and net assets and of cash flows for each of the
years ended December 31, 1994, 1995 and 1996.
- The consolidated balance sheets of Sygnet Wireless, Inc. as of December
31, 1996 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1997.
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Holliday, Lemons, Thomas & Cox, P.C. (now Holliday, Lemons & Cox, P.C.),
independent public accountants, has audited the following financial statements
appearing in this Prospectus and elsewhere in the Registration Statement, as
indicated in their report appearing herein with respect thereto:
- The balance sheets of Cellular 2000 (A Partnership) as of December 31,
1996 and 1997, and the related statements of income, changes in partners'
equity and cash flows for the years ended December 31, 1996 and 1997.
We have included the above financial statements in reliance of the report of
Holliday, Lemons, Thomas & Cox, P.C., given upon its authority as experts in
accounting and auditing.
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CERTAIN TERMS
1997 ACQUISITIONS--The West Maryland Acquisition and the Arizona 5
Acquisition.
1998 ACQUISITION--The California 4 Acquisition.
1997 FINANCINGS--The issuance and sale of the our Senior Notes, and the
establishment of and fundings under the DOC Facility to finance the 1997
Acquisitions.
1998 FINANCINGS--The issuance and sale of the Senior Preferred Stock to
finance the 1998 Acquisition and repay a portion of the outstanding indebtedness
under the DOC Facility and the establishment of the DCOC Facility.
1997 TRANSACTIONS--The 1997 Acquisitions and the 1997 Financings.
1998 TRANSACTIONS--The 1998 Acquisition, the 1998 Financings, the Sygnet
Acquisition and the Sygnet Financing.
ACQUISITIONS--The 1997 Acquisitions, the 1998 Acquisition and the Sygnet
Acquisition.
AIRTOUCH--AirTouch Communications, Inc. and its affiliates.
ALLEGIANCE TELECOM--Allegiance Telecom, Inc.
ALLTEL--ALLTEL Corporation and its affiliates.
ARIZONA 5 ACQUISITION; ARIZONA 5 PARTNERSHIP; ARIZONA 5--Our acquisition of
a 75% interest in the partnership (the "Arizona 5 Partnership") which owns the
FCC license for and certain assets related to the system for Arizona 5 RSA
("Arizona 5"), completed on October 1, 1997.
AT&T--AT&T Corp.
AT&T WIRELESS--AT&T Wireless Services, Inc. and its affiliates.
ATTI--Associated Telecommunications and Technologies, Inc., an affiliate of
Dobson Communications Corporation.
BAM--Bell Atlantic Mobile.
BELL ATLANTIC--Bell Atlantic Corporation.
BELLSOUTH MOBILITY--BellSouth Mobility, Inc.
BTA--Basic Trading Area, an FCC-designated region for purposes of PCS
regulation.
CALIFORNIA 4 ACQUISITION; CALIFORNIA 4 PARTNERSHIP; CALIFORNIA 4--Our
acquisition of the outstanding stock of two corporations that own all interests
in the partnership ("California 4 Partnership") that owns the FCC license for
and assets related to California 4 RSA ("California 4"), completed on April 1,
1998.
CDMA--A digital technology that uses code division multiple access.
CELL--The service area of an individual transmitter located in a cellular
system.
CHILDS--J.W. Childs Associates, L.P., a Delaware limited partnership.
CHURN--The number of cellular subscriber cancellations per month as a
percentage of the total cellular subscribers at the end of such period. Churn is
stated as the average monthly churn rate for the period.
CMT--CMT Partners, a partnership between AT&T Wireless and AirTouch.
CREDIT FACILITIES--The Existing Credit Facilities and the New Credit
Facilities.
191
<PAGE>
DCOC--Dobson Cellular Operating Company, a wholly-owned subsidiary of Dobson
Communications Corporation.
DCOC FACILITY--A senior secured revolving credit facility of DCOC
established pursuant to a credit agreement among DCOC, NationsBank, N.A. and
certain other lenders.
DOBSON PARTNERSHIP--Dobson CC Limited Partnership, an Oklahoma limited
partnership. Everett R. Dobson is the president and sole director and
shareholder of RLD, Inc., the general partner of the partnership, and members of
his family and trusts established for certain of his family members are limited
partners.
DOBSON SENIOR NOTES--The 11 3/4% Senior Notes due 2007 issued by Dobson
Communications Corporation.
DOBSON/SYGNET--Dobson/Sygnet Communications Company, a wholly owned
subsidiary Dobson Communications Corporation.
DOBSON/SYGNET NOTES--The 12 1/4% Senior Notes due 2008 to be issued by
Dobson/Sygnet.
DOBSON/SYGNET OPERATING--Dobson/Sygnet Operating Company, a wholly owned
subsidiary of Dobson/ Sygnet.
DOBSON TOWER--Dobson Tower Company, a wholly owned subsidiary of Dobson
Communications Corporation.
DOC--Dobson Operating Company, a wholly owned subsidiary of Dobson
Communications Corporation.
DOC FACILITY--A senior secured bank credit facility of DOC established
pursuant to a credit agreement among DOC, NationsBank, N.A. and certain other
lenders.
DTC--Depository Trust Company.
EAST MARYLAND ACQUISITION; EAST MARYLAND--Our acquisition of the FCC license
for and assets related to Maryland 2 RSA ("East Maryland") completed on March 3,
1997.
ENID CELLULAR--Enid MSA Partnership d/b/a Enid Cellular.
EQUITY INVESTMENTS--Equity investments in Dobson Communications Corporation
aggregating $145.0 million to be made by the Dobson Partnership, Childs and
certain of Sygnet's existing stockholders.
ERICSSON--Telefonaktiebolaget LM Ericsson and its affiliates.
ERIE ACQUISITION--Sygnet's 1995 acquisition of Erie Cellular Telephone
Company which owned the FCC license and the related system for the Erie,
Pennsylvania MSA.
EXISTING CREDIT FACILITIES--The DOC Facility and the DCOC Facility.
FCC--Federal Communications Corporation.
FLEET INVESTORS--Collectively, Fleet Venture Resources, Inc., Fleet Equity
Partners VI, L.P. and Kennedy Plaza Partners.
FOOTPRINT--Refers to the total system coverage area served under an FCC
license by a given licensee.
FINANCING AGREEMENTS--The Senior Note Indenture; the certificates of
designation governing Senior Preferred Stock and the Preferred Stock; and the
documents and instruments governing and evidencing the Credit Facilities.
GTE--GTE Corporation and its affiliates.
192
<PAGE>
HORIZON ACQUISITION--Sygnet's 1996 acquisition of the FCC licenses and
related systems for Pennsylvania 1 RSA, Pennsylvania 2 RSA, Pennsylvania 6 RSA,
Pennsylvania 7 RSA and New York 3 RSA.
HOUSTON CELLULAR--A partnership between AT&T Wireless and BellSouth
Mobility.
INITIAL PURCHASER--NationsBanc Montgomery Securities LLC.
ITDS--International Telecommunications Data Service.
LOGIX--Logix Communications Enterprises, Inc., a wholly owned subsidiary of
Dobson Communnications Corporation.
MARYLAND 1 ACQUISITION; MARYLAND 1--Our acquisition of the FCC license for,
and certain assets related to, Maryland 1 RSA ("Maryland 1").
MOTOROLA--Motorola, Inc.
MSA--Metropolitan Statistical Area, an FCC-designated cellular regulatory
region.
MTA--Major Trading Area, an FCC-designated region for purposes of PCS
regulation.
NACN--The North American Cellular Network.
NATIONSBANK--NationsBank, N.A.
NET POPS--The estimated population with respect to a given service area
mulitplied by the percentage interest that we own in the license for, or the
entity licensed, in such service area.
NEW CREDIT FACILITIES--A $430.0 million senior secured bank facility
consisting of a $50.0 million reducing revolving credit facility and $380.0
million of term loan facilities provided by banks led by NationsBank, N.A.
NORTHERN TELECOM--Northern Telecom, Inc.
OCC--Oklahoma Corporation Commission.
OHIO 2 ACQUISITION; OHIO 2--Our acquisition on September 2, 1998 of the FCC
license for, and certain assets related to, Ohio 2 RSA ("Ohio 2").
OKLAHOMA TELECOM ACT--Oklahoma Telecommunications Act of 1997.
OTHER PREFERRED STOCK--Our Class A Preferred Stock, Class D Preferred Stock,
Class E Preferred Stock, Class F Preferred Stock, Class G Preferred Stock and
Class H Preferred Stock.
PCS--Personal Communications Services.
PENNSYLVANIA 2 ACQUISITION; PENNSYLVANIA 2--Sygnet's acquisition of the FCC
license for, and certain assets related to, Pennsylvania 2 RSA ("Pennsylvania
2").
POPS--The estimated population of an MSA or RSA, as derived from the KAGAN
CELLULAR TELEPHONE ATLAS for 1998.
RECENT AND PENDING ACQUISITIONS--The Sygnet Acquisition, the Texas 10
Acquisition, the Maryland 1 Acquisition and the Ohio 2 Acquisition.
REGSISTRATION RIGHTS AGREEMENT--The Registration Rights Agreement dated
December 23, 1998 between NationsBanc Montgomery Securities LLC and Dobson
Communications Corporation.
RESALE--Resale by a provider of telecommunications services (such as a local
exchange carrier) of such services to other providers or carriers on a wholesale
or a retail basis.
RSA--Rural Service Area, an FCC-designated cellular regulatory region.
193
<PAGE>
SBC--SBC Communications, Inc.
SENIOR EXCHANGE DEBENTURES--The 12 1/4% Senior Subordinated Debentures due
2008 which may be issued by us.
SENIOR NOTES--Our outstanding 11 3/4% Senior Notes due 2007 issued by us on
February 28, 1997.
SENIOR NOTE INDENTURE--The indenture dated as of February 28, 1997 between
Dobson Communications Corporation and United States Trust Company of New York,
governing the Senior Notes.
SENIOR PREFERRED STOCK--Our outstanding 12 1/4% Senior Exchangeable
Preferred Stock Mandatorily Redeemable 2008 originally issued on January 22,
1998 and additional shares issued to pay dividends thereon.
SPRINT--Sprint Corporation and affiliated companies.
SWBM--Southwestern Bell Mobile Systems, Inc.
SWBT--Southwestern Bell Telephone Company.
SYGNET--Sygnet Wireless, Inc. and its wholly-owned subsidiary, Sygnet
Communications, Inc.
SYGNET ACQUISITION--The merger of Dobson/Sygnet Operating with and into
Sygnet Wireless, Inc.
SYGNET FINANCING--The sale of the Old Shares, the Equity Investments, the
issuance and sale of the Dobson/Sygnet Notes, the establishment of and funding
under the New Credit Facilities, the repayment of Sygnet's credit facility, and
the purchase of Sygnet Notes in the Sygnet Tender Offer.
SYGNET NOTES--Sygnet's 11 1/2% Senior Notes due 2006.
SYGNET TENDER OFFER--Sygnet's offer to purchase all outstanding Sygnet
Notes.
SYSTEM--An FCC-licensed cellular telephone system.
TELECOMMUNICATIONS ACT--The Telecommunications Act of 1996.
TEXAS 10 ACQUISITION; TEXAS 10--Our acquisition on December 2, 1998 of the
FCC license for, and certain assets related to, the system for Texas 10 RSA
("Texas 10").
TDMA--A digital technology that uses time division multiple access.
TRANSACTIONS--The 1997 Transactions and the 1998 Transactions.
U.S. CELLULAR--United States Cellular Corporation.
US WEST--US WEST, Inc. and its affiliated companies.
VANGUARD--Vanguard Cellular Systems, Inc.
VYVX--Vyvx, Inc.
WEST MARYLAND ACQUISITION; WEST MARYLAND PROPERTIES--Our acquisition of the
FCC licenses for and assets related to the Cumberland, Maryland MSA, Hagerstown,
Maryland MSA and Pennsylvania 10 West RSA (the "West Maryland Properties")
completed on February 28, 1997 and March 3, 1997.
WESTERN WIRELESS--Western Wireless Corporation.
WORLDCOM--MCI WorldCom, Inc.
194
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Report of independent public accountants....................................................................... F-2
Consolidated balance sheets as of December 31, 1996 and 1997................................................... F-3
Consolidated statements of operations for the years ended December 31, 1995, 1996
and 1997..................................................................................................... F-4
Consolidated statements of stockholders' equity for the years ended December 31, 1995, 1996 and 1997........... F-5
Consolidated statements of cash flows for the years ended December 31, 1995, 1996
and 1997..................................................................................................... F-6
Notes to consolidated financial statements..................................................................... F-8
Condensed consolidated balance sheets as of December 31, 1997 and September 30, 1998 (unaudited)............... F-26
Condensed consolidated statements of operations for the nine months ended September 30, 1997 and 1998
(unaudited).................................................................................................. F-28
Condensed consolidated statements of cash flows for the nine months ended September 30, 1997 and 1998
(unaudited).................................................................................................. F-29
Notes to condensed consolidated financial statements (unaudited)............................................... F-30
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF HORIZON CELLULAR TELEPHONE COMPANY, L.P.
Report of independent auditors................................................................................. F-37
Combined statements of assets and liabilities as of December 31, 1995 and 1996................................. F-38
Combined statements of operations and net assets for the years ended December 31, 1994, 1995 and 1996.......... F-39
Combined statements of cash flows for the years ended December 31, 1994, 1995 and 1996......................... F-40
Notes to combined financial statements......................................................................... F-41
GILA RIVER CELLULAR GENERAL PARTNERSHIP
Report of independent public accountants....................................................................... F-46
Balance sheets as of December 31, 1995 and 1996................................................................ F-47
Statements of operations for the years ended December 31, 1994, 1995 and 1996.................................. F-48
Statements of changes in partners' capital for the years ended December 31, 1994, 1995 and 1996................ F-45
Statements of cash flows for the years ended December 31, 1994, 1995 and 1996.................................. F-50
Notes to financial statements.................................................................................. F-51
Balance sheet as of September 30, 1997 (unaudited)............................................................. F-54
Statements of operations for the nine months ended September 30, 1996 and 1997 (unaudited)..................... F-55
Statements of changes in partners' capital for the year ended December 31, 1996 and the nine months ended
September 30, 1997 (unaudited)............................................................................... F-56
Statements of cash flows for the nine months ended September 30, 1996 and 1997 (unaudited)..................... F-57
Notes to financial statements (unaudited)...................................................................... F-58
CELLULAR 2000 (A PARTNERSHIP)
Report of independent auditors................................................................................. F-59
Balance sheets as of December 31, 1996 and 1997................................................................ F-60
Statements of income for the years ended December 31, 1996 and 1997............................................ F-61
Statements of changes in partners' equity for the years ended December 31, 1996 and 1997....................... F-62
Statements of cash flows for the years ended December 31, 1996 and 1997........................................ F-63
Notes to financial statements.................................................................................. F-64
Balance sheets as of December 31, 1997 and March 31, 1998 (unaudited).......................................... F-72
Statements of income for the three months ended March 31, 1997 and 1998 (unaudited)............................ F-73
Statements of cash flows for the three months ended March 31, 1997 and 1998 (unaudited)........................ F-75
Notes to financial statements (unaudited)...................................................................... F-76
SYGNET WIRELESS, INC.
Report of independent auditors................................................................................. F-83
Consolidated balance sheets as of December 31, 1996 and 1997................................................... F-84
Consolidated statements of operations for the years ended December 31, 1995, 1996 and 1997..................... F-85
Consolidated statements of shareholders' equity (deficit) for the years ended December 31, 1995, 1996 and
1997......................................................................................................... F-86
Consolidated statements of cash flows for the years ended December 31, 1995, 1996 and 1997..................... F-87
Notes to consolidated financial statements..................................................................... F-88
Consolidated balance sheets as of December 31, 1997 and September 30, 1998 (unaudited)......................... F-98
Consolidated statements of operations for the nine months ended September 30, 1997 and 1998 (unaudited)........ F-99
Consolidated statements of cash flows for the nine months ended September 30, 1997 and 1998 (unaudited)........ F-100
Notes to consolidated financial statements (unaudited)......................................................... F-101
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dobson Communications Corporation:
We have audited the accompanying consolidated balance sheets of Dobson
Communications Corporation (an Oklahoma corporation) and subsidiaries as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dobson
Communications Corporation and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
March 26, 1998 (except with
respect to the matters discussed
in Note 15, as to which the date
is September 30, 1998)
F-2
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 980,571 $ 2,752,399
Accounts receivable--
Due from customers, net of allowance for doubtful accounts of $325,619 and $632,661
in 1996 and 1997, respectively.................................................... 4,529,768 14,003,688
Affiliates......................................................................... 1,704,033 633,146
Restricted cash and investments...................................................... -- 17,561,231
Inventory............................................................................ 895,204 1,229,420
Deposits............................................................................. 6,350,000 --
Income taxes receivable.............................................................. 1,133,063 845,000
Prepaid expenses and other........................................................... 45,461 1,539,683
Deferred income taxes................................................................ 390,553 214,000
----------- -----------
Total current assets............................................................. 16,028,653 38,778,567
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net..................................................... 26,794,365 52,373,866
----------- -----------
OTHER ASSETS:
Receivables--Affiliates.............................................................. 721,718 529,107
Notes receivable--Affiliates......................................................... 15,278,071 5,852,282
Notes receivable..................................................................... 41,673 --
Restricted investments............................................................... -- 9,216,202
Cellular license acquisition costs, net of accumulated amortization of $3,286,104 and
$13,814,229 in 1996 and 1997, respectively......................................... 23,465,128 206,694,474
Deferred costs, net of accumulated amortization of $1,818,736 and $2,628,777 in 1996
and 1997, respectively............................................................. 3,438,559 9,884,308
Other intangibles, net of accumulated amortization of $851,107 in 1997............... -- 9,328,031
Investments in unconsolidated subsidiaries and other................................. 590,910 6,911,002
Deferred tax asset................................................................... 719,748 --
Net assets of discontinued operations................................................ 8,297,100 20,077,167
Total other assets............................................................... 52,552,907 268,492,573
----------- -----------
Total assets..................................................................... $95,375,925 $359,645,006
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 3,051,571 $11,708,420
Accrued expenses..................................................................... 1,079,321 7,641,021
Deferred revenue and customer deposits............................................... 605,712 1,979,508
Accrued dividends payable............................................................ 732,391 1,595,238
----------- -----------
Total current liabilities........................................................ 5,468,995 22,924,187
----------- -----------
PAYABLES--AFFILIATES................................................................... 11,514,356 8,206,935
LONG-TERM DEBT, net of current portion................................................. 75,750,000 335,570,059
DEFERRED CREDITS....................................................................... -- 1,039,000
MINORITY INTERESTS..................................................................... 2,444,176 16,954,165
COMMITMENTS (Note 12)
CLASS B CONVERTIBLE PREFERRED STOCK.................................................... 10,000,000 10,000,000
CLASS C PREFERRED STOCK................................................................ -- 1,623,329
STOCKHOLDERS' EQUITY:
Class A preferred stock.............................................................. -- 100,000
Class A common stock, $1 par value, 1,000,000 shares authorized and 473,152 issued
and outstanding in 1996 and 1997................................................... 473,152 473,152
Paid-in capital...................................................................... 5,508,285 5,508,285
Retained deficit..................................................................... (15,783,039) (42,754,106)
----------- -----------
Total stockholders' equity....................................................... (9,801,602) (36,672,669)
----------- -----------
Total liabilities and stockholders' equity....................................... $95,375,925 $359,645,006
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
OPERATING REVENUE:
Service revenue......................................................... $13,948,966 $17,593,317 $38,410,263
Roaming revenue......................................................... 4,369,476 7,852,532 26,262,370
Equipment sales......................................................... 671,349 661,632 1,455,088
Other................................................................... 693,411 831,802 586,206
----------- ---------- -----------
Total operating revenue............................................... 19,683,202 26,939,283 66,713,927
----------- ---------- -----------
OPERATING EXPENSES:
Cost of service......................................................... 4,653,969 6,118,734 16,430,603
Cost of equipment....................................................... 2,012,871 2,571,531 4,045,500
Marketing and selling................................................... 3,102,766 4,462,227 10,669,485
General and administrative.............................................. 3,035,562 3,901,631 11,555,355
Depreciation and amortization........................................... 2,528,747 5,241,446 16,797,780
----------- ---------- -----------
Total operating expenses.............................................. 15,333,915 22,295,569 59,498,723
----------- ---------- -----------
OPERATING INCOME.......................................................... 4,349,287 4,643,714 7,215,204
INTEREST EXPENSE.......................................................... (1,853,426) (4,283,482) (27,639,739)
OTHER INCOME (EXPENSE), net............................................... (209,983) (1,502,776) 2,776,730
----------- ---------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES, INCOME
TAXES AND EXTRAORDINARY ITEMS........................................... 2,285,878 (1,142,544) (17,647,805)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES.............................. (1,334,155) (675,098) (1,693,372)
----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEMS..................................................... 951,723 (1,817,642) (19,341,177)
INCOME TAX (PROVISION) BENEFIT............................................ (347,086) 593,307 3,624,610
----------- ---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................................. 604,637 (1,224,335) (15,716,567)
INCOME FROM DISCONTINUED OPERATIONS, net of income tax expense of $391,149
in 1995, $182,512 in 1996 and $470,170 in 1997.......................... 499,543 331,058 332,141
----------- ---------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS.................................. 1,104,180 (893,277) (15,384,426)
EXTRAORDINARY EXPENSE, net of income tax expense of $323,205 in 1996 and
$827,210 in 1997 (Note 4)............................................... -- (527,334) (1,349,659)
----------- ---------- -----------
NET INCOME (LOSS)......................................................... 1,104,180 (1,420,611) (16,734,085)
DIVIDENDS ON PREFERRED STOCK.............................................. (591,300) (849,137) (2,603,362)
----------- ---------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS....................... $ 512,880 $(2,269,748) $(19,337,447)
----------- ---------- -----------
----------- ---------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE
Basic earnings per share
Before discontinued operations and extraordinary expense.............. .02 (4.38) (38.72)
Discontinued operations............................................... 1.06 .70 .70
Extraordinary expense................................................. -- (1.12) (2.85)
----------- ---------- -----------
BASIC EARNINGS (LOSS)..................................................... $ 1.08 $ (4.80) $ (40.87)
----------- ---------- -----------
----------- ---------- -----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......................... $ 473,152 $ 473,152 $ 473,152
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B STOCK OWNED BY
PREFERRED STOCK COMMON STOCK COMMON STOCK SUBSIDIARY
-------------------- -------------------- ------------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994.......... -- $ -- 300 $ 1,000 1,000 $ 1,000 1,000 $ (1,000) $5,980,437
Net income............... -- -- -- -- -- -- -- -- --
Cash dividends declared
on preferred stock..... -- -- -- -- -- -- -- -- --
Cash dividends declared
on common stock........ -- -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
DECEMBER 31, 1995.......... -- -- 300 1,000 1,000 1,000 1,000 (1,000) 5,980,437
Net loss................. -- -- -- -- -- -- -- -- --
Recapitalization (Note
6)..................... -- -- 472,852 472,152 (1,000) (1,000) (1,000) 1,000 (472,152)
Cash dividends declared
on preferred stock..... -- -- -- -- -- -- -- -- --
Cash dividends declared
on common stock........ -- -- -- -- -- -- -- -- --
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
DECEMBER 31, 1996.......... -- -- 473,152 473,152 -- -- -- -- 5,508,285
Net loss................. -- -- -- -- -- -- -- -- --
Cash dividends declared
on preferred stock..... -- -- -- -- -- -- -- -- --
Cash dividends declared
on common stock........ -- -- -- -- -- -- -- -- --
Preferred stock
dividend............... -- -- -- -- -- -- -- -- --
Reorganization........... 100,000 100,000 -- -- -- -- 100,000 (100,000) --
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
DECEMBER 31, 1997.......... 100,000 $ 100,000 473,152 $ 473,152 -- $ -- 100,000 $(100,000) $5,508,285
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
--------- --------- --------- --------- ----------- ----------- --------- --------- ---------
<CAPTION>
TREASURY RETAINED
STOCK, AT EARNINGS
COST (DEFICIT)
----------- -----------
<S> <C> <C>
DECEMBER 31, 1994.......... $(11,913,000) $ (892,022)
Net income............... -- 1,104,180
Cash dividends declared
on preferred stock..... -- (591,300)
Cash dividends declared
on common stock........ -- (660,858)
----------- -----------
DECEMBER 31, 1995.......... (11,913,000) (1,040,000)
Net loss................. -- (1,420,611)
Recapitalization (Note
6)..................... 11,913,000 (11,913,000)
Cash dividends declared
on preferred stock..... -- (849,137)
Cash dividends declared
on common stock........ -- (560,291)
----------- -----------
DECEMBER 31, 1996.......... -- (15,783,039)
Net loss................. -- (16,734,085)
Cash dividends declared
on preferred stock..... -- (980,033)
Cash dividends declared
on common stock........ -- (7,633,620)
Preferred stock
dividend............... -- (1,623,329)
Reorganization........... -- --
----------- -----------
DECEMBER 31, 1997.......... $ -- $(42,754,106)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 1,104,180 $ (1,420,611) $ (16,734,085)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization............................... 6,652,792 9,720,379 21,729,095
Amortization of bond premium and financing cost............. -- -- 1,663,818
Deferred income taxes and investment tax credits, net....... 277,882 (361,003) (4,072,494)
Other deferred credits...................................... (1,450) -- --
Loss on disposition of assets, net.......................... -- 1,799,570 205,694
Extraordinary loss on financing cost........................ -- 850,539 2,527,655
Minority interests in income of subsidiaries................ 1,334,155 675,098 1,693,372
Equity in losses (income) of unconsolidated partnerships.... 98,288 (21,576) (222,348)
Changes in current assets and liabilities--
Accounts receivable......................................... (1,814,510) (360,480) (7,017,005)
Inventory................................................... 88,862 (540,295) (267,292)
Income taxes receivable..................................... 274,207 (1,133,063) 288,063
Prepaid expenses and other.................................. 257,904 90,684 (2,070,762)
Accounts payable............................................ (132,794) 1,904,193 8,121,481
Accrued expenses............................................ 403,132 283,650 5,616,066
Deferred revenue............................................ 74,426 79,166 636,135
Customer deposits........................................... 16,291 21,030 178,402
-------------- -------------- ---------------
Net cash provided by operating activities............... 8,633,365 11,587,281 12,275,795
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... $ (3,924,961) $ (17,437,774) $ (23,215,535)
Purchase of cellular license and properties................... -- (30,000,000) (190,719,765)
Proceeds from sale of property, plant and equipment........... 23,500 377,178 332,331
Proceeds from sale of investment in unconsolidated
subsidiary.................................................. -- 967,000 --
Deposits...................................................... (5,000,000) (1,350,000) 1,583,706
(Increase) decrease in receivable--affiliate.................. (340,606) (468,054) 769,821
Increase in notes receivable, net............................. (1,164,290) (1,004,435) (2,585,517)
Deferred costs................................................ -- -- (1,101,322)
Investment in unconsolidated partnerships and other, net...... (663,122) (463,668) (6,164,084)
-------------- -------------- ---------------
Net cash used in investing activities................... (11,069,479) (49,379,753) (221,100,365)
-------------- -------------- ---------------
</TABLE>
F-6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................................... $ 700,000 $ 100,000 $ --
Repayments of notes payable................................... -- (800,000) --
Proceeds from long-term debt.................................. 7,373,499 75,750,000 343,500,000
Repayments of long-term debt.................................. (4,723,198) (35,910,470) (88,841,512)
Dividend distributions--
Preferred stock............................................. (591,300) (176,748) (117,186)
Common stock................................................ (660,858) (549,564) (7,633,620)
Distributions to partners..................................... (877,122) (145,005) (458,378)
Issuance of preferred stock................................... -- 10,000,000 --
Purchase of treasury stock.................................... -- (5,913,000) --
Purchase of restricted investments............................ (38,389,299)
Proceeds from restricted investments.......................... -- -- 10,836,243
Redemption of RTFC subordinated capital certificates........ 866,283 57,632 1,051,057
Deferred costs................................................ (297,087) (4,127,925) (9,725,288)
-------------- -------------- ---------------
Net cash provided by financing activities............... 1,790,217 38,284,920 210,222,017
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (645,897) 492,448 1,397,447
CASH AND CASH EQUIVALENTS, beginning of year
From continuing operations.................................... 607,135 732,443 980,571
From discontinued operations.................................. 1,155,535 384,330 628,650
-------------- -------------- ---------------
Total cash and cash equivalents at beginning of period...... 1,762,670 1,116,773 1,609,221
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, end of year
From continuing operations.................................... 732,443 980,571 2,752,399
From discontinued operations.................................. 384,330 628,650 254,269
-------------- -------------- ---------------
Total cash and cash equivalents at end of period............ $ 1,116,773 $ 1,609,221 $ 3,006,668
-------------- -------------- ---------------
-------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest (net of amounts capitalized)....................... $ 3,415,088 $ 6,784,154 $ 22,679,047
Income taxes................................................ $ 303,031 $ 838,100 $ --
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Dobson Communications Corporation ("DCC" or the "Company") was incorporated
as an Oklahoma corporation in February 1997, under an Agreement and Plan of
Reorganization effective February 28, 1997. Under this plan, DCC acquired all of
the outstanding Class A Common Stock, Class C Common Stock and Class B
Convertible Preferred Stock of Dobson Operating Company ("DOC"). In exchange,
the holders of the Class A Common Stock and Class B Convertible Preferred Stock
of DOC received equivalent shares of stock of DCC. The holders of Class C Common
Stock received 100,000 shares of Class A Preferred Stock of DCC. In addition,
DCC assumed all DOC outstanding stock options, substituting shares of DCC Class
B Common Stock for the DOC stock subject to options. As a result of the
reorganization, DCC is the parent company of DOC.
As part of the reorganization, the stock of certain subsidiaries of DOC was
distributed to DCC. DOC continues to be the holding company for the Company's
cellular, local exchange and wholly-owned fiber subsidiaries. See Note 15 for
discussion of the Company's reorganization subsequent to December 31, 1997.
CAPITAL RESOURCES AND GROWTH
The Company's total indebtedness and debt service requirements will
substantially increase as a result of the transactions described in Notes 7 and
15 and the Company will be subject to significant financial restrictions and
limitations. If the Company is unable to satisfy any of the covenants under the
credit facilities described in Note 15, including financial covenants, the
Company will be unable to borrow under the credit facilities during such time
period to fund planned capital expenditures, its ongoing operations or other
permissible uses.
The Company's ability to manage future growth will depend upon its ability
to monitor operations, control costs, maintain effective quality controls and
significantly expand the Company's internal management, technical and accounting
systems, all of which will result in higher operating expenses. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations.
WIRELESS ENTITIES
The Company is comprised of the cellular entities listed below, which
operate cellular telephone systems servicing areas in Oklahoma, Texas, Kansas,
Missouri, Maryland, Pennsylvania and Arizona. The
F-8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION: (CONTINUED)
name of the entity/partnership, metropolitan statistical area ("MSA")/rural
service area ("RSA") and the Company's percentage of ownership are as follows:
<TABLE>
<CAPTION>
PERCENT
ENTITY/PARTNERSHIP MSA/RSA SERVED OWNERSHIP
- ------------------------------------------------ --------------------------------------------------- -----------
<S> <C> <C>
Dobson Cellular of Enid, Inc. Oklahoma MSA 2 100
Dobson Cellular of Woodward, Inc. Oklahoma RSA 2 100
Texas RSA 2 Limited Partnership Texas RSA 2 61
Oklahoma Independent RSA 5 Partnership Oklahoma RSA 5 64.35
Oklahoma Independent RSA 7 Partnership Oklahoma RSA 7 64.35
Oklahoma RSA 3 Limited Partnership Oklahoma RSA 3 5
Dobson Cellular of Kansas/Missouri, Inc. Kansas RSA 5, Missouri RSAs 1 and 4, and the Linn 100
County portion of Missouri RSA5
Dobson Cellular of Maryland, Inc. Maryland RSA 2; Cumberland, MD MSA; Hagerstown, MD 100
MSA; Maryland RSA 3; Bedford County portion of
Pennsylvania 10 West RSA
Gila River Cellular General Partnership Arizona RSA 5 75
</TABLE>
The Company is responsible for managing and providing administrative
services to the Oklahoma Independent RSA 5 and 7 Partnerships, Texas RSA 2
Limited Partnership ("Texas Partnership") and the Gila River Cellular General
Partnership. The Company is accountable to the partners for the execution and
compliance with contracts and agreements and for filing of instruments required
by law which are made on behalf of these partnerships. The books and records of
these partnerships are also maintained by the Company.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
all majority owned subsidiaries. For financial reporting purposes, the Company
reports 100% of revenues and expenses for the markets for which it provides
wireless telecommunications service. However, in several of its markets, the
Company holds less than 100% of the equity ownership. The minority stockholders'
and partners' shares of income or losses in those markets are reflected in the
consolidated statements of operations as "minority interests in income of
subsidiaries." For financial reporting purposes, the Company consolidates each
subsidiary and partnership in which it has a controlling interest (greater than
50%). Significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated partnerships where the Company does not have a
controlling interest are accounted for under the equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents on the accompanying consolidated balance sheets
includes cash and short-term investments with original maturities of three
months or less.
F-9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORY
The Company values its inventory at the lower of cost or market on the
first-in, first-out method of accounting.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairments of long-lived assets, certain
identifiable intangibles and goodwill when there is evidence that events or
changes in circumstances indicate that an asset's carrying value may not be
recoverable. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. The amount
of any recognized impairment would be based on the estimated fair value of the
asset subject to impairment compared to the carrying amount of such asset. No
such losses have been identified by the Company.
CELLULAR LICENSE ACQUISITION COSTS
Cellular license acquisition costs consist of amounts paid to acquire FCC
licenses to provide cellular services. Cellular license acquisition costs are
being amortized on a straight-line basis over ten to fifteen years. Amortization
expense of $413,486, $1,596,794 and $10,528,125 was recorded in 1995, 1996 and
1997, respectively.
The ongoing value and remaining useful lives of intangible and other
long-term assets are subject to periodic evaluation and the Company currently
expects the carrying amounts to be fully recoverable. When events and
circumstances indicate that intangible and other long-term assets might be
impaired, an undiscounted cash flow methodology would be used to determine
whether an impairment loss would be recognized.
DEFERRED COSTS
Deferred costs consist primarily of fees incurred to secure long-term debt,
start-up costs and organizational costs. Deferred start-up costs are amortized
on a straight-line basis over three years. Deferred financing costs are being
amortized on a straight-line basis over the term of the debt of eight years.
Amortization expense related to these costs of $403,690, $401,871 and $1,074,845
was recorded in 1995, 1996 and 1997, respectively.
OTHER INTANGIBLES
Other intangibles consist of amounts paid to acquire FCC licenses to provide
PCS service and amounts paid to acquire cellular customer lists in 1997. PCS
license acquisition costs are not being amortized until the Company's PCS
service becomes operational. Customer list acquisition costs are being amortized
on a straight-line basis over five years. Amortization expense of $851,107 was
recorded in 1997.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included as marketing and
selling expenses in the accompanying consolidated statements of operations.
F-10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company files a consolidated income tax return. Income taxes are
allocated among the various entities included in the consolidated tax return, as
agreed, based on the ratio of each entity's taxable income (loss) to
consolidated taxable income (loss). Deferred income taxes reflect the estimated
future tax effects of differences between financial statement and tax bases of
assets and liabilities at year end.
REVENUE RECOGNITION
The Company records service revenues over the period they are earned. The
cost of providing service is recognized as incurred.
Airtime and toll revenue is billed in arrears. The Company accrued estimated
unbilled revenues for services provided of approximately $858,000 and $1,209,000
as of December 31, 1996 and 1997, respectively, which are included in accounts
receivable in the accompanying consolidated balance sheets. Monthly access
charges are billed in advance and are reflected as deferred revenue on the
accompanying consolidated balance sheets. Cellular equipment sales are
recognized when the cellular equipment is delivered to the customer. Subscriber
acquisition costs (primarily commissions and loss on equipment sales) are
expensed as incurred.
EARNINGS PER SHARE
Basic income (loss) per common share is computed by the weighted average
number of shares of common stock outstanding during the year. Primary loss per
common share for 1996 was determined on the assumption that shares of Class B
convertible preferred stock were common stock from the date of their issuance as
each share of Class B convertible preferred stock is entitled to participate in
common stock dividends on a basis equivalent to shares of common stock, in
addition to the stated preferred stock dividend. In 1997, the Company adopted
SFAS No. 128, "Earnings Per Share." As a result, the Company's reported net
income (loss) per common share for 1995 and 1996 were restated.
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.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
SIGNIFICANT CONCENTRATIONS
In connection with providing cellular services to customers of other
cellular carriers, the Company has contractual agreements with those carriers
which provide for agreed-upon billing rates between the parties. Approximately
45% of the Company's cellular roaming revenue was earned from three cellular
carriers during the year ended December 31, 1997, while 54% and 56% of the
Company's cellular roaming revenue was earned from two cellular carriers during
the years ended December 31, 1995 and 1996, respectively.
F-11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. Management of the Company plans to adopt this accounting standard as of
January 1, 1998. SFAS No. 130 requires that all items required to be recognized
under accounting standards as components of comprehensive income (loss),
consisting of both net income (loss) and those items that bypass the statement
of operations and are reported as a separate component of stockholders' deficit,
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company does not believe that its
comprehensive income (loss) through December 31, 1997, will differ materially
from net income (loss).
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Newly constructed
cellular systems are added to property, plant and equipment at cost which
includes contracted services, direct labor, materials overhead and capitalized
interest. For the years ended December 31, 1995, 1996 and 1997, interest
capitalized was not material. Existing property, plant and equipment purchased
through acquisitions is recorded at its fair value at the date of the purchase.
Repairs, minor replacements and maintenance are charged to operations as
incurred. The provisions for depreciation are provided using the straight-line
method based on the estimated useful lives of the various classes of depreciable
property.
Listed below are the major classes of property, plant and equipment and
their estimated useful lives, in years, as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
USEFUL LIFE 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Wireless systems and equipment......................................... 2 - 10 $ 21,441,766 $ 42,279,323
Buildings and improvements............................................. 5 - 40 5,773,937 10,387,759
Vehicles, aircraft and other work equipment............................ 3 - 10 1,758,430 1,895,477
Furniture and office equipment......................................... 5 - 10 1,147,029 3,716,401
Plant under construction............................................... 2,100,359 4,456,878
Land................................................................... -- 217,892
------------- -------------
Property, plant and equipment........................................ 32,221,521 62,953,730
Accumulated depreciation............................................... 5,427,156 10,579,864
------------- -------------
Property, plant and equipment, net................................... $ 26,794,365 $ 52,373,866
------------- -------------
------------- -------------
</TABLE>
During 1996, the Company disposed of two mobile telecommunications switching
offices and related equipment for which it recognized a pretax loss of
$1,725,396. The loss is included in other income (expenses) in the accompanying
consolidated statements of operations.
F-12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT:
The Company's long-term debt as of December 31, 1996 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
Revolving credit facility................................. $ 75,750,000 $ 171,513,855
Senior notes.............................................. -- 160,000,000
Other notes payable....................................... -- 4,056,204
------------- --------------
Total long-term debt.................................... $ 75,750,000 $ 335,570,059
------------- --------------
------------- --------------
</TABLE>
REVOLVING CREDIT FACILITY
On February 28, 1997, the Company's bank credit agreement was amended and
restated to provide the Company with a $200 million revolving credit facility
maturing in 2005. Interest on borrowings under the new credit agreement accrues
at variable rates (weighted average rate of 8.43% at December 31, 1997). Initial
proceeds were used to refinance existing indebtedness, finance the
Maryland/Pennsylvania Acquisition described in Note 7 and for general corporate
purposes, including $7.5 million to pay a dividend to holders of its Class A
Common stock. In connection with the closing of the revolving credit facility,
the Company extinguished its then existing credit facility, and recognized a
pretax loss of approximately $2.5 million as a result of writing off previously
capitalized financing costs associated with the old revolving credit facility.
This loss has been reflected as an extraordinary item, net of tax, in the
Company's consolidated statement of operations for the year ended December 31,
1997.
On March 19, 1996, the Company amended and restated the old revolving credit
agreement. In connection with this amendment, the Company recorded a pretax loss
of approximately $.8 million as a result of writing off previously capitalized
financing costs. This loss has been reflected as an extraordinary item, net of
tax, in the accompanying consolidated statement of operations for the year ended
December 31, 1996.
In April 1997, the Company entered into an interest rate hedge agreement to
hedge the Company's interest expense on its indebtedness under the revolving
credit facility. The agreement provides for a rate cap of 8% plus a factor,
based on the Company's leverage ratio (cap at December 31, 1997, was 10.5%),
terminating on the earlier of April 24, 2000, or the date an option to enter
into an interest rate swap transaction is exercised by the counterparty. Under
the swap agreement, the interest rate would be fixed at 6.13% plus the factor
used to determine the rate cap or a floating LIBOR rate, terminating on April
24, 2002. The Company accounts for this instrument as a hedge.
SENIOR NOTES
On February 28, 1997, the Company issued $160 million principal amount of
11.75% senior notes maturing in 2007. The net proceeds were used to finance the
Maryland/Pennsylvania Acquisition described in Note 7 and to purchase securities
pledged to secure payment of the first four semi-annual interest payments on the
notes, which began on October 15, 1997. The pledged securities are reflected as
"restricted investments" in the Company's consolidated balance sheet. The senior
notes are redeemable at the option of the Company in whole or in part, on or
after April 15, 2002, initially at 105.875%. Prior to April 15, 2000, the
Company may redeem up to 35% of the principal amount of the senior notes at
111.750% with proceeds from sales of stock, provided that after any such
redemption at least $104 million remains outstanding.
F-13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
OTHER NOTES PAYABLE
Other notes payable represents the amount financed with United States
Government for nine PCS licenses as discussed in Note 7. Minimum future payments
of long-term debt for years subsequent to December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ --
1999........................................................ 198,871
2000........................................................ 19,712,038
2001........................................................ 28,743,176
2002........................................................ 30,915,471
2003 and thereafter......................................... 256,000,503
--------------
$335,570,059
--------------
--------------
</TABLE>
5. RESTRICTED CASH AND INVESTMENTS:
Restricted cash and investments consist of an interest pledge deposit of
approximately $26.8 million which includes an initial deposit of $38.4 million
(as discussed in Note 4), net of interest earned and payments issued to
bondholders. Amortization expense of $322,850 was recorded in 1997 for bond
premiums recorded with the purchase of the restricted investments. At December
31, 1997, the carrying value of these investments exceeded the market value by
approximately $404,000.
6. STOCKHOLDERS' DEFICIT:
Effective February 28, 1997, the stockholders of DCC and Dobson Holdings
Corporation ("Dobson Holdings"), a new corporation, entered into an agreement
and plan of reorganization. Under the reorganization, Dobson Holdings acquired
all of the outstanding Class A common stock, Class C common stock and Class B
Preferred of DCC. In exchange, the holders of the Class A common stock and Class
B Preferred of DCC received equivalent shares of stock of Dobson Holdings. The
holders of the Class C common stock received 100,000 shares of Class A preferred
stock of Dobson Holdings. In addition, Dobson Holdings assumed all DCC
outstanding stock options, substituting shares of Dobson Holdings Class B common
stock for the stock subject to options. As a result, Dobson Holdings is the
parent company of DCC.
As part of the reorganization, the stock of certain subsidiaries was
distributed to Dobson Holdings so that DCC is the holding company for the
wireline and wireless subsidiaries. Additionally, DCC changed its corporate name
to DOC and Dobson Holdings changed its corporate name to DCC.
On March 19, 1996, the Company redeemed all of the shares of the Class A
Preferred for $5,913,000, which is reflected in the accompanying consolidated
statement of cash flows for the year ended December 31, 1996.
In conjunction with the execution of the amended and restated revolving
credit facility on March 19, 1996, as described in Note 4, the Company canceled
its then outstanding Class A and Class B common stock, thereby cancelling its
treasury stock and authorized the capital structure of the Company to consist of
1,000,000 shares of Class A voting common stock, $1 par value per share, 31,000
shares of Class B common stock, $1 par value per share, 59,130 shares of 10%
cumulative, compounded, convertible,
F-14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' DEFICIT: (CONTINUED)
redeemable Class A preferred stock, $100 par value per share, and 100,000 shares
of Class B convertible preferred stock ("Class B Preferred"), $1 par value per
share, 8% dividend that accrues on a daily basis. On the same date, the Company
issued 100,000 shares of Class B Preferred. The net proceeds from the issuance
of the Class B Preferred was approximately $9,400,000. In addition, the Company
issued 473,152 shares of Class A voting common stock to the holders of the
original Class A common stock. On November 15, 1996, the Company amended its
certificate of incorporation to eliminate Class A Preferred from its authorized
capital stock.
As part of this recapitalization of the Company, Dobson Telephone was
entitled to receive shares of Class C common stock in exchange for its shares of
Class B common stock. In 1997, the Company issued these shares of Class C Common
Stock to Dobson Telephone.
Holders of Class B Preferred are entitled to cumulative dividends as and
when declared by the board of directors of the Company and a liquidation
preference over the other classes of capital stock. The Class B Preferred
stockholders are also entitled to a dividend equal to the amount they would have
received had the Preferred Stock been converted into Class A common stock. Each
share of Class B Preferred is convertible into Class A common stock initially at
a ratio of one to one. Each share of Class B Preferred has voting rights
equivalent to Class A common stock, at a rate equal to the number of Class A
common shares into which the share of Class B Preferred is convertible at the
record date of such vote. In addition, the Class B Preferred stockholders have
the right, as a class, to elect two members of the board of directors of the
Company.
Holders of Class B Preferred have the right to sell up to 50% and 100% of
their stock to the Company after March 19, 2001 and 2002, respectively, or upon
the occurrence of certain events, at the then fair market value. After March 19,
2003, the Company has the right to call all of the outstanding shares of Class B
Preferred at the then fair market value.
In February 1997, a $7.5 million dividend was paid on the Class A Common
Stock. As a result of the $7.5 million dividend, holders of Class B Preferred
were entitled to a "Make-Whole Dividend" of approximately $1.6 million. In lieu
of such Make-Whole Dividend, the holders of Class B Preferred received 100,000
shares of Class C Preferred Stock having a liquidation preference of $1,623,329.
Holders of Class C Preferred are entitled to 8% cumulative dividends as and
when declared by the board of directors of the Company and a liquidation
preference over the other classes of common stock and equity securities. The
Class C Preferred is not convertible and has no voting rights.
The Company may redeem, by vote of the board of directors, the Class C
Preferred at any time and from time to time, in whole or in part. Upon the
earlier of the occurrence of certain events or February 28, 2002, the Company
must redeem all the outstanding shares of Class C Preferred at the liquidation
value thereof plus accrued dividends.
7. ACQUISITIONS:
On February 28, 1997, the Company purchased the FCC cellular licenses for,
and certain assets relating to, two MSAs and two RSAs located in Maryland and
Pennsylvania for $77.6 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area.
On March 3, 1997, the Company purchased the FCC cellular license for, and
certain assets relating to, Maryland RSA 2 for $75.8 million. The property is
located to the east of the Washington/Baltimore
F-15
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITIONS: (CONTINUED)
metropolitan area. This acquisition and the one completed on February 28, 1997,
are referred to together as the "Maryland/Pennsylvania Acquisition."
On October 1, 1997, the Company purchased a 75% interest in the Gila River
Cellular General Partnership (the "Arizona 5 Partnership"), which owns the
cellular license for Arizona RSA 5, as well as the associated tangible operating
assets, and Gila River Telecommunications Subsidiary, Inc. ("GRTSI") purchased a
25% interest in the Arizona 5 Partnership. As part of this transaction, the
Company purchased the stock of Associated Telecommunications and Technologies,
Inc. ("ATTI"), which owned 49% of one of the partners of the Arizona 5
Partnership (with a 41.95% interest). Of the $14.2 million purchase price for
ATTI, $9.5 million was paid to a director and the chief executive officer and
the chairman of the board of the Company, who together owned two-thirds of the
ATTI stock. Contemporaneously, the Company received the following payments on
outstanding loans from affiliates: $1.9 million from the chairman of the board
of directors, president and chief executive officer of the Company, $446,000
from a director and $1.9 million from an affiliate. Upon completion of these
transactions, the Company paid a net purchase price of $39.8 million for its 75%
interest in the Arizona 5 Partnership. In addition, the Company financed
approximately $5.2 million of the $13.3 million purchase price paid by GRTSI for
its 25% interest in the Arizona 5 Partnership. The $5.2 million note receivable
bears interest at the Company's available rate under its revolving credit
facility. Principal and interest will be paid from 60% of partnership
distributions beginning after September 30, 1998. Any unpaid amounts of
principal and interest are due on December 31, 2013.
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
consolidated statements of operations from the respective dates of acquisition.
The unaudited pro forma information set forth below includes all acquisitions
for the years ended 1997 and 1996, respectively, as if the purchases occurred at
the beginning of 1996. The unaudited pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated at that time:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Operating revenue................................................................. $ 63,835,474 $ 79,413,533
Loss from continuing operations before extraordinary items........................ (19,462,046) (13,886,970)
Net loss applicable to common stockholders........................................ (20,507,459) (17,507,850)
Basic net loss applicable to common stockholders per common share................. (43.34) (37.00)
</TABLE>
On March 19, 1996, the Company purchased the FCC cellular licenses for, and
certain assets relating to, one RSA located in Kansas and three RSAs and a
portion of another RSA located in Missouri for $30 million. The properties (the
"Kansas/Missouri Cluster") are located in northeastern Kansas and northwestern
Missouri near Kansas City.
PCS LICENSES
In the second quarter of 1997, the Company was granted PCS licenses in the
FCC "F" Block auction for nine markets adjacent to or overlapping the Company's
existing cellular footprint in Oklahoma, Kansas and Missouri. The aggregate bid
for these licenses was $5.1 million after a 15% discount. The Company financed
approximately $4.1 million of the purchase price in July 1997 by notes payable
to the United
F-16
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITIONS: (CONTINUED)
States Government at an annual interest rate of 6.25% (see Note 4). This
represented a non-cash financing activity, and accordingly, is not reflected in
the accompanying consolidated statement of cash flows. Interest payments are due
quarterly beginning no earlier than April 30, 1998. The obligations will be
amortized quarterly over an eight-year period beginning in 1999.
8. EMPLOYEE BENEFIT PLANS:
401(k) PLAN
The Company maintains a 401(k) plan (the "Plan") in which substantially all
employees of the Company are eligible to participate. The Plan requires the
Company to match 100% of employees' contributions up to 4% of their salary.
Contributions to the Plan charged to the Company's operations were approximately
$105,000, $109,000 and $179,000 during the years ended December 31, 1995, 1996
and 1997, respectively.
STOCK OPTION PLAN
The Company has adopted a stock option plan, the 1996 Stock Option Plan
("1996 Plan"). The Company accounts for this plan under APB Opinion 25, under
which no compensation cost is recognized in the accompanying consolidated
financial statements if the option price is equal to or greater than the fair
market value of the stock at the time the option is granted.
Under the Company's 1996 Plan, the Board of Directors may grant both
incentive and non-incentive stock options for employees, officers and directors
to acquire Class B Common Stock. Since the 1996 Plan's adoption, stock options
have been issued at the market price on the date of grant with an expiration of
ten years from the grant date. Options granted to one employee during 1997
representing 42.9% of total options granted in 1997 vest as follows: options to
purchase 12% of such shares first become exercisable on each of the first five
anniversaries of the grant date; options to purchase an additional 8% of such
shares first become exercisable on the same dates if annual performance
objectives are achieved. The remaining options issued in 1997 and all of the
options issued in 1996 vest at a rate of 20% per year. The Company has reserved
30,166 shares of authorized but unissued Class B Common Stock for issuance under
the 1996 Plan.
F-17
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS: (CONTINUED)
Stock options outstanding under the 1996 Plan are presented for the periods
indicated.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES RANGE
----------- ------------
<S> <C> <C>
Outstanding December 31, 1995....................................... -- --
----------- ------------
Granted............................................................. 8,374 $100
Exercised........................................................... -- --
Canceled............................................................ -- --
----------- ------------
Outstanding December 31, 1996....................................... 8,374 $100
----------- ------------
Granted............................................................. 14,059 $100-$150
Exercised........................................................... -- --
Canceled............................................................ -- --
----------- ------------
Outstanding December 31, 1997....................................... 22,433 $100-$150
----------- ------------
Exercisable at December 31, 1997.................................... 1,675 $100
----------- ------------
</TABLE>
The following schedule shows the Company's net loss and net loss per share
for each of the years ended December 31, had compensation expense been
determined consistent with SFAS No. 123. The pro forma information presented
below is based on several assumptions and should not be viewed as indicative of
the Company in future periods.
<TABLE>
<CAPTION>
($ IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1996 1997
- ------------------------------------------------------------------------ --------- ----------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported........................................................... $ (2,270) $ (19,337)
Pro forma............................................................. $ (2,309) $ (19,540)
Basic net loss applicable to common stockholders per common share:
As reported........................................................... $ (4.80) $ (40.87)
Pro forma............................................................. $ (4.88) $ (41.30)
</TABLE>
Diluted net loss per common share has been omitted because the impact of
common stock equivalents is anti-dilutive. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively:
<TABLE>
<CAPTION>
(AMOUNTS EXPRESSED IN PERCENTAGES) 1996 1997
- -------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Interest rate............................................................. 6.98% 6.60%
Dividend yield............................................................ -- --
Expected volatility....................................................... 39.88% 40.27%
</TABLE>
The weighted average fair value of options granted using the Black-Scholes
option pricing model was $64.84 for 1996 and $71.42 for 1997.
F-18
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES:
Provision (benefit) for income taxes for the years ended December 31, 1995,
1996 and 1997, were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -------------
<S> <C> <C> <C>
Federal income taxes--
Current................................................................. $ (84,000) $ (452,000) $ --
Deferred................................................................ 327,000 (83,000) (3,243,000)
State income taxes (current and deferred)................................. 104,000 (58,000) (382,000)
---------- ----------- -------------
Total income tax provision (benefit).................................. $ 347,000 $ (593,000) $ (3,625,000)
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
The provisions for income taxes for the years ended December 31, 1995, 1996
and 1997, differ from amounts computed at the statutory rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -------------
<S> <C> <C> <C>
Income taxes at statutory rate (34%)...................................... $ 324,000 $ (618,000) $ (6,576,000)
State income taxes, net of Federal income tax effect...................... 38,000 (73,000) (774,000)
Purchase price adjustment................................................. -- -- 3,747,000
Other, net................................................................ (15,000) 98,000 (22,000)
---------- ----------- -------------
$ 347,000 $ (593,000) $ (3,625,000)
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Current deferred income taxes:
Allowance for doubtful accounts receivable......................................... $ 92,000 $ 152,000
Accrued liabilities................................................................ -- 45,000
Deferred expenses.................................................................. 298,000 17,000
------------ -------------
Net current deferred income tax asset............................................ 390,000 214,000
------------ -------------
Non-current deferred income taxes:
Fixed assets....................................................................... (74,000) (1,566,000)
Intangible assets.................................................................. -- (9,859,000)
Tax credits and carryforwards...................................................... 794,000 10,386,000
------------ -------------
Net non-current deferred income tax asset (liability)............................ 720,000 (1,039,000)
------------ -------------
Total deferred income taxes...................................................... $ 1,110,000 $ (825,000)
------------ -------------
------------ -------------
</TABLE>
At December 31, 1997, the Company had NOL carryforwards of approximately
$23,600,000, which may be utilized to reduce future Federal income taxes
payable.
F-19
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS:
At December 31, 1996 and 1997, the Company had notes and interest receivable
of $3,308,438 and $5,888,054, respectively, of which $3,266,765 and $5,852,282
was due from related parties, including $2,253,892 and $295,612 at December 31,
1996 and 1997, respectively, from the Company's directors and officers. The
notes bear interest at various interest rates ranging from 4% to 14.5% at
December 31, 1997.
The Company leases its corporate office space from a related party, as
discussed in Note 12.
During 1995, the Company purchased 75,000 shares of common stock of Zenex
Communications, Inc. ("Zenex") a long distance carrier serving customers
primarily in Oklahoma, for $75,000 and purchased 400,000 shares of Zenex Class B
preferred stock for $400,000. In 1996, the Company purchased an additional
275,000 shares of Zenex Class B preferred stock for $275,000.
On October 28, 1996, the Company sold its 675,000 shares of Zenex Class B
preferred stock and 30,000 of its shares of Zenex common stock for approximately
$817,000. In addition, the Company sold its option to purchase additional stock
for $150,000. The Company recognized a $262,000 gain on these transactions.
In July 1997, the Company purchased 30,000 shares of Zenex common stock for
$150,000 and resold the shares in November 1997 to the Company's chairman of the
board of directors, president and chief executive officer at a price equal to
the Company's cost.
In September 1997, the Company purchased a loan for $263,882 made by a bank
to Zenex and resold such loan to the Company's chairman of the board of
directors, president and chief executive officer in November 1997 at a price
equal to the Company's cost.
11. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Interest.......................................................... $ 165,282 $ 5,991,857
Property tax...................................................... 151,419 55,660
Vacation, wages and other......................................... 762,620 1,593,504
------------ ------------
Total accrued expenses.......................................... $ 1,079,321 $ 7,641,021
------------ ------------
------------ ------------
</TABLE>
12. COMMITMENTS:
Effective December 6, 1995 (amended December 20, 1995 and June 24, 1997),
the Company entered into an equipment supply agreement in which the Company
agreed to purchase approximately $30 million of cell site and switching
equipment between June 24, 1997 and June 23, 2001, to update the cellular
systems for the newly acquired and existing MSAs and RSAs. Of the commitment,
approximately $13.8 million remained at December 31, 1997.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1998. The Company agreed to purchase approximately
$81 million of cell sites and switching equipment between January 13, 1998 and
January 12, 2002, to update the cellular systems for the newly acquired and
existing MSAs and RSAs.
F-20
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS: (CONTINUED)
Future minimum lease payments required under operating leases that have an
initial or remaining noncancellable lease term in excess of one year at December
31, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................................ $1,848,613
1999............................................................ 1,733,051
2000............................................................ 1,567,725
2001............................................................ 1,396,336
2002............................................................ 1,112,958
2003 and thereafter............................................. 5,061,921
</TABLE>
Included in the annual lease commitments is approximately $277,000, payable
annually to an affiliated entity through July 2005. Lease expense under the
above leases was approximately $300,000, $425,000 and $1,106,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
13. LITIGATION SETTLEMENT:
On February 16, 1994, a judgment was entered against Dobson Cellular
Systems, Inc. ("Dobson Cellular") in a lawsuit initiated by a competitor for
violation of the Federal Communications Act in connection with pricing of
various services in the Texas RSA 2 market area in the amount of $742,318, and
post-judgment interest at a rate of 3.74% from the date of the judgment until
the amount was to be paid in full.
Management of the Texas Partnership agreed to reimburse Dobson Cellular for
any and all costs related to these actions. A provision of $150,000 was charged
to the Texas Partnership's operations in 1993, for anticipated costs of
appealing the judgment. During 1995, this case was settled at a total cost to
the Texas Partnership of approximately $430,000, net of insurance proceeds. A
provision for $280,000 was charged to the Texas Partnership's operations in
1995, and is included in other expenses in the accompanying consolidated
statement of operations for the year ended December 31, 1995.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Unless otherwise noted, the carrying value of the Company's financial
instruments approximates fair value. The Company estimates the fair value of its
long-term debt based on quoted market prices for publicly traded debt or on the
current rates available to the Company for debt with similar terms and remaining
maturation.
Indicated below are the carrying amounts and estimated fair values of the
Company's financial instruments as of December 31:
<TABLE>
<CAPTION>
1996 1997
---------------------------- ------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revolving credit facility......................... $ 75,750,000 $ 75,750,000 $ 171,513,855 $ 171,513,855
Senior notes...................................... -- -- 160,000,000 169,200,000
Mortgage notes payable............................ 29,744,726 24,855,656 28,639,359 26,969,543
Other notes payable............................... -- -- 4,056,204 4,200,695
Interest rate hedge............................... -- -- -- (2,644,414)
</TABLE>
F-21
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS:
PREFERRED STOCK
In January 1998, the Company issued 175,000 shares of 12.25% senior
exchangeable preferred stock mandatorily redeemable in 2008 for $1,000 per
share. Holders of the preferred stock are entitled to cumulative dividends from
the date of issuance and a liquidation preference over the other classes of
capital stock. Additionally, the preferred stock is redeemable at the option of
the Company on or after January 15, 2003. Holders of the preferred stock have no
voting rights. The preferred stock is not registered under the Securities Act of
1933 and may not be offered or sold in the United States without registration or
absent an applicable exemption from registration requirements. The Company must
make an offer to exchange substantially identical shares registered under the
Securities Act of 1933 for the shares outstanding within six months of the
issuance, or the stated dividend rate will increase by .5%.
REORGANIZATION
In conjunction with the issuance of the preferred stock discussed above, the
Company formed three new subsidiaries: Dobson Cellular Operating Company
("DCOC"), DOC Cellular Subsidiary Company ("DOC Cellular Subsidiary") and Dobson
Wireline Company ("DWC"). DCOC was created as the holding company for
subsidiaries formed to effect cellular acquisitions. DCOC has been designated an
unrestricted subsidiary under the senior note indenture which covers the senior
notes discussed in Note 4. DOC Cellular Subsidiary was created as the holding
company for the then existing cellular subsidiaries. DWC was created as the
holding company for the Company's wireline, fiber and resale operations. DWC was
designated an unrestricted subsidiary under the senior note indenture and the
certificate of designation establishing the preferred stock. On September 30,
1998, the Company adopted a plan to spin off DWC, as discussed below.
CREDIT FACILITY
In March 1998, the Company's subsidiary DCOC established a $200 million
senior secured credit facility (the "DCOC Credit Facility"). DCOC's obligations
under the DCOC Credit Facility are secured by all current and future assets of
DCOC, including the Texas 16 assets and assets acquired in future wireless
acquisitions. The Company's subsidiary DOC also established a $250 million
senior secured credit facility (the "Amended Bank Facility") to replace the
existing revolving credit facility discussed in Note 4. The Amended Bank
Facility continues to be secured by all of DOC's stock and the stock or
partnership interests of its restricted subsidiaries and all assets of DOC and
its restricted subsidiaries. The DCOC Credit Facility and the Amended Bank
Facility requires the Company to maintain certain financial ratios. The failure
to maintain such ratios would constitute an event of default, notwithstanding
the Company's ability to meet its debt service obligations. The credit
facilities will be used primarily to refinance existing indebtedness, finance
capital expenditures, consummate acquisitions, finance interest payments on the
Company's 11.75% senior notes, and fund general corporate operations. The
facilities will terminate in 2006.
In connection with the closing of the Amended Bank Facility, the Company
extinguished its then existing credit facility and recognized a pretax loss of
approximately $3.3 million as a result of writing off previously capitalized
financing costs associated with the revolving credit facility in March 1998.
Such amount is included in deferred costs in the accompanying consolidated
balance sheets at December 31, 1997.
F-22
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS: (CONTINUED)
DISCONTINUED OPERATIONS
On September 30, 1998, the Company's Board of Directors authorized the
distribution of the wireline segment to the holders of the Company's common
stock on a tax-free basis, subject to the receipt of a private letter ruling
from the Internal Revenue Service ("IRS") under Internal Revenue Code 355(e).
The request was filed with the IRS on October 6, 1998, and a ruling is expected
in the second quarter of 1999. The wireline segment, which consists of Logix and
its subsidiaries, operates as an integrated communications provider under the
LOGIX-SM- brand name in Oklahoma and Texas, owns local telephone exchanges in
Oklahoma and operates regional fiber optic transmission networks in Oklahoma,
Texas and Colorado. Pursuant to Accounting Principles Board Opinion ("APB") No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions," the consolidated financial statements have been
restated for all periods presented to reflect the wireline operations, assets
and liabilities as discontinued operations.
The assets and liabilities of such operations have been classified as "Net
assets of discontinued operations" on the consolidated balance sheets and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................ $ 629 $ 254
Other current assets............................................. 3,299 2,758
Property, plant and equipment, net............................... 35,136 35,976
Other assets..................................................... 15,544 12,965
------------ ------------
Total assets................................................... 54,608 51,953
Current liabilities.............................................. 3,948 2,544
Long-term debt, net of current portion........................... 40,565 27,498
Other liabilities................................................ 1,798 1,834
------------ ------------
Total liabilities.............................................. 46,311 31,876
------------ ------------
Net assets (liabilities) of discontinued operations.............. $ 8,297 $ 20,077
------------ ------------
------------ ------------
</TABLE>
The net income from operations of the wireline segment was classified on the
consolidated statement of operations as "Income from discontinued operations."
Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Net revenues..................................................................... $ 16,265 $ 17,908 $ 20,177
Income from continuing operations before income taxes............................ 891 514 886
Income tax provision............................................................. (391) (183) (337)
Extraordinary item............................................................... -- -- (217)
Income from discontinued operations.............................................. 500 331 332
</TABLE>
F-23
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS: (CONTINUED)
ACQUISITIONS
TEXAS 16
On January 26, 1998, the Company purchased the FCC cellular license for and
certain assets relating to the Texas RSA 16 for $56.6 million, subject to
adjustment. The property is located in south central Texas between Houston, San
Antonio and Austin. As of December 31, 1997, the Company had placed $2.7 million
into escrow pending closing the acquisition and is included in investments in
unconsolidated subsidiaries and other in the accompanying balance sheet.
CALIFORNIA 4
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.
SANTA CRUZ
On June 16, 1998, the Company acquired an 86.4% interest 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.
CALIFORNIA 7
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.
SYGNET
On July 28, 1998 the Company entered into a definitive agreement to acquire
the stock of Sygnet Wireless, Inc. ("Sygnet") for $337.5 million. Sygnet owns
and operates cellular systems in Ohio, Pennsylvania and New York covering an
estimated population base of 2.4 million people. In connection with the
acquisition, the Company plans to redeem Sygnet's senior notes ($110 million at
September 30, 1998) and refinance Sygnet's credit facility ($192.6 million at
September 30, 1998) (collectively, the "Refinancings"). In connection with the
Sygnet acquisition, the Company will also be required to finance the acquisition
of Pennsylvania 2 RSA for $6.0 million.
In July 1998, the Company placed $25 million into escrow pending the close
of the Sygnet acquisition. The Company expects to finance the remaining
purchase, consisting of the remaining $312.5 million of stock, the Refinancings
and the Pennsylvania 2 RSA acquisition, through a combination of bank financing
discussed below and the issuance of senior notes and preferred stock.
OHIO 2
On August 20, 1998, the Company entered into a definitive agreement to
purchase the FCC license for the Ohio 2 RSA for $39.3 million, subject to
adjustment. In September 1998, the Company placed
F-24
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS: (CONTINUED)
$39.3 million into escrow pending closing of the acquisition. The Company
expects to enter into agreements with AirTouch to acquire the subscribers and to
lease certain equipment necessary to operate Ohio 2. The license covers the area
in north central Ohio near Sandusky. The acquisition is expected to close in the
fourth quarter of 1998.
TEXAS 10
On September 2, 1998, the Company entered into a definitive agreement to
acquire the FCC license for, and certain assets relating to, the Texas 10 RSA
for $55.0 million, subject to adjustment. Texas 10 is located in central Texas.
In September 1998, the Company placed $3 million into escrow pending closing of
the acquisition. The acquisition is expected to close in the fourth quarter of
1998.
F-25
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 2,752,399 $ 5,041,044
Restricted cash and investments................................................ 17,561,231 18,508,358
Accounts receivable, net....................................................... 14,003,688 32,054,707
Receivables--affiliates........................................................ 633,146 629,252
Other current assets........................................................... 3,828,103 4,588,260
-------------- --------------
Total current assets......................................................... 38,778,567 60,821,621
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net............................................... 52,373,866 76,360,458
-------------- --------------
OTHER ASSETS:
Receivables--affiliates........................................................ 6,381,389 9,167,408
Restricted investments......................................................... 9,216,202 --
Cellular license acquisition costs, net........................................ 206,694,474 459,731,396
Deferred costs, net............................................................ 9,884,308 17,686,313
Other intangibles, net......................................................... 9,328,031 8,562,035
Deposits....................................................................... 5,150,000 67,300,000
Investments in unconsolidated subsidiaries and other........................... 1,761,002 1,411,711
Net assets of discontinued operations.......................................... 20,077,167 --
-------------- --------------
Total other assets........................................................... 268,492,573 563,858,863
-------------- --------------
Total assets............................................................... $ 359,645,006 $ 701,040,942
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-26
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................... $ 11,708,420 $ 25,404,208
Accrued expenses............................................................... 7,641,021 14,008,734
Accrued dividends payable...................................................... 1,595,238 7,296,175
Deferred revenue and customer deposits......................................... 1,979,508 3,215,933
-------------- --------------
Total current liabilities.................................................... 22,924,187 49,925,050
NET LIABILITIES OF DISCONTINUED OPERATIONS....................................... -- 628,962
ACCOUNTS PAYABLE--AFFILIATE...................................................... 8,206,935 --
LONG-TERM DEBT................................................................... 335,570,059 448,056,204
DEFERRED CREDITS................................................................. 1,039,000 66,641,994
MINORITY INTERESTS............................................................... 16,954,165 22,948,727
SENIOR EXCHANGEABLE PREFERRED STOCK.............................................. -- 185,513,000
CLASS B CONVERTIBLE PREFERRED STOCK.............................................. 10,000,000 10,000,000
CLASS C PREFERRED STOCK.......................................................... 1,623,329 1,623,329
STOCKHOLDERS' DEFICIT:
Class A Preferred Stock........................................................ 100,000 100,000
Class A Common Stock, $1 par value, 1,000,000 shares authorized and 473,152
shares issued and outstanding................................................ 473,152 473,152
Paid-in capital................................................................ 5,508,285 5,508,285
Retained deficit............................................................... (42,754,106) (90,377,761)
-------------- --------------
Total stockholders' deficit.................................................... (36,672,669) (84,296,324)
-------------- --------------
Total liabilities and stockholders' deficit.................................... $ 359,645,006 $ 701,040,942
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Service revenue..................................................... $ 26,487,441 $ 47,769,305
Roaming revenue..................................................... 17,781,657 45,916,023
Equipment sales..................................................... 740,538 2,502,707
Other............................................................... 703,331 158,020
------------ ------------
Total operating revenues.......................................... 45,712,967 96,346,055
------------ ------------
OPERATING EXPENSES:
Cost of service..................................................... 10,931,862 22,603,067
Cost of equipment................................................... 2,834,416 5,166,528
Marketing and selling............................................... 6,913,298 14,855,588
General and administrative.......................................... 8,136,923 16,219,389
Depreciation and amortization....................................... 11,942,536 29,713,544
------------ ------------
Total operating expenses.......................................... 40,759,035 88,558,116
------------ ------------
OPERATING INCOME...................................................... 4,953,932 7,787,939
INTEREST EXPENSE...................................................... (17,646,377) (25,039,213)
OTHER INCOME (EXPENSE), net........................................... 1,854,707 3,303,914
------------ ------------
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES, INCOME TAXES
AND EXTRAORDINARY ITEMS............................................. (10,837,738) (13,947,360)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES.......................... (1,314,312) (1,963,308)
------------ ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...................... (12,152,050) (15,910,668)
INCOME TAX BENEFIT.................................................... 498,758 4,864,070
------------ ------------
LOSS FROM CONTINUING OPERATIONS....................................... (11,653,292) (11,046,598)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of income tax
(benefit) expense of $80,003 and $(7,267,566) for the nine months
ended September 30, 1997 and 1998, respectively..................... 1,651,759 (17,184,832)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEMS....................................... (10,001,533) (28,231,430)
EXTRAORDINARY EXPENSE, net of income tax benefit of $85,392 in 1997
and $671,000 in 1998................................................ (2,186,223) (2,643,439)
------------ ------------
NET LOSS.............................................................. (12,187,756) (30,874,869)
DIVIDENDS ON PREFERRED STOCK.......................................... (727,646) (16,748,786)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS............................ $(12,915,402) $(47,623,655)
------------ ------------
------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE.....
Before discontinued operations and extraordinary expense............ $ (26.17) $ (58.74)
Discontinued operations............................................. 3.49 (36.32)
Extraordinary expense............................................... (4.62) (5.59)
------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON SHARE..... $ (27.30) $ (100.65)
------------ ------------
------------ ------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...................... 473,152 473,152
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................... $(12,187,756) $(30,874,869)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization.................................................... 15,473,672 37,399,250
Amortization of bond premium and financing cost.................................. -- 1,624,390
Deferred income taxes and investment tax credits, net............................ 486,519 (14,253,819)
(Gain) Loss on disposition of assets............................................. 19,632 (10,387)
Extraordinary loss on financing costv 2,497,598 3,314,439
Cumulative effect of change in accounting principle.............................. -- 1,162,629
Minority interests in income of subsidiaries..................................... 1,071,342 1,963,308
Changes in current assets and liabilities--
Accounts receivable.............................................................. (2,056,381) (12,480,566)
Other current assets............................................................. (1,148,883) (49,023)
Accounts payable................................................................. 4,122,827 7,998,999
Accrued expenses................................................................. 12,429,907 13,169,966
Deferred revenue and customer deposits........................................... -- 1,479,843
------------ ------------
Net cash provided by operating activities...................................... 20,708,477 10,444,160
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................... (13,780,956) (41,528,017)
Acquisitions....................................................................... (154,784,566) (333,354,429)
Deferred costs..................................................................... (1,592,979) --
Increase in receivable--affiliate.................................................. (1,047,284) (1,297,403)
Deposits 3,190,732 (62,150,000)
Investments in unconsolidated subsidiaries and other............................... (21,124,176) (1,931,189)
Proceeds on sale of assets......................................................... -- 6,700
------------ ------------
Net cash used in investing activities.......................................... (189,139,229) (440,254,338)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................................................... 95,250,000 284,000,000
Repayments of long-term debt....................................................... (797,708) (172,296,542)
Cash dividends..................................................................... (8,361,266) --
Issuance of preferred stock........................................................ -- 175,000,000
Issuance of senior notes........................................................... 160,000,000 350,000,000
Purchase of restricted investments................................................. (66,258,444) (120,976,000)
Maturities of restricted investments............................................... -- 9,400,000
Interest on restricted investments................................................. (1,553,949) (3,135,934)
Redemption of RTFC subordinated capital certificates............................... 1,051,057 --
Deferred financing costs........................................................... (10,842,406) (23,868,695)
------------ ------------
Net cash provided by financing activities...................................... 168,487,284 498,122,829
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................ 56,532 68,312,651
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period
From continuing operations......................................................... 980,571 2,752,399
From discontinued operations....................................................... 628,650 254,269
------------ ------------
Total cash and cash equivalents, beginning of period......................... 1,609,221 3,006,668
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.............................................
From continuing operations......................................................... 1,084,117 5,041,044
From discontinued operations....................................................... 581,636 66,278,275
------------ ------------
Total cash and cash equivalents, end of period............................... $ 1,665,753 $ 71,319,319
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of December 31, 1997 and September 30, 1998, the condensed consolidated
statements of operations for the nine months ended September 30, 1998 and 1997
and the condensed consolidated statements of cash flows for the nine months
ended September 30, 1998 and 1997 are unaudited. In the opinion of management,
such financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented.
The condensed balance sheet data at December 31, 1997 was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The financial statements presented
herein should be read in connection with the Company's December 31, 1997
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
1. ORGANIZATION
The Company, through its predecessors, was organized in 1936 as Dobson
Telephone Company and adopted its current organizational structure in 1998. The
Company is a provider of rural and suburban wireless telephone services.
1997 REORGANIZATION
DCC was incorporated as an Oklahoma corporation in February 1997. Under an
Agreement and Plan of Reorganization effective February 28, 1997 ("1997
Reorganization"), DCC acquired all of the outstanding Class A Common Stock,
Class C Common Stock and Class B Convertible Preferred Stock of Dobson Operating
Company ("DOC"). In exchange, the holders of the Class A Common Stock and Class
B Convertible Preferred Stock of DOC received equivalent shares of stock of DCC.
The holders of Class C Common Stock received 100,000 shares of Class A Preferred
Stock of DCC. In addition, DCC assumed all DOC outstanding stock options,
substituting shares of DCC Class B Common Stock for the DOC stock subject to
options. As a result of the 1997 Reorganization, DCC became the parent company
of DOC and the stock of certain subsidiaries of DOC was distributed to DCC.
1998 REORGANIZATIONS
In conjunction with the January 1998 issuance of 175,000 shares of 12.25%
Senior Exchangeable Preferred Stock mandatorily redeemable in 2008 (see Note 5),
the Company formed three new subsidiaries: Dobson Cellular Operating Company
("DCOC"), DOC Cellular Subsidiary Company ("DOC Cellular Subsidiary") and Logix
Communications Enterprises, Inc. ("Logix"), formerly named Dobson Wireline
Company. DCOC was created as the holding company for subsidiaries formed to
effect certain wireless acquisitions. DCOC has been designated an unrestricted
subsidiary under the Senior Note Indenture which covers the Senior Notes
discussed in Note 4. DOC Cellular Subsidiary was created as the holding company
for the then existing wireless subsidiaries. Logix was created as the holding
company for the Company's incumbent local exchange carrier ("ILEC"), fiber and
integrated communications provider ("ICP") operations. Logix was designated an
unrestricted subsidiary under the Senior Note Indenture and the Certificate of
Designation establishing the Senior Exchangeable Preferred Stock.
F-30
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION (CONTINUED)
On September 30, 1998, the Company adopted a plan to spin off Logix as
discussed in Note 3 ("September 1998 Reorganization"). Collectively, the January
1998 Reorganization and the September 1998 Reorganization are known as the "1998
Reorganizations."
2. ACQUISITIONS
RECENT ACQUISITIONS
On December 2, 1998, the Company purchased the FCC license for, and certain
assets related to, Texas 10 RSA for $55.0 million, subject to resolution of
certain title matters regarding the FCC licenses. Texas 10 is located in
north-central Texas, in an area bordered by Dallas, Austin, Tyler and Longview,
MSAs.
On September 2, 1998, the Company purchased the FCC license for, and related
assets of, Ohio 2 RSA for $39.3 million, subject to resolution of certain title
matters regarding the FCC licenses. Ohio 2 is located in north-central Ohio
bordered by Lake Erie on the north and Cleveland on the east.
On July 29, 1998, the Company purchased the FCC cellular license and certain
assets of the California 7 RSA for $21 million. California 7 is located in the
Imperial Valley extending from east of San Diego to the Arizona state line.
On June 16, 1998, the Company acquired an 86.4% interest in the Santa Cruz
Cellular Telephone Partnership ("SCCTP") for $31 million. SCCTP owns the
cellular license and other assets for the Santa Cruz MSA. The Santa Cruz MSA is
located adjacent to the California 4 RSA purchased in April 1998. Subsequent to
September 30, 1998, the Company acquired an additional .5% interest in SCCTP for
$.2 million.
On April 1, 1998, the Company acquired all of the capital stock of the
corporations which owned the Cellular 2000 Partnership. The Cellular 2000
Partnership owns the FCC cellular license and system for, and certain assets
relating to, the California 4 RSA. The total purchase price paid by the Company
was $90.9 million. The property is located in central California adjacent to
Fresno, Modesto and Yosemite National Park.
On January 26, 1998, the Company purchased the FCC cellular license for, and
certain assets relating to, the Texas 16 RSA for $56.6 million. The property is
located in south-central Texas in an area bordered by Austin, Houston and San
Antonio.
On October 1, 1997, the Company purchased for $39.8 million a 75% interest
in the Gila River Cellular General Partnership (the "Arizona 5 Partnership"),
which owns the cellular license for the Arizona 5 RSA as well as the associated
tangible operating assets. Certain affiliates of the Company indirectly owned a
20.6% interest in the Arizona 5 Partnership and received $9.5 million in
connection with the acquisition. In addition, the Company loaned $6.1 million to
the current partner which acquired a 25% interest in the Arizona 5 Partnership.
On March 3, 1997, the Company purchased the FCC cellular license for, and
certain assets relating to the Maryland 2 RSA for $75.8 million. The property is
located to the east of the Washington/Baltimore metropolitan area. This
acquisition and the one completed on February 28, 1997 are referred to together
as the "Maryland/Pennsylvania Acquisition".
F-31
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
On February 28, 1997, the Company purchased the FCC cellular licenses for,
and certain assets relating to two MSAs and two RSAs located in Maryland and
Pennsylvania for $77.6 million. The properties are located immediately outside
the Washington/Baltimore metropolitan area.
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes the
1997 acquisitions and 1998 acquisitions accounted for as if the purchases
occurred at the beginning of the respective periods presented. The unaudited pro
forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
($ IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Operating revenue............................................................... $ 92,996 $ 109,832
Loss before discontinued operations and extraordinary expense................... (23,633) (15,515)
Net loss........................................................................ (45,624) (48,220)
Net loss applicable to common stockholders...................................... (62,430) (65,862)
Net loss applicable to common stockholders per common share..................... $ (131.94) $ (139.20)
</TABLE>
PENDING ACQUISITIONS
As of July 28, 1998, the Company entered into a definitive agreement to
acquire the stock of Sygnet Wireless, Inc. ("Sygnet Acquisition") for $337.5
million. Sygnet owns and operates cellular systems in Ohio, Pennsylvania and New
York covering an estimated population base of 2.4 million people. In July 1998,
the Company placed $25 million into escrow pending closing of the acquisition.
The Sygnet acquisition is expected to close in the fourth quarter of 1998.
On November 24, 1998, the Company entered into a definitive agreement to
purchase the FCC licenses for, and certain assets related to, Maryland 1 RSA for
$9.1 million, subject to adjustment. Maryland 1 is located in western Maryland.
3. DISCONTINUED OPERATIONS
On September 30, 1998, the Company's Board of Directors authorized the
distribution of the wireline segment to the holders of the Company's common
stock on a tax-free basis, subject to the receipt of a private letter ruling
from the Internal Revenue Service ("IRS") under Internal Revenue Code 355(e).
The request was filed with the IRS on October 6, 1998, and a ruling is expected
in the second quarter of 1999. The wireline segment, which consists of Logix and
its subsidiaries, operates as an ICP under the LOGIX-SM- brand name in Oklahoma
and Texas, owns local telephone exchanges in Oklahoma and operates regional
fiber optic transmission networks in Oklahoma, Texas and Colorado. Pursuant to
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," the
consolidated financial statements have been restated for all periods presented
to reflect the wireline operations, assets and liabilities as discontinued
operations.
F-32
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of such operations have been classified as "Net
assets (liabilities) of discontinued operations" on the condensed consolidated
balance sheets and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................. $ 254 $ 66,278
Restricted investments--current........................................... -- 43,448
Other current assets...................................................... 2,758 14,090
Property, plant and equipment, net........................................ 35,976 54,097
Restricted investments--non-current....................................... -- 79,533
Goodwill.................................................................. -- 124,481
Other assets.............................................................. 12,965 20,896
------------ -------------
Total assets............................................................ 51,953 402,823
Current liabilities....................................................... 2,544 26,184
Long-term debt, net of current portion.................................... 27,498 376,544
Other liabilities......................................................... 1,834 724
------------ -------------
Total liabilities....................................................... 31,876 403,452
------------ -------------
Net assets (liabilities) of discontinued operations....................... $ 20,077 $ (629)
------------ -------------
------------ -------------
</TABLE>
The net income from operations of the wireline segment was classified on the
condensed consolidated statement of operations as "Income (loss) from
discontinued operations." Summarized results of discontinued operations are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1998
--------- ----------
($ IN THOUSANDS)
<S> <C> <C>
Net revenues..................................................................... $ 15,221 $ 40,176
Income (loss) from continuing operations before income taxes..................... 1,949 (23,753)
Income tax benefit (provision)................................................... (80) 7,268
Extraordinary item............................................................... (217) --
Cumulative effect of change in accounting principle.............................. -- (700)
Income from discontinued operations.............................................. (1,652) (17,185)
</TABLE>
4. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
Revolving credit facilities............................................ $ 171,513,855 $ 284,000,000
DCC Senior Notes....................................................... 160,000,000 160,000,000
Other notes payable.................................................... 4,056,204 4,056,204
-------------- --------------
Total long-term debt................................................. $ 335,570,059 $ 448,056,204
-------------- --------------
-------------- --------------
</TABLE>
F-33
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
REVOLVING CREDIT FACILITIES
On March 25, 1998, the Company's subsidiary DCOC established a $200 million
senior secured credit facility (the "DCOC Credit Facility"). DCOC's obligations
under the DCOC Credit Facility are secured by all current and future assets of
DCOC. As of September 30, 1998, $143 million was outstanding under the DCOC
Credit Facility. At the same time, the Company's subsidiary DOC established a
$250 million senior secured credit facility (the "DOC Bank Facility") to replace
its existing revolving credit facility established on February 28, 1997 and
discussed below. The DOC Bank Facility is secured by all of DOC's stock and the
stock or partnership interests of its restricted subsidiaries and all assets of
DOC and its restricted subsidiaries. DCOC is designated an unrestricted
subsidiary with regard to the DOC Facility. The Company and DOC's wholly owned
subsidiaries other than Logix and the Arizona 5 Partnership have guaranteed
DOC's obligations under the DOC Bank Facility. As of September 30, 1998, $141
million was outstanding under the DOC Bank Facility. The DCOC Credit Facility
and the DOC Bank Facility require the Company to maintain certain financial
ratios. The failure to maintain such ratios would constitute an event of
default, notwithstanding the Company's ability to meet its debt service
obligations. Interest on borrowings under the new credit agreements accrue at
variable rates (weighted average rate of approximately 6.9% at September 30,
1998). Initial proceeds were used primarily to refinance existing indebtedness
and finance the 1998 acquisitions described above. The Company expects to use
the remaining availability to finance capital expenditures, consummate future
acquisitions and fund general corporate operations. The facilities will
terminate in 2006.
In connection with the closing of the DOC Bank Facility, the Company
extinguished its then existing credit facility and recognized a pretax loss of
approximately $3.3 million as a result of writing off previously capitalized
financing costs associated with the revolving credit facility. Such amount is
included in the Company's condensed consolidated statement of operations, net of
tax, for the nine months ended September 30, 1998 as an extraordinary expense.
In April 1997, the Company entered into an interest rate hedge agreement
terminating on April 24, 2002 to hedge the Company's interest expense on $160
million of its indebtedness under the revolving credit facilities. Subsequent to
September 30, 1998, the counterparty exercised its rights under the swap
agreement, fixing the interest rate at 6.13% plus a factor based on the
Company's leverage. The Company accounts for this as a hedge.
On February 28, 1997, the Company's bank credit agreement was amended and
restated to provide the Company with a $200 million revolving credit agreement
facility maturing in 2005 ("1997 Credit Facility"). Interest on borrowings under
the credit agreement accrued at a variable rate. Initial proceeds were used to
refinance existing indebtedness, finance the Maryland/Pennsylvania Acquisition
described in Note 2 and for general corporate purposes, including $7.5 million
to pay a dividend to holders of its Class A Common Stock. In connection with the
closing of the revolving credit facility, the Company extinguished its then
existing credit facility, and recognized a pretax loss of approximately $2.5
million as a result of writing off previously capitalized financing costs
associated with the old revolving credit facility. This loss has been reflected
as an extraordinary item, net of tax, in the Company's condensed consolidated
statement of operations for the nine months ended September 30, 1997.
F-34
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
SENIOR NOTES
On February 28, 1997, the Company issued $160 million of 11.75% Senior Notes
maturing in 2007 ("DCC Senior Notes"). The net proceeds were used to finance the
Maryland/Pennsylvania Acquisition described above and to purchase securities
pledged to secure payment of the first four semi-annual interest payments on the
notes, which began on October 15, 1997. The pledged securities are reflected as
restricted cash and investments in the Company's condensed consolidated balance
sheets. The DCC Senior Notes are redeemable at the option of the Company in
whole or in part, on or after April 15, 2002, initially at 105.875%. Prior to
April 15, 2000, the Company may redeem up to 35% of the principal amount of the
DCC Senior Notes at 111.750% with proceeds from sales of stock, provided that
after any such redemption at least $104 million remains outstanding.
SYGNET FINANCING
On July 20, 1998, in connection with the pending Sygnet Acquisition, the
Company received commitments for a new $450 million credit facility to be
secured by the assets acquired in the Sygnet Acquisition. The Company also
obtained commitments for bridge financing, which expired subsequent to September
20, 1998.
5. PREFERRED STOCK
In January 1998, the Company issued 175,000 shares of 12.25% Senior
Exchangeable Preferred Stock mandatorily redeemable in 2008 for $1,000 per
share. Holders of the preferred stock are entitled to cumulative quarterly
dividends from the date of issuance and a liquidation preference of $1,000 per
share with rights over the other classes of capital stock. In 1998, the Company
has issued cumulative quarterly dividends in the form of 10,513 additional
shares of preferred stock (having a liquidation preference of $10.5 milion)
which represented non-cash financing activity, and thus are not included in the
accompanying condensed consolidated statement of cash flows. On and before
January 15, 2003, the Company may pay dividends, at its option, in cash or in
additional shares having an aggregate liquidation preference equal to the amount
of such dividends. Additionally, the preferred stock is redeemable at the option
of the Company on or after January 15, 2003. Holders of the preferred stock have
no voting rights.
6. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of securities pledged to secure
payment of interest on the DCC Senior Notes through April 1999.
7. TAXES
The income tax benefit amounts for the nine months ended September 30, 1997
and 1998 differ from amounts computed at the statutory rate due primarily to net
operating losses for which no benefit has been recognized.
8. EARNINGS PER COMMON SHARE
Basic loss per common share is computed by the weighted average number of
shares of common stock outstanding during the year. Diluted net loss per common
share has been omitted because the impact of stock options and convertible
preferred stock on the Company's net loss per common share is anti-dilutive.
F-35
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133 will be effective for
fiscal years beginning after June 15, 1999. The Company has not yet evaluated
the impact of adopting SFAS 133 and has not determined the timing or method of
adoption of SFAS 133.
10. COMMITMENTS
Effective December 6, 1995 (amended December 20, 1995, June 24, 1997 and
September 30, 1998), the Company entered into an equipment supply agreement in
which the Company agreed to purchase approximately $65 million of cell site and
switching equipment between June 24, 1997 and November 23, 2001 to update the
cellular systems for newly acquired and existing MSAs and RSAs. Of this
commitment, approximately $34.6 million remained at September 30, 1998.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1998. The Company agreed to purchase approximately
$81 million of cell site and switching equipment between January 13, 1998 and
January 12, 2002 to update the cellular systems for newly acquired and existing
MSAs and RSAs. Of this commitment, $67 million remained at September 30, 1998.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Horizon, G.P., Inc.
We have audited the accompanying combined statements of assets and
liabilities of The Cellular Telephone Business of Selected Systems of Horizon
Cellular Telephone Company, L.P. as of December 31, 1995 and 1996, and the
related combined statements of operations and net assets and of cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Horizon Cellular Telephone Company, L.P.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Cellular Telephone
Business of Selected Systems of Horizon Cellular Telephone Company, L.P. at
December 31, 1995 and 1996, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 27, 1997
F-37
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 355,069 $ 435,407
Accounts receivable, net of allowance for doubtful accounts of $82,160 and
$100,790....................................................................... 1,709,143 2,240,468
Inventory........................................................................ 130,730 219,079
Prepaid expenses................................................................. 77,731 29,991
------------- -------------
Total current assets............................................................... 2,272,673 2,924,945
Property and equipment:
Cellular system.................................................................. 8,669,758 10,810,808
Other............................................................................ 959,727 1,287,823
------------- -------------
9,629,485 12,098,631
Accumulated depreciation......................................................... (3,080,449) (4,491,663)
------------- -------------
6,549,036 7,606,968
Licenses, net of accumulated amortization of $3,099,061 and $4,020,825............. 32,763,313 31,841,549
Other assets, net of accumulated amortization of $18,483 and $22,838............... 94,275 99,200
------------- -------------
Total assets....................................................................... $ 41,679,297 $ 42,472,662
------------- -------------
------------- -------------
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable................................................................. $ 354,798 $ 702,859
Accrued expenses................................................................. 669,390 968,815
Deferred revenue................................................................. 403,994 566,521
------------- -------------
Total current liabilities.......................................................... 1,428,182 2,238,195
Advances from affiliates........................................................... 14,862,381 13,399,571
Net assets......................................................................... 25,388,734 26,834,896
------------- -------------
Total liabilities and net assets................................................... $ 41,679,297 $ 42,472,662
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-38
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS AND NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Cellular service.................................................. $ 5,863,828 $ 7,801,918 $ 10,867,791
Roaming revenues.................................................. 2,765,685 3,496,366 4,264,112
Cellular equipment sales.......................................... 524,892 402,430 388,505
------------- ------------- -------------
Total revenues...................................................... 9,154,405 11,700,714 15,520,408
Operating expenses:
Cellular service.................................................. 2,918,043 3,569,152 4,532,595
Cellular equipment................................................ 1,100,160 1,182,309 1,133,171
General and administrative........................................ 1,528,970 1,471,078 1,869,299
LPAR compensation................................................. -- -- 275,000
Marketing and selling............................................. 1,272,265 1,944,731 2,478,918
Depreciation and amortization..................................... 1,959,106 2,170,963 2,331,184
------------- ------------- -------------
8,778,544 10,338,233 12,620,167
------------- ------------- -------------
Income from operations.............................................. 375,861 1,362,481 2,900,241
Interest expense.................................................... 1,358,153 1,568,883 1,454,079
------------- ------------- -------------
Net (loss) income................................................... (982,292) (206,402) 1,446,162
Net assets at beginning of year..................................... 21,926,001 25,314,904 25,388,734
Partners' contributions............................................. 4,371,195 280,232 --
------------- ------------- -------------
Net assets at end of year........................................... $ 25,314,904 $ 25,388,734 $ 26,834,896
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-39
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................................... $ (982,292) $ (206,402) $ 1,446,162
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization...................................... 1,959,106 2,170,963 2,331,184
Provision for bad debts............................................ 433,490 3,075 169,582
LPAR compensation.................................................. -- -- 275,000
Accrued interest expense--affiliate................................ 1,358,153 1,568,883 1,454,079
Changes in operating assets and liabilities:
Accounts receivable.............................................. (1,194,015) (280,891) (700,907)
Inventory........................................................ (72,670) 42,003 (88,349)
Prepaid expenses................................................. (4,768) (61,027) 47,740
Accounts payable and accrued expenses............................ 691,454 (239,835) 372,486
Deferred revenue................................................. 95,128 205,588 162,527
------------- ------------- -------------
Net cash provided by operating activities............................ 2,283,586 3,202,357 5,469,504
INVESTING ACTIVITIES
Purchases of property and equipment.................................. (1,942,166) (1,418,979) (2,462,997)
License and system acquisitions...................................... (4,205,125) -- --
Other................................................................ 27,925 (12,161) (9,280)
------------- ------------- -------------
Net cash used in investing activities................................ (6,119,366) (1,431,140) (2,472,277)
FINANCING ACTIVITIES.................................................
Advances to affiliates, net of $166,069 and $280,232 noncash
contributions in 1994 and 1995, respectively........................ (139,739) (2,038,131) (2,916,889)
Partners' contributions.............................................. 4,205,125 -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities.................. 4,065,386 (2,038,131) (2,916,889)
------------- ------------- -------------
Net increase (decrease) in cash...................................... 229,606 (266,914) 80,338
Cash at beginning of year............................................ 392,377 621,983 355,069
------------- ------------- -------------
Cash at end of year.................................................. $ 621,983 $ 355,069 $ 435,407
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-40
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying audited combined financial statements of The Cellular
Telephone Business of Selected Systems of Horizon Cellular Telephone Company,
L.P. (HCTC) reflect the combined assets and liabilities, combined results of
operations, and combined cash flows of the cellular telephone business of
Horizon Cellular Telephone Company of Frederick ("Frederick"), Horizon Cellular
Telephone Company of Bedford ("Bedford"), Horizon Cellular Telephone Company of
Hagerstown, L.P. ("Hagerstown"), and the Cumberland Cellular Partnership
("Cumberland") (collectively referred to as "the Selected Systems," "the
Systems," or "the Company") as of December 31, 1995 and 1996, and for each of
the three years in the period ended December 31, 1996. The accompanying
financial statements are presented on HCTC's historical cost basis and are
intended to reflect only the assets, liabilities, operations, and cash flows
relating to the cellular telephone business of the named legal entities, which
are majority-owned subsidiary partnerships of HCTC, and do not represent the
financial statements of the named legal entities. The combined financial
statements include only the operating results since the Systems were acquired by
HCTC.
The Company owns, designs, develops, and operates cellular communications
systems. With the exception of Cumberland, KCCGP, L.P. (KCCGP) is the managing
and sole general partner of the subsidiary partnerships that own directly the
aforesaid cellular telephone businesses at December 31, 1996. With respect to
Cumberland, KCCGP is the managing and sole general partner of Horizon Cellular
Telephone Company of Cumberland, L.P., a 90.55% general partner in Cumberland.
KCCGP performs certain administrative functions for the Systems and,
accordingly, certain expenses of KCCGP (see Note 5) have been allocated to the
Systems on a basis which, in the opinion of management, is reasonable. However,
such expenditures are not necessarily indicative of, and it is not practicable
for management to estimate, the nature and level of expenses which might have
been incurred had the Systems been operating as separate independent companies.
2. ACQUISITIONS
In April 1994, HCTC simultaneously closed on various purchase, sale and
exchange agreements which ultimately resulted in HCTC (i) acquiring a majority
interest (90.55%) in the non-wireline FCC Operating License of the Cumberland
MSA, (ii) acquiring the non-wireline FCC Operating License of the Hagerstown MSA
together with certain operating assets, in exchange for substantially all of the
assets of the eastern portion of Bedford, and (iii) making a net payment of $4.2
million in cash. Simultaneously, HCTC contributed the Operating License to
Cumberland and contributed the Operating License to Hagerstown in exchange for a
99.0% interest in Hagerstown and KCCGP obtained a 1.0% interest in Hagerstown.
Effective January 1, 1995, the operations of Frederick and Bedford were
merged into Hagerstown. As part of the market consolidation, the general partner
interests were reorganized. KCCGP acquired an additional .9% interest in
Frederick (resulting in a 1% general partner ownership), reducing HCTC's Limited
Partnership interest to 99%. The additional partner contribution was based on
the estimated fair market value of the Frederick System.
All of the Company's acquisitions were accounted for under the purchase
method of accounting; accordingly, assets acquired and liabilities assumed have
been recorded at their estimated fair market values at the dates of acquisition
and their results of operations are included in the accompanying combined
statements of operations since the date of acquisition. The accompanying
financial statements
F-41
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. ACQUISITIONS (CONTINUED)
exclude the results of operations of the eastern portion of Bedford. The excess
of purchase price over the fair market value of identifiable net tangible assets
acquired has been allocated to customer lists and licenses. Pro forma results of
operations for 1994, assuming the acquisitions of Hagerstown and Cumberland
occurred on January 1, 1994, would not differ materially from reported results.
3. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are carried at the lower of cost (using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives (three to twelve years) using the straight-line method.
Depreciation expense amounted to approximately $1,143,000 in 1994,
$1,237,000 in 1995, and $1,405,000 in 1996.
LICENSES
Licenses primarily represent the acquisition costs of the Operating
Licenses. Such costs are being amortized over a period of 40 years using the
straight-line method.
The Systems periodically review the carrying value of their licenses to
determine whether such amounts are recoverable based on undiscounted future cash
flows and whether a reduction to fair value is necessary. There have been no
such reductions through December 31, 1996.
ADVANCES FROM AFFILIATES
Advances from affiliates primarily represent cash advances from HCTC and
KCCGP which provided funds for investing and operating activities, and have no
specific repayment terms. Interest expense is charged monthly at a rate of
11 3/8% of the ending balances payable to HCTC.
REVENUE AND EXPENSE RECOGNITION
Cellular airtime revenue and access charges are recognized as service is
provided. Cellular airtime is billed in arrears and access charges are billed in
advance. Subscriber acquisition costs (mainly commissions and loss on equipment
sales) are expensed when incurred. Accounts receivable consist mainly of amounts
due from subscribers and other cellular companies whose subscribers use the
Systems' cellular service.
F-42
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. ACCOUNTING POLICIES (CONTINUED)
Approximately 40% of the 1996 roaming revenues were generated from
subscribers of a cellular company serving an adjacent market when such
subscribers place or receive calls on the Company's system.
ADVERTISING EXPENSES
Advertising expenses are charged to operations as incurred and amounted to
approximately $256,100 in 1994, $394,400 in 1995, and $512,000 in 1996.
ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Property, sales, and excise taxes..................................... $ 128,400 $ 112,800
Interconnection and other billing costs............................... 68,400 63,500
Salaries and bonuses.................................................. 118,900 139,100
LPAR compensation..................................................... -- 275,000
Other................................................................. 353,700 378,400
---------- ----------
$ 669,400 $ 968,800
---------- ----------
---------- ----------
</TABLE>
INCOME TAXES
The legal entities under which the Systems operate are partnerships
organized under the laws of Delaware. Accordingly, federal and state income
taxes are not paid at the partnership level but by the ultimate partners. The
tax basis of the Systems' assets amounted to approximately $28.8 million and $30
million at December 31, 1995 and 1996, respectively.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The impact of adopting this Statement in 1996 was not material
to the financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," is effective for
fiscal years beginning after December 15, 1995. SFAS 123 provides companies with
a choice to follow the provisions of SFAS 123 in determining stock-based
compensation expense or to continue with the provisions of APB 25, "Accounting
for Stock Issued to Employees." Although the Selected Systems expect to continue
to follow APB 25, Statement 123 would have no effect on the combined financial
statements for the periods indicated (see Note 6).
F-43
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. COMMITMENTS AND CONTINGENCIES
The Systems lease office space, office equipment, and cellular sites and
facilities under operating leases with initial terms ranging from 1 to 20 years.
Most cellular sites contain renewal options ranging up to 25 years.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following amounts as of December 31,
1996:
<TABLE>
<CAPTION>
CELLULAR
SITES OTHER
---------- ------------
<S> <C> <C>
1997................................................................ $ 87,000 $ 353,000
1998................................................................ 89,000 289,000
1999................................................................ 65,000 244,000
2000................................................................ 61,000 197,000
2001................................................................ 41,000 --
Thereafter.......................................................... 281,000 --
---------- ------------
Total minimum lease payments........................................ $ 624,000 $ 1,083,000
---------- ------------
---------- ------------
</TABLE>
Rental expense amounted to approximately $251,100 in 1994, $336,500 in 1995,
and $389,800 in 1996.
5. RELATED PARTY TRANSACTIONS
KCCGP provides various administrative services to the Systems, including
accounting, engineering, and marketing and advertising services, in addition to
funding working capital requirements and capital expenditures as necessary.
These expenses are charged, first on the basis of direct usage when
identifiable, with the remainder allocated equally among its operating systems.
Allocated expenses amounted to $107,000 for the year ended December 31, 1994,
and $50,000 for each of the years ended December 31, 1995 and 1996.
6. BENEFIT PLANS
HCTC has granted certain officers of the Selected Systems limited
partnership appreciation rights in HCTC pursuant to a Limited Partnership Unit
Appreciation Rights Plan ("LPAR Plan"), as amended, that was adopted September
1, 1994 to be effective January 1, 1993. Upon the occurrence of certain events
as specified therein ("Termination Events"), participants are entitled to share
in the amounts, if any, of distributions to HCTC's partners after all capital
contributions made by HCTC's partners have been repaid, together with a fixed
return on such contributions. Such rights vest over a period of five years;
however, vesting is automatically accelerated upon the occurrence of a
Termination Event. LPAR Plan compensation expense of $275,000 has been
recognized and included in accrued expenses as of December 31, 1996, which is
the LPAR Plan amount attributable to participants who are employees of the
Selected Systems.
Effective July 1, 1994, KCCGP established an employee savings plan (the
"Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Plan, which covers employees of the
Selected Systems who have met certain eligibility requirements, participating
F-44
<PAGE>
THE CELLULAR TELEPHONE BUSINESS OF SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. BENEFIT PLANS (CONTINUED)
employees may defer up to 15% of their pretax earnings, up to the Internal
Revenue Service annual contribution limit ($9,500 for calendar year 1996). The
Company matches up to 50% of the employee's contributions, up to a maximum of 3%
of the employee's earnings. Employees who participate in the LPAR Plan are
excluded from matching contributions. Matching Plan contributions, which vest
equally over five years, amounted to approximately $7,600 in 1994, $10,100 in
1995, and $17,600 in 1996.
7. SUBSEQUENT EVENTS
On November 19, 1996, the Company entered into a definitive agreement to
sell the FCC Operating Licenses of the Selected Systems, together with certain
operating assets and liabilities, to Dobson Cellular of Maryland, Inc. for
approximately $75 million, subject to adjustment. The combined financial
statements do not reflect either the estimated gain, or any expenses incurred or
expected to be incurred related to the sale of the systems. The sale is expected
to close in February of 1997, and is subject to certain regulatory and other
approvals.
F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Gila River Cellular General Partnership:
We have audited the accompanying balance sheets of Gila River Cellular
General Partnership (an Arizona general partnership) as of December 31, 1996 and
1995, and the related statements of operations, changes in partners' capital and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gila River Cellular General
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 10, 1997
F-46
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2)............................................... $ -- $ 1,569,595
Accounts receivable, net of allowance of $58,696, and $159,707 respectively...... 503,165 849,026
Inventories (Note 2)............................................................. 32,551 27,645
Prepaid expenses................................................................. 555 107
------------- -------------
Total current assets........................................................... 536,271 2,446,373
------------- -------------
Property and Equipment (Notes 2 and 5):
Cellular systems................................................................. 10,218,397 10,363,236
Furniture and equipment.......................................................... 5,354 5,354
Construction in progress......................................................... 178,687 466,707
------------- -------------
10,402,438 10,835,297
Less accumulated depreciation and amortization................................... (1,361,443) (2,605,661)
------------- -------------
9,040,995 8,229,636
------------- -------------
Total assets................................................................... $ 9,577,266 $ 10,676,009
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................................................. $ 170,867 $ 614,134
Accrued liabilities.............................................................. 762,799 415,006
Advance billings and deposits (Note 2)........................................... 80,964 97,915
Due to general partner (Notes 2 and 4)........................................... 2,111,267 --
------------- -------------
Total current liabilities...................................................... 3,125,897 1,127,055
Long-term liabilities.............................................................. 8,002 8,002
Commitments (Note 3) -- --
Partners' capital.................................................................. 6,443,367 9,540,952
------------- -------------
Total liabilities and partners' capital........................................ $ 9,577,266 $ 10,676,009
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Note 2)
Cellular service...................................................... $ 906,882 $ 1,286,901 $ 2,151,888
Cellular equipment.................................................... 258,582 226,193 275,346
Roaming and other..................................................... 2,437,233 4,230,127 5,583,073
------------ ------------ ------------
Total revenues...................................................... 3,602,697 5,743,221 8,010,307
------------ ------------ ------------
Operating Expenses (Notes 2 and 4):
Cost of cellular service.............................................. 373,159 531,380 993,086
Cost of cellular equipment............................................ 269,986 264,037 350,028
Selling............................................................... 419,683 708,545 1,080,862
General and administrative............................................ 596,117 911,065 1,208,123
Depreciation and amortization......................................... 320,727 926,995 1,244,204
------------ ------------ ------------
Total operating expenses............................................ 1,979,672 3,342,022 4,876,303
------------ ------------ ------------
Operating income........................................................ 1,623,025 2,401,199 3,134,004
Other (expense) income (Note 2)......................................... 24,251 (50,024) (36,419)
------------ ------------ ------------
Net income........................................................ $ 1,647,276 $ 2,351,175 $ 3,097,585
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
BEGINNING BALANCE TRANSFER OF BALANCE ADJUSTED BALANCE
OWNERSHIP DEC. 31, INTEREST DEC. 31, OWNERSHIP DEC. 31,
INTEREST 1993 NET INCOME (NOTE 1) 1994 INTEREST NET INCOME 1995
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Partners:
Gila River
Telecommunications,
Inc.................. 40.00% $ 977,966 $ 658,910 $ 79,799 $1,716,675 41.9500% $ 986,318 $2,702,993
Tohono O'odham Utility
Authority............ 23.00% 562,331 378,874 (30,590) 910,615 22.2525% 523,195 1,433,810
Aztel, Inc............. 23.00% 562,331 378,874 (30,590) 910,615 22.2525% 523,195 1,433,810
U S WEST NewVector
Group, Inc........... 14.00% 342,288 230,618 (18,619) 554,287 13.5450% 318,467 872,754
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
100.00% $2,444,916 $1,647,276 $ -- $4,092,192 100.0000% $2,351,175 $6,443,367
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
<CAPTION>
BALANCE
DEC. 31,
NET INCOME 1996
----------- ---------
<S> <C> <C>
General Partners:
Gila River
Telecommunications,
Inc.................. $1,299,437 $4,002,430
Tohono O'odham Utility
Authority............ 689,290 2,123,100
Aztel, Inc............. 689,290 2,123,100
U S WEST NewVector
Group, Inc........... 419,568 1,292,322
----------- ---------
$3,097,585 $9,540,952
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................................................... $ 1,647,276 $ 2,351,175 $ 3,097,585
------------- ------------- -------------
Adjustments to net income:
Depreciation and amortization...................................... 320,727 926,995 1,244,204
Changes in current assets and current liabilities:
Accounts receivable, net......................................... (139,488) (143,655) (345,861)
Inventories...................................................... (9,171) (3,259) 4,906
Accounts payable................................................. 62,289 10,260 35,995
Accrued liabilities.............................................. 99,636 663,163 (347,793)
Advance billings and deposits.................................... 22,220 33,632 16,951
Prepaid expenses................................................. (306) (249) 448
Other............................................................ (20,389) -- --
------------- ------------- -------------
Total adjustments................................................ 335,518 1,486,887 608,850
------------- ------------- -------------
Cash provided by operations...................................... 1,982,794 3,838,062 3,706,435
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment................................. (1,381,306) (7,090,057) (25,573)
Cash received on disposition of property and equipment............. -- 525,000 --
------------- ------------- -------------
Cash used for investing activities............................... (1,381,306) (6,565,057) (25,573)
------------- ------------- -------------
FINANCING ACTIVITIES:
(Payments to) advances from general partner........................ -- 2,111,267 (2,111,267)
------------- ------------- -------------
Cash (used for) provided by financing activities................. -- 2,111,267 (2,111,267)
------------- ------------- -------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease).......................................... 601,488 (615,728) 1,569,595
Beginning balance................................................ 14,240 615,728 --
------------- ------------- -------------
Ending balance................................................... $ 615,728 $ -- $ 1,569,595
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Gila River Cellular General Partnership (an Arizona general partnership) was
formed on September 1, 1990, to fund, establish and provide cellular
telecommunication services to customers within the geographical area between the
cities of Phoenix and Tucson, Arizona known as the Gila Rural Service Area
("RSA") Number 5 (corridor). Gila River Telecommunications, Inc., Tohono O'odham
Utility Authority (a subsidiary organization of the Tohono O'odham Nation), and
Aztel, Inc. participate as general partners. U S WEST NewVector Group, Inc.
participates as the managing general partner.
Effective December 31, 1994, the partners of Gila River Cellular General
Partnership entered into a definitive agreement to amend the Partnership
Agreement to incorporate the geographical service area of Arizona RSA Number 5
(non-corridor) served by a separate partnership of Gila River
Telecommunications, Inc., Tohono O'odham Utility Authority and Aztel, Inc. As a
result of this transaction, the ownership interest of the general partners of
Gila River Cellular General Partnership has been revised as reflected in the
accompanying financial statements.
In late 1996, Dobson Communications Corporation ("Dobson") and the general
partners signed a letter of intent wherein Dobson agreed to purchase the
interests of the general partners. Upon completion of the transaction, which is
expected to occur in the first half of 1997, Dobson and the Gila River Indian
Community will have a 100% interest in Arizona RSA Number 5. At Dobson's option,
during the sales transition and post-transition periods, Dobson may purchase
services from the managing general partner similar to those discussed in Note 4.
2. SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts which are readily convertible into
cash and which are not subject to significant risk from fluctuations in interest
rates.
INVENTORIES
Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis. Inventories consist of cellular mobile telephone
equipment that is purchased by the Partnership primarily for sale to customers.
PROPERTY, EQUIPMENT AND DEPRECIATION
The Partnership's investment in property and equipment is stated at cost
less accumulated depreciation. Interest incurred during construction is
capitalized and amortized over the life of the underlying asset. Interest of
$9,216, $163,427 and $2,404 was capitalized during the years ended December 31,
1996, 1995 and 1994, respectively. The cost of these assets includes purchased
materials, contracted services, internal labor and applicable overhead.
F-51
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is calculated on a straight-line basis over the following
estimated economic life of the assets:
<TABLE>
<S> <C>
3 to 20
Cellular systems.............................. years
Furniture and equipment....................... 3 to 5 years
</TABLE>
INCOME TAXES
Under provisions of the Internal Revenue Code, the partners include their
respective share of Partnership income or loss in their individual tax returns.
Accordingly, no provision for income taxes has been made in the accompanying
financial statements.
MANAGING GENERAL PARTNER FINANCING
The managing general partner advances funds to the Partnership as necessary
to finance operations and network construction. Interest is charged to the
Partnership on these advances at a rate equivalent with U S WEST NewVector
Group, Inc.'s borrowing rate which averaged 8.1% for the year ended December 31,
1996 and 7.5% for the years ended December 31, 1995 and 1994. Interest expense
incurred and paid, net of amounts capitalized for the years ended December 31,
1996, 1995 and 1994 was $50,098, $50,024 and $0, respectively.
REVENUES
The Partnership earns cellular service revenue by providing access to the
cellular network (access revenue) and for use of the network (airtime revenue).
Access revenue is billed one month in advance. Airtime and access revenues are
recognized when the service is provided.
ADVERTISING COSTS
Costs incurred for advertising are expensed as incurred.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to the prior year's financial
statements in order to present them on a basis consistent with that of the
current year.
F-52
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
3. COMMITMENTS:
OPERATING LEASES
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancelable lease terms ending after
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 91,086
1998.............................................. 80,038
1999.............................................. 67,769
2000.............................................. 19,090
2001.............................................. 180
---------
Total............................................. $ 258,163
---------
---------
</TABLE>
Leases for real estate provide for renewal at various intervals with
provision for increased rents at each renewal.Rental expense for the years ended
December 31, 1996, 1995 and 1994 was $91,663, $103,604 and $51,809,
respectively.
4. RELATED PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the managing general partner
provides many services to the Partnership as well as to other cellular
partnerships. These include legal, financial, engineering, operations, marketing
and accounting services. Costs for performing these services are charged to the
Partnership primarily on the basis of the managing general partner's time and
effort incurred on behalf of the Partnership for each activity.The Partnership
incurred costs from the managing general partner for the years ended December
31, 1996, 1995, and 1994 of $986,301, $848,279 and $529,924, respectively.
The Partnership purchases telecommunication services from an affiliate of
the managing general partner. Purchases for the years ended December 31, 1996,
1995 and 1994 were $289,404, $175,641 and $80,840, respectively.
The managing general partner provides switching services to the Partnership.
The Partnership was charged $196,202, $97,220 and $58,266 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Partnership utilizes digital transmission facilities from a U S WEST
NewVector Group, Inc. managed partnership. The Partnership was charged $4,380
for these services during the year ended December 31, 1996 and $0 for the two
years ended December 31, 1995 and 1994.
5. UPGRADE OF CELLULAR SYSTEM
During 1993, the Partnership decided to replace substantially all of its
cellular network equipment consisting primarily of cell site electronics. The
Partnership recorded a reserve of $460,000 in connection with this transaction
in order to reduce the cellular equipment to its net realizable value. During
the fourth quarter of 1995, assets with a book value of $1,132,394 and
accumulated depreciation of $200,153 were replaced in connection with the
upgrade. As part of this transaction, the Partnership's displaced cellular
equipment was transferred to the managing general partner at its fair market
value of $525,000.
F-53
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................................................ $ 1,773,244
Accounts receivable, net of allowance of $164,039................................................ 949,650
Prepaid expenses................................................................................. 768
-------------
Total current assets....................................................................... 2,723,662
-------------
Property and Equipment
Cellular systems................................................................................. 10,482,892
Furniture and equipment.......................................................................... 7,420
Construction in progress......................................................................... 285,880
-------------
10,776,192
Less accumulated depreciation.................................................................... (3,374,726)
-------------
7,401,466
-------------
Total Assets............................................................................... $ 10,125,128
-------------
-------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................................................................. $ 239,846
Accrued liabilities.............................................................................. 725,517
Advance billings and deposits.................................................................... 100,214
-------------
Total current liabilities.................................................................. 1,065,577
Long-term liabilities............................................................................ 8,002
Commitments
Partners' capital................................................................................ 9,051,549
-------------
Total liabilities and partners' capital...................................................... $ 10,125,128
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-54
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
(UNAUDITED)
Revenues
Cellular service.................................................................... $ 1,550,972 $ 1,906,980
Cellular equipment.................................................................. 197,669 382,956
Roaming and other................................................................... 4,082,018 5,347,644
------------ ------------
Total revenues.................................................................... 5,830,659 7,637,580
------------ ------------
Operating Expenses
Cost of cellular service............................................................ 649,269 902,609
Cost of cellular equipment.......................................................... 246,925 401,466
Selling............................................................................. 778,398 627,374
General and administrative.......................................................... 971,937 965,002
Depreciation and amortization....................................................... 791,961 903,908
------------ ------------
Total operating expenses.......................................................... 3,438,490 3,800,359
------------ ------------
Operating income...................................................................... 2,392,169 3,837,221
Other income (expense)................................................................ (50,098) 149,583
------------ ------------
Net income.................................................................... $ 2,342,071 $ 3,986,804
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DISTRIBUTION BALANCE
OWNERSHIP BALANCE DEC. BALANCE DEC. TO GENERAL SEPT. 30,
INTEREST 31, 1995 NET INCOME 31, 1996 NET INCOME PARTNERS 1997
------------ ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
General Partners:
Gila River Telecommunications,
Inc......................... 41.9500% 2,702,993 1,299,437 4,002,430 1,672,464 (1,877,769) 3,797,125
Tohono O'odham Utility
Authority................... 22.2525% 1,433,810 689,290 2,123,100 887,164 (996,068) 2,014,196
Aztel, Inc.................... 22.2525% 1,433,810 689,290 2,123,100 887,164 (996,068) 2,014,196
U S WEST NewVector Group,
Inc......................... 13.5450% 872,754 419,568 1,292,322 540,012 (606,302) 1,226,032
------------ ------------ ------------ ------------ ------------ ------------- ------------
100.0000% $ 6,443,367 $ 3,097,585 $ 9,540,952 $ 3,986,804 $ (4,476,207) $ 9,051,549
------------ ------------ ------------ ------------ ------------ ------------- ------------
------------ ------------ ------------ ------------ ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996
------------- 1997
-------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................ $ 2,342,071 $ 3,986,804
------------- -------------
Adjustments to net income:
Depreciation...................................................................... 791,961 903,908
Changes in current assets and current liabilities:
Accounts receivable, net........................................................ (147,386) (100,624)
Inventories..................................................................... 17,406 27,645
Accounts payable................................................................ 25,773 (374,288)
Accrued liabilities............................................................. (299,017) 705,919
Advance billings and deposits................................................... 18,244 2,299
Prepaid expenses................................................................ (235) (661)
------------- -------------
Total adjustments............................................................... $ 406,746 $ 1,164,198
------------- -------------
Cash provided by operating activities........................................... 2,748,817 5,151,002
------------- -------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (274,363) (927,322)
------------- -------------
Cash used for investing activities.............................................. (274,363) (927,322)
------------- -------------
FINANCING ACTIVITIES:
Cash distributions to general partners............................................ (2,155,613) (4,476,207)
Cash received from managing partner............................................... -- 456,176
------------- -------------
Cash used for financing activities.............................................. (2,155,613) (4,020,031)
------------- -------------
CASH AND CASH EQUIVALENTS:
Net increase...................................................................... 318,841 203,649
Beginning balance................................................................. -- 1,569,595
------------- -------------
Ending balance.................................................................... $ 318,841 $ 1,773,244
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
GILA RIVER CELLULAR GENERAL PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
BASIS OF PRESENTATION
The unaudited condensed financial statements include all normal adjustments
which, in the opinion of management, are necessary to present fairly the
condensed financial position at September 30, 1997, and the results of
operations and cash flows for the nine months ended September 30, 1997 and 1996.
These unaudited condensed financial statements should be read in conjunction
with the December 31, 1996 financial statements and related notes.
RECENT TRANSACTION
Effective October 1, 1997, the Gila River Cellular General Partnership (the
"Partnership") completed the transaction wherein Dobson Communications
Corporation ("DCC") agreed to purchase the interests of the general partners. As
a result of this transaction, Dobson and the Gila River Indian Community own a
100% interest in Arizona 5 RSA. See Note 1 and Note 4 of the December 31, 1996
financial statements for more information related to this transaction.
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
Cellular 2000 (A Partnership)
We have audited the accompanying balance sheet of Cellular 2000 (A
Partnership) as of December 31, 1996 and 1997 and the related statements of
income, changes in partners' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cellular 2000 (A
Partnership) as of December 31, 1996 and 1997 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
HOLLIDAY, LEMONS, THOMAS & COX, P.C.
Texarkana, Texas
February 13, 1998
F-59
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 1,142,409 $ 1,079,070
Accounts receivable............................................................... 1,495,970 1,231,461
Accounts receivable--related parties.............................................. 1,201,698 1,396,810
Inventory......................................................................... 147,551 160,677
Prepaid and other current assets.................................................. 283,112 370,334
------------- -------------
Total current assets.......................................................... 4,270,740 4,238,352
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings and towers.............................................................. 5,729,609 7,234,628
Cellular and switching equipment.................................................. 10,899,265 15,059,156
Autos and trucks.................................................................. 108,233 126,140
Office equipment and furniture.................................................... 405,133 413,672
Leasehold improvements............................................................ 110,976 333,675
Construction in progress.......................................................... 241,827 2,730,032
------------- -------------
Total property, plant and equipment........................................... 17,495,043 25,897,303
Less accumulated depreciation..................................................... 4,695,405 6,563,647
------------- -------------
Net property, plant and equipment................................................. 12,799,638 19,333,656
------------- -------------
OTHER ASSETS:
Start up costs 56,827
Loan costs........................................................................ 246,801 268,084
Licensing costs................................................................... 26,015 54,169
------------- -------------
Total other assets............................................................ 329,643 322,253
------------- -------------
TOTAL ASSETS.................................................................. $ 17,400,021 $ 23,894,261
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft.................................................................... $ -- $ 536,924
Notes payable..................................................................... 1,200,000 --
Notes payable--related party...................................................... -- 1,253,381
Accounts payable.................................................................. 714,601 723,491
Accounts payable--related parties................................................. 325,552 305,437
Obligation for equipment.......................................................... -- 1,621,169
Accrued management termination fee................................................ 1,500,000 --
Accrued expenses.................................................................. 62,332 143,022
Unearned revenue.................................................................. 246,738 297,792
Federal and state taxes payable................................................... 324,520 819,903
Customer deposits................................................................. 22,000 17,600
------------- -------------
Total current liabilities..................................................... 4,395,743 5,718,719
------------- -------------
LONG-TERM LIABILITIES:
Notes payable, less current portion............................................... 8,900,000 12,800,000
Obligation for equipment.......................................................... 1,497,616 --
------------- -------------
Total long term liabilities................................................... 10,397,616 12,800,000
------------- -------------
Total liabilities............................................................. 14,793,359 18,518,719
PARTNERS' EQUITY.................................................................... 2,606,662 5,375,542
------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY........................................ $ 17,400,021 $ 23,894,261
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
REVENUES:
Cellular service................................................................. $ 8,580,109 $ 8,539,822
Cellular roaming................................................................. 10,856,424 10,654,382
Equipment sales.................................................................. 224,504 351,256
Other income..................................................................... 66,089 175,437
------------- -------------
Total revenues................................................................... 19,727,126 19,720,897
------------- -------------
COSTS AND EXPENSES:
Cost of services................................................................. 6,103,477 5,914,442
Cost of equipment sales.......................................................... 728,357 1,154,816
Marketing and selling expenses................................................... 1,314,631 1,104,764
General and administrative expenses.............................................. 1,966,416 2,237,552
Legal and professional fees...................................................... 440,181 460,320
Depreciation..................................................................... 1,501,755 1,883,951
Amortization..................................................................... 188,892 127,390
------------- -------------
Total costs and expenses......................................................... 12,243,709 12,883,235
------------- -------------
Net income from operations......................................................... 7,483,417 6,837,662
------------- -------------
OTHER INCOME (EXPENSE):
Interest income.................................................................. 31,260 16,440
Interest expense................................................................. (822,573) (830,901)
Loss on disposition of fixed assets.............................................. -- (44,199)
Miscellaneous income............................................................. 2,265 9,444
Management termination fee....................................................... (3,000,000) --
------------- -------------
Total other income (expense)..................................................... (3,789,048) (849,216)
------------- -------------
Net income......................................................................... $ 3,694,369 $ 5,988,446
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Partners' equity, beginning of period................................................. $ 3,682,068 $ 2,606,662
Net income............................................................................ 3,694,369 5,988,446
Distributions......................................................................... 4,769,775 3,219,566
------------ ------------
Partners' equity, end of period....................................................... $ 2,606,662 $ 5,375,542
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ 3,694,369 $ 5,988,446
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 1,690,647 2,011,341
Loss on disposition of fixed assets............................................... -- 44,199
(Increase) decrease in assets:
Accounts receivable............................................................. (526,635) 69,397
Inventory....................................................................... 26,786 (13,126)
Prepaid and other current assets................................................ (178,022) (87,222)
Loan costs...................................................................... -- (80,000)
Licensing costs................................................................. -- (40,000)
Increase (decrease) in liabilities:
Accounts payable................................................................ 67,338 (11,225)
Accrued management termination fee.............................................. 500,000 (1,500,000)
Accrued liabilities............................................................. (14,072) 80,690
Unearned revenue................................................................ 51,630 51,054
Federal and state taxes payable................................................. 19,139 495,383
Customer deposits............................................................... (6,300) (4,400)
------------- -------------
Net cash provided by operating activities......................................... 5,324,880 7,004,537
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets................................................ -- 1,976
Capital expenditures for property, plant and equipment............................ (2,214,973) (7,087,210)
------------- -------------
Net cash used for investing activities............................................ (2,214,973) (7,085,234)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable....................................................... (1,150,000) (300,000)
Proceeds from notes payable....................................................... 2,000,000 3,000,000
Distributions..................................................................... (4,769,775) (3,219,566)
------------- -------------
Net cash provided (used) by financing activities.................................. (3,919,775) (519,566)
------------- -------------
Net increase (decrease) in cash and cash equivalents.............................. (809,868) (600,263)
Cash and cash equivalents at beginning of period.................................... 1,952,277 1,142,409
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 1,142,409 $ 542,146
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Partnership is the owner of a license issued by the Federal
Communications Commission (FCC) to provide non-wireline cellular
telecommunications service to the California 4 Rural Service Area. California 4
Rural Service Area includes Merced, Madera and San Benito counties in central
California. The Partnership has a large customer base within this area that
includes individuals, businesses and governments. The Partnership is not
dependent on any single or major group of customers for its sales. Approximately
54% of Partnership revenue is derived from providing cellular service to
customers of other cellular companies 'roaming' through the Company's service
area. Approximately 43% of revenue is derived from providing cellular service to
its own subscriber customers. As more fully described in Note 9 to the financial
statements, in late 1997 the partner which owns the controlling interest in the
Partnership and Dobson Cellular of California, Inc. (Dobson) signed an agreement
in which the Partner agreed to sell their interest in the Partnership and to
transfer the FCC license of the Partnership to Dobson.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid unrestricted cash instruments with
original maturities of three months or less. The Partnership places its
temporary cash investments with high credit quality financial institutions. At
times such investments may be in excess of the FDIC insurance limit. The
Partnership has not experienced any losses in such accounts.
REVENUE RECOGNITION
Cellular air time is recorded as revenue as earned. Subscriber acquisition
costs (mainly commissions and loss on equipment sales) are expensed when
incurred. Sales of equipment are recorded at the point of sale. Cellular access
charges generally are billed in advance and recognized as revenue when the
services are provided.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
under the specific identification method.
F-64
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
15-20
Buildings and towers............................................ years
Cellular and switching equipment................................ 10 years
Autos and trucks................................................ 5 years
Furniture, fixtures and office equipment........................ 5-7 years
Leasehold Improvements.......................................... 5 years
</TABLE>
Expenditures for repairs and maintenance are charged to operating expense as
incurred. Betterments, replacement equipment and additions are capitalized.
CONSTRUCTION IN PROGRESS
The Partnership's cellular communications system expenditures are recorded
as construction in progress until the system or assets are placed in service.
When the assets are placed in service, they are transferred to the appropriate
property and equipment category and depreciated. All direct, administrative and
interest costs related to the construction are capitalized to construction in
progress during the construction period.
START UP COSTS
Start up costs are administrative costs incurred related to the construction
of the cellular mobile communications system. Such amounts are being amortized
over five years beginning June 1, 1992. Accumulated amortization of start up
costs at December 31, 1996 and 1997 was $625,105 and $681,933, respectively. At
December 31, 1997 the start up costs were fully amortized.
LOAN COSTS
Costs associated with the financing of the Partnership's debt have been
capitalized and are amortized on a straight line basis over the life of the
note. Additional costs incurred with the loan in June 1997 have been capitalized
and amortized over the remaining life of the loan. Accumulated amortization of
loan costs at December 31, 1996 and 1997 was $114,387 and $173,103,
respectively.
LICENSING COSTS
Licensing costs primarily represent costs incurred to acquire the Federal
Communications Commission License. Amortization of these costs began in May,
1992, using the straight-line method over a period of 40 years. In March 1997,
the Partnership entered into an agreement to use licensed software to process
billing information for its cellular communications system. In consideration of
this agreement, the Partnership paid a one-time license fee which is being
amortized using the straight-line method over a three-year period. Accumulated
amortization of licensing costs at December 31, 1997 and 1996 was $15,213 and
$3,367, respectively.
F-65
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Partnership's legal form of organization is that of a partnership. A
partnership as such is not taxed under the Internal Revenue Code, rather the
income or loss of the partnership is required to be reported by each respective
partner on their appropriate tax return.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred and amounted to approximately
$122,808 in 1996 and $183,690 in 1997. The expenses are included as marketing
and selling expenses in the statement of income.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Partnership to
concentrations of credit risk, as defined by FASB Statement No. 105 consist
primarily of trade accounts receivable and cash equivalents.
At December 31, 1997 approximately 54% of trade accounts receivable were
attributable to cellular companies which subscribe to the clearinghouse network.
Of this amount, approximately 72% of these receivables were from AT&T Wireless
Services of California, Inc. (AWS-CA) companies and approximately 19% of these
receivables were from Bay Area Cellular Telephone Company, of which the parent
company of AWS-CA owns an interest. Concentrations of credit risk from these
receivables is limited due to the large number of subscribers, none of which
individually comprise a significant amount of the accounts receivable balance at
December 31, 1997. The Partnership establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information. Receivables are not collateralized. The
Partnership is directly affected by the well being of the California economic
climate and the effects of any changes in the cellular telecommunications act.
However, management does not believe significant credit risk exists at December
31, 1997.
RECLASSIFICATIONS
Certain accounts relating to the prior year have been reclassified to
conform to the current year presentation. The reclassifications have no effect
on previously reported net earnings.
NOTE 2--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash and cash equivalents at December 31, 1996 and 1997 for the statement of
cash flows consist of:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
Cash and money market funds...................................... $ 1,142,409 $ 1,079,070
Cash overdrafts.................................................. -- (536,924)
------------ -------------
Total............................................................ $ 1,142,409 $ 542,146
------------ -------------
------------ -------------
</TABLE>
At December 31, 1997, the balance sheet presentation of cash and cash
equivalents omits the cash overdrafts.
F-66
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 2--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED)
In 1997, noncash investing and financing activities include purchases of
property, plant and equipment and obligation for equipment of $123,553 and
increases to construction in progress and notes payable-related party of
$1,253,381.
For the years ended December 31, 1996 and 1997, interest paid amounted to
$826,780 and $830,901, respectively, net of capitalized interest.
NOTE 3--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Commercial promissory note due December 31, 1997.
Collateralized by subordinated security interest in property
and assets purchased under contract with AWS and outcollect
revenues..................................................... -- $ 1,253,381
8.09375% Variable rate term loan due September 30, 2001.
Collateralized by all property and assets of the
partnership.................................................. $ 7,600,000 --
8.09375% Variable rate revolving note due September 30, 2001.
Collateralized by all property and assets of the
partnership.................................................. 2,500,000 --
8.16797% Variable rate term loan due December 31, 2003.
Collateralized by all property and assets of the
partnership.................................................. -- 12,800,000
------------- -------------
Total.......................................................... $ 10,100,000 $ 14,053,381
Less current maturities........................................ 1,200,000 1,253,381
------------- -------------
Total long term portion of notes payable....................... $ 8,900,000 $ 12,800,000
------------- -------------
------------- -------------
</TABLE>
On December 31, 1996, the Partnership entered into an agreement which allows
the Partnership to request AT&T Wireless Services, Inc. (AWS) to place orders
for certain equipment, software, materials and services (hereinafter equipment)
intended to be used by the Partnership in the ordinary course of business for
the operation, modification, improvement or expansion of its system. Although it
is under no obligation to do so, if AWS chooses to honor in its sole discretion
any such request from the Partnership, such orders for equipment will be charged
on AWS' account and the dollar amount of such charges shall be deemed for all
purposes as loans or advances from AWS to the Partnership. The unpaid balance of
all loans or advances shall not exceed $750,000. The payment of the loans and
advances is secured by the equipment purchased and all of the Partnership's
outcollect revenues, as they are commonly defined in the cellular telephone
industry. The purchasing agreement contains a provision which allows AWS to
offset roaming revenues owed to the Partnership against amounts owed under this
purchasing agreement if the Partnership defaults in its obligation. Interest is
payable at one and one-half percent per month on the outstanding balance after
specified time intervals have elapsed. No interest cost was incurred on this
loan during 1997.
F-67
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 3--NOTES PAYABLE (CONTINUED)
On October 14, 1994, the Partnership arranged financing with a financial
institution for a $10,000,000 term loan and a $2,500,000 revolving credit loan.
On September 29, 1996, the Partnership increased the commitment on the revolving
credit loan to $4,500,000. The increased financing was obtained to satisfy a
portion of the termination fee due on the settlement of the management agreement
with RCM. On June 11, 1997, the term loan and the revolving credit loan were
combined and the total commitment on the loan was increased to $16,000,000. The
increased financing was obtained to upgrade equipment and increase the capacity
of the cellular communications system. The credit agreement associated with the
loan contains, among other covenants, provisions which limit capital
expenditures. For the year ended December 31, 1997, capital expenditures cannot
exceed $7,100,000. As of December 31, 1997, the Partnership was not in
compliance with the capital expenditures covenant. This noncompliance would, by
the terms of the loan agreement, constitute an event of default. The agreement
provides that in an event of default the bank may by notice in writing declare
all amounts owing with respect to these agreements immediately due and payable.
Due to the pending sale as discussed in Note 9, management does not expect to
receive such notice. The credit agreement also contains provisions which limit
distributions to partners to no more than $500,000 during any fiscal quarter
except distributions to the partners to pay Federal and State income taxes on
the taxable income allocated by the Borrowers to its partners. Distributions
totaling $3,219,566 and $4,769,775 were made in 1997 and 1996, respectively.
At December 31, 1997, these borrowings bear interest at 2.25% above the
LIBOR rate established for the period. Total interest incurred during the years
ended December 31, 1997 and 1996 was $933,766 and $784,477, respectively. Of
this, $117,216 was capitalized in 1997 as construction costs. No interest
capitalization was required during 1996.
Annual maturities of noncurrent notes payable are as follows:
<TABLE>
<S> <C>
1999........................................................... $ -0-
2000........................................................... 2,400,000
2001........................................................... 3,200,000
2002........................................................... 3,200,000
2003........................................................... 4,000,000
----------
Total.................................................... $12,800,000
----------
----------
</TABLE>
F-68
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 4--RELATED PARTY TRANSACTIONS
McCaw Communications of the Pacific Inc. and RSA 339, Inc. are subsidiaries
of AT&T Wireless Services, Inc. (AWS), and own minority interests in the
Partnership. AWS owns an interest in Bay Area Cellular Telephone Company.
Norfolk County Internet is owned by Thomas Morse, a member of the Executive
Committee of the Partnership. Cellular 2000 Telephone Co. owns the controlling
interest in the Partnership.
<TABLE>
<CAPTION>
AMOUNT OF
TRANSACTION
TYPE OF ------------------------
RELATED PARTY TRANSACTION 1996 1997
- --------------------------------------------------------------- ---------------------- ---------- ------------
<S> <C> <C> <C>
AT&T Wireless Services......................................... Accounts receivable $ 887,000 $ 1,057,000
of California, Inc. (including systems owned Accounts payable 268,000 243,000
or controlled by AWS) Notes payable -- 1,253,000
Bay Area Cellular Telephone.................................... Accounts receivable 315,000 281,000
Company Accounts payable 58,000 51,000
Norfolk County Internet........................................ Accounts receivable -- 56,000
Cellular 2000 Telephone Co..................................... Accounts receivable -- 3,000
</TABLE>
NOTE 5--OBLIGATION FOR EQUIPMENT
In 1995, the Partnership negotiated a contract with Ericsson Inc. for an
upgrade to the switch. The contract price for this upgrade totaled $1,782,525.
The upgrade was completed and became fully operational in January 1996. By the
terms of the contract, payment of $284,909 was made during 1995 leaving a
balance due Ericsson, Inc. of $1,497,616. The original contract for the
equipment has been adjusted to include sales tax of $123,553 for a total balance
due to Ericsson, Inc. of $1,621,169. This obligation will become due in full if
one of the following conditions are met: when the system reaches 25,000
subscribers; or if the switch is moved from its present location; or if the
switch is taken out of service; or prior to or as an item of closing of the sale
of the system to another business entity. Due to the pending sale of the system
as discussed in Note 9, management expects the obligation for the upgrade to the
switch to become due in full during 1998, therefore this obligation is
classified as a current liability at December 31, 1997 on the balance sheet.
NOTE 6--ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Accounts receivable--roamer....................................... $ 314,304 $ 114,270
Accounts receivable--subscriber................................... 1,233,315 1,216,190
Accounts receivable--other........................................ 168,351 27,001
Less allowance for doubtful accounts.............................. (220,000) (126,000)
------------ ------------
Total........................................................... $ 1,495,970 $ 1,231,461
------------ ------------
------------ ------------
</TABLE>
F-69
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 7--RETIREMENT PLAN
The Partnership maintains a 401(k) profit sharing plan for its employees.
After meeting eligibility requirements on age and months of service, all
employees are covered. Contributions to the plan consist of the salary reduction
each eligible employee has elected to defer. Additional contributions to the
plan are at the discretion of management. Contributions for the years ended
December 31, 1996 and 1997 were $10,800 and $20,545, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Partnership is committed under operating leases principally for
facilities, cell sites and office space with remaining terms from one to nine
years with options for additional periods. Certain leases provide for payment by
the lessee of taxes, maintenance and insurance.
The statement of income includes rental expense for operating leases of
approximately $428,000 for the year ended December 31, 1997 and $326,000 for the
year ended December 31, 1996. The partnership's future minimum lease commitments
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT
YEAR LEASES RENTALS
- ------------------------------------------------ ------------ -----------
<S> <C> <C>
12-31-98........................................ $ 399,870 $ 3,807
12-31-99........................................ 346,501 1,586
12-31-00........................................ 326,523 --
12-31-01........................................ 226,151 --
12-31-02........................................ 133,049 --
Thereafter...................................... 432,377 --
------------ -----------
Total......................................... $ 1,864,471 $ 5,393
------------ -----------
------------ -----------
</TABLE>
The Partnership had a management agreement with Rural Cellular Management
(RCM) which terminated on September 1, 1995. Prior to termination, the monthly
management fee was based upon the most current population of the Rural Service
Area (RSA) multiplied by $.1042. In 1996, the Partnership paid $45,350 to RCM
which represented a correction in the calculation of the prior year's management
fee paid. On August 24, 1996, the Partnership and RCM agreed upon a termination
fee of $4,000,000 in settlement of the management agreement. As of December 31,
1996, the partnership had paid $2,500,000 to RCM. The balance of the termination
fee, $1,500,000, was paid during the year ended December 31, 1997.
NOTE 9--SUBSEQUENT EVENT
On November 17, 1997, the shareholders of Cellular 2000 Telephone Co.
entered into a definitive agreement to sell their stock in Cellular 2000
Telephone Co. and to transfer the Federal Communications Commission (FCC)
Operating Licenses to Dobson Cellular of California, Inc. (Dobson). Cellular
2000 Telephone Co. owns 75.018 percent of the outstanding partnership interests
of Cellular 2000 (A Partnership), and thereby owns a controlling interest in the
Partnership. The financial statements do not reflect any expenses incurred or
expected to be incurred related to the sale. The FCC has consented to the
F-70
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
NOTE 9--SUBSEQUENT EVENT (CONTINUED)
transfer of control of the Partnership's FCC licenses to Dobson and has granted
authorization to Dobson to operate the cellular telephone system. The sale is
expected to close in April, 1998.
On March 19, 1998, RSA 339, Inc. entered into a definitive agreement to sell
their minority interest in the Partnership to Dobson. RSA 339, Inc. owns the
remaining 24.982 percent of the outstanding partnership interests of the
Partnership. The sale is also expected to close in April, 1998.
F-71
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1997 AND MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------- -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 1,079,070 $ 130,801
Accounts receivable.............................................................. 1,231,461 1,443,923
Accounts receivable--related parties............................................. 1,396,810 1,115,548
Inventory........................................................................ 160,677 112,859
Prepaid and other current assets................................................. 370,334 221,161
------------- -------------
Total current assets............................................................. 4,238,352 3,024,292
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Buildings and towers............................................................. 7,234,628 7,247,880
Cellular and switching equipment................................................. 15,059,156 16,719,661
Autos and trucks................................................................. 126,140 126,140
Office equipment and furniture................................................... 413,672 415,852
Leasehold improvements........................................................... 333,675 333,675
Construction in progress......................................................... 2,730,032 1,360,988
------------- -------------
Total property, plant and equipment.............................................. 25,897,303 26,204,196
Less accumulated depreciation.................................................... 6,563,647 7,137,194
------------- -------------
Net property, plant and equipment................................................ 19,333,656 19,067,002
------------- -------------
OTHER ASSETS:
Loan costs....................................................................... 268,084 252,281
Licensing costs.................................................................. 54,169 50,652
------------- -------------
Total other assets............................................................... 322,253 302,933
------------- -------------
TOTAL ASSETS....................................................................... $ 23,894,261 $ 22,394,227
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................... $ 536,924 $
Notes payable--related party..................................................... 1,253,381 203,793
Accounts payable................................................................. 723,491 640,282
Accounts payable--related parties................................................ 305,437 264,034
Obligation for equipment......................................................... 1,621,169 1,621,169
Accrued expenses................................................................. 143,022 171,362
Unearned revenue................................................................. 297,792 310,083
Federal and state taxes payable.................................................. 819,903 735,034
Customer deposits................................................................ 17,600 21,300
------------- -------------
Total current liabilities........................................................ 5,718,719 3,967,057
------------- -------------
LONG-TERM LIABILITIES:
Notes payable, less current portion.............................................. 12,800,000 12,800,000
------------- -------------
Total long term liabilities...................................................... 12,800,000 12,800,000
------------- -------------
Total liabilities................................................................ 18,518,719 16,767,057
PARTNERS' EQUITY................................................................... 5,375,542 5,627,170
------------- -------------
TOTAL LIABILITIES AND PARTNERS' EQUITY............................................. $ 23,894,261 $ 22,394,227
------------- -------------
------------- -------------
</TABLE>
See accompanying notes and accountants' report.
F-72
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES:
Cellular service.................................................................... $ 1,959,180 $ 2,398,814
Cellular roaming.................................................................... 2,061,429 2,336,412
Equipment sales..................................................................... 67,339 273,614
Other income........................................................................ 47,934 74,541
------------ ------------
Total revenues...................................................................... 4,135,882 5,083,381
------------ ------------
COSTS AND EXPENSES:
Cost of services.................................................................... 1,361,129 1,451,133
Cost of equipment sales............................................................. 215,516 433,286
Marketing and selling expenses...................................................... 284,870 235,264
General and administrative expenses................................................. 512,199 773,488
Legal and professional fees......................................................... 161,089 204,062
Depreciation........................................................................ 403,913 573,547
Amortization........................................................................ 47,831 19,321
------------ ------------
Total costs and expenses............................................................ 2,986,547 3,690,101
------------ ------------
Net income from operations............................................................ 1,149,335 1,393,280
------------ ------------
OTHER INCOME (EXPENSE):
Interest income..................................................................... 6,238 7,031
Interest expense.................................................................... (176,495) (240,041)
Loss on disposition of fixed assets................................................. (43,723)
Miscellaneous income................................................................ 40 91,358
------------ ------------
Total other income (expense)........................................................ (213,940) (141,652)
------------ ------------
Net income............................................................................ $ 935,395 $ 1,251,628
------------ ------------
------------ ------------
</TABLE>
See accompanying notes and accountants' report.
F-73
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Partners' equity, beginning of period................................................. $ 2,606,661 $ 5,375,542
Net income............................................................................ 935,395 1,251,628
Distributions......................................................................... 500,000 1,000,000
------------ ------------
Partners' equity, end of period....................................................... $ 3,042,056 $ 5,627,170
------------ ------------
------------ ------------
</TABLE>
See accompanying notes and accountants' report.
F-74
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................. $ 935,395 $ 1,251,628
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 451,744 592,868
Loss on disposition of fixed assets............................................. 43,723
(Increase) decrease in assets:
Accounts receivable........................................................... 447,986 68,800
Inventory..................................................................... 11,323 47,818
Prepaid and other current assets.............................................. 94,940 149,173
Licensing costs............................................................... (40,000)
Increase (decrease) in liabilities:
Accounts payable.............................................................. 113,353 (124,612)
Accrued expenses.............................................................. (3,510) 28,340
Unearned revenue.............................................................. 100,335 12,291
Federal and state taxes payable............................................... 34,259 (84,869)
Customer deposits............................................................. (1,967) 3,700
------------- -------------
Net cash provided by operating activities..................................... 2,187,581 1,945,137
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets................................................ 1,900
Capital expenditures for property, plant and equipment............................ (2,558,154) (306,894)
------------- -------------
Net cash used for investing activities............................................ (2,556,254) (306,894)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable....................................................... (300,000) (1,049,588)
Distributions..................................................................... (500,000) (1,000,000)
------------- -------------
Net cash provided (used) by financing activities.................................. (800,000) (2,049,588)
------------- -------------
Net increase (decrease) in cash and cash equivalents.............................. (1,168,673) (411,345)
Cash and cash equivalents at beginning of period.................................... 1,142,409 542,146
------------- -------------
Cash and cash equivalents at end of period.......................................... $ (26,264) $ 130,801
------------- -------------
------------- -------------
</TABLE>
See accompanying notes and accountants' report.
F-75
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Partnership is the owner of a license issued by the Federal
Communications Commission (FCC) to provide non-wireline cellular
telecommunications service to the California 4 Rural Service Area. California 4
Rural Service Area includes Merced, Madera and San Benito counties in central
California. The Partnership has a large customer base within this area that
includes individuals, businesses and governments. The Partnership is not
dependent on any single or major group of customers for its sales. Approximately
54% of Partnership revenue is derived from providing cellular service to
customers of other cellular companies 'roaming' through the Company's service
area. Approximately 43% of revenue is derived from providing cellular service to
its own subscriber customers. As more fully described in Note 9 to the financial
statements, in late 1997 the partner which owns the controlling interest in the
Partnership and Dobson Cellular of California, Inc. (Dobson) signed an agreement
in which the Partner agreed to sell their interest in the Partnership and to
transfer the FCC license of the Partnership to Dobson.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid unrestricted cash instruments with
original maturities of three months or less. The Partnership places its
temporary cash investments with high credit quality financial institutions. At
times such investments may be in excess of the FDIC insurance limit. The
Partnership has not experienced any losses in such accounts.
REVENUE RECOGNITION
Cellular air time is recorded as revenue as earned. Subscriber acquisition
costs (mainly commissions and loss on equipment sales) are expensed when
incurred. Sales of equipment are recorded at the point of sale. Cellular access
charges generally are billed in advance and recognized as revenue when the
services are provided.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
under the specific identification method.
F-76
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
15-20
Buildings and towers............................................ years
Cellular and switching equipment................................ 10 years
Autos and trucks................................................ 5 years
Furniture, fixtures and office equipment........................ 5-7 years
Leasehold Improvements.......................................... 5 years
</TABLE>
Expenditures for repairs and maintenance are charged to operating expense as
incurred. Betterments, replacement equipment and additions are capitalized.
CONSTRUCTION IN PROGRESS
The Partnership's cellular communications system expenditures are recorded
as construction in progress until the system or assets are placed in service.
When the assets are placed in service, they are transferred to the appropriate
property and equipment category and depreciated. All direct, administrative and
interest costs related to the construction are capitalized to construction in
progress during the construction period.
START UP COSTS
Start up costs are administrative costs incurred related to the construction
of the cellular mobile communications system. Such amounts are being amortized
over five years beginning June 1, 1992. Accumulated amortization of start up
costs at December 31, 1997 and March 31, 1998 was $681,933 and $681,933,
respectively. At December 31, 1997 the start up costs were fully amortized.
LOAN COSTS
Costs associated with the financing of the Partnership's debt have been
capitalized and are amortized on a straight line basis over the life of the
note. Additional costs incurred with the loan in June 1997 have been capitalized
and amortized over the remaining life of the loan. Accumulated amortization of
loan costs at December 31, 1997 and March 31, 1998 was $173,103 and $188,907,
respectively.
LICENSING COSTS
Licensing costs primarily represent costs incurred to acquire the Federal
Communications Commission License. Amortization of these costs began in May,
1992, using the straight-line method over a period of 40 years. In March, 1997,
the Partnership entered into an agreement to use licensed software to process
billing information for its cellular communications system. In consideration of
this agreement, the Partnership paid a one-time license fee which is being
amortized using the straight-line method over a three-year period. Accumulated
amortization of licensing costs at December 31, 1997 and March 31, 1998 was
$15,213 and $18,730, respectively.
F-77
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Partnership's legal form of organization is that of a partnership. A
partnership as such is not taxed under the Internal Revenue Code, rather the
income or loss of the partnership is required to be reported by each respective
partner on their appropriate tax return.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred and amounted to approximately
$42,535 and $85,778 for the three months ended March 31, 1997 and 1998,
respectively. The expenses are included as marketing and selling expenses in the
statement of income.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Partnership to
concentrations of credit risk, as defined by FASB Statement No. 105 consist
primarily of trade accounts receivable and cash equivalents.
At March 31, 1998, approximately 48% of trade accounts receivable were
attributable to cellular companies which subscribe to the clearinghouse network.
Of this amount, approximately 72% of these receivables were from AT&T Wireless
Services of California, Inc. (AWS-CA) companies and approximately 19% of these
receivables were from Bay Area Cellular Telephone Company, of which the parent
company of AWS-CA owns an interest. Concentrations of credit risk from these
receivables is limited due to the large number of subscribers, none of which
individually comprise a significant amount of the accounts receivable balance at
March 31, 1998. The Partnership establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. Receivables are not collateralized. The
Partnership is directly affected by the well being of the California economic
climate and the effects of any changes in the cellular telecommunications act.
However, management does not believe significant credit risk exists at March 31,
1998.
RECLASSIFICATIONS
Certain accounts relating to the prior year have been reclassified to
conform to the current year presentation. The reclassifications have no effect
on previously reported net earnings.
NOTE 2--SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash and cash equivalents at March 31, 1997 and 1998 for the statement of
cash flows consist of:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Cash and money market funds.......................................... $ 151,576 $ 130,801
Cash overdrafts...................................................... (177,840)
----------- ----------
Total................................................................ $ (26,264) $ 130,801
----------- ----------
----------- ----------
</TABLE>
For the three months ended March 31, 1997 and 1998, interest paid amounted
to $176,495 and $144,204, respectively, net of capitalized interest.
F-78
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 3--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
Commercial promissory note due April 1, 1998. Collateralized by
subordinated security interest in property and assets
purchased under contract with AWS and outcollect revenues.... $ 1,253,381 $ 203,793
8.16797% Variable rate term loan due December 31, 2003.
Collateralized by all property and assets of the
partnership.................................................. 12,800,000 12,800,000
------------- -------------
Total.......................................................... $ 14,053,381 $ 13,003,793
Less current maturities........................................ 1,253,381 203,793
------------- -------------
Total long term portion of notes payable....................... $ 12,800,000 $ 12,800,000
------------- -------------
------------- -------------
</TABLE>
On December 31, 1996, the Partnership entered into an agreement which allows
the Partnership to request AT&T Wireless Services, Inc. (AWS) to place orders
for certain equipment, software, materials and services (hereinafter equipment)
intended to be used by the Partnership in the ordinary course of business for
the operation, modification, improvement or expansion of its system. Although it
is under no obligation to do so, if AWS chooses to honor in its sole discretion
any such request from the Partnership, such orders for equipment will be charged
on AWS' account and the dollar amount of such charges shall be deemed for all
purposes as loans or advances from AWS to the Partnership. The unpaid balance of
all loans or advances shall not exceed $750,000. The payment of the loans and
advances is secured by the equipment purchased and all of the Partnership's
outcollect revenues, as they are commonly defined in the cellular telephone
industry. The purchasing agreement contains a provision which allows AWS to
offset roaming revenues owed to the Partnership against amounts owed under this
purchasing agreement if the Partnership defaults in its obligation. Interest is
payable at one and one-half percent per month on the outstanding balance after
specified time intervals have elapsed. No interest cost was incurred on this
loan during 1998.
On October 14, 1994, the Partnership arranged financing with a financial
institution for a $10,000,000 term loan and a $2,500,000 revolving credit loan.
On September 29, 1996, the Partnership increased the commitment on the revolving
credit loan to $4,500,000. The increased financing was obtained to satisfy a
portion of the termination fee due on the settlement of the management agreement
with RCM. On June 11, 1997, the term loan and the revolving credit loan were
combined and the total commitment on the loan was increased to $16,000,000. The
increased financing was obtained to upgrade equipment and increase the capacity
of the cellular communications system. The credit agreement associated with the
loan contains, among other covenants, provisions which limit capital
expenditures. For the year ended December 31, 1997, capital expenditures cannot
exceed $7,100,000. As of December 31, 1997, the Partnership was not in
compliance with the capital expenditures covenant. This noncompliance would, by
the terms of the loan agreement, constitute an event of default. The agreement
provides that in an event of default the bank may by notice in writing declare
all amounts owing with respect to these agreements immediately due and payable.
Due to the pending sale as discussed in Note 9, management does not expect to
receive such
F-79
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 3--NOTES PAYABLE (CONTINUED)
notice. The credit agreement also contains provisions which limit distributions
to partners to no more than $500,000 during any fiscal quarter except
distributions to the partners to pay Federal and State income taxes on the
taxable income allocated by the Borrowers to its partners. Distributions
totaling $3,219,566 and $1,000,000 were made during the period ended December
31, 1997 and March 31, 1998, respectively.
At March 31, 1998, these borrowings bear interest at 2.25% above the LIBOR
rate established for the period. Total interest incurred during the three month
period ended March 31, 1997 and 1998 was $204,367 and $168,442, respectively. Of
this, $30,316 and $24,238 were capitalized in 1997 and 1998, respectively, as
construction costs.
Annual maturities of noncurrent notes payable are as follows:
<TABLE>
<S> <C>
1999........................................................... $ -0-
2000........................................................... 2,400,000
2001........................................................... 3,200,000
2002........................................................... 3,200,000
2003........................................................... 4,000,000
----------
Total.......................................................... $12,800,000
----------
----------
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS
McCaw Communications of the Pacific, Inc. and RSA 339, Inc. are subsidiaries
of AT&T Wireless Services, Inc. (AWS), and own minority interests in the
Partnership. AWS owns an interest in Bay Area Cellular Telephone Company.
Cellular 2000 Telephone Co. owns the controlling interest in the Partnership.
<TABLE>
<CAPTION>
AMOUNT OF TRANSACTION
---------------------------------
RELATED PARTY TYPE OF TRANSACTION DECEMBER 31, 1997 MARCH 31, 1998
- -------------------------------------- -------------------------------------- ----------------- --------------
<S> <C> <C> <C>
AT&T Wireless Services of California, Accounts receivable $ 1,057,000 $ 876,372
Inc. (including systems owned or Accounts payable 243,000 216,088
controlled by AWS) Notes payable 1,253,000 203,793
Bay Area Cellular Telephone Company Accounts receivable 281,000 239,176
Accounts payable 51,000 47,946
Norfolk County Internet Accounts receivable 56,000
Cellular 2000 Telephone Co. Accounts receivable 3,000
</TABLE>
NOTE 5--OBLIGATION FOR EQUIPMENT
In 1995, the Partnership negotiated a contract with Ericsson, Inc. for an
upgrade to the switch. The contract price for this upgrade totaled $1,782,525.
The upgrade was completed and became fully operational in January, 1996. By the
terms of the contract, payment of $284,909 was made during 1995 leaving a
F-80
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 5--OBLIGATION FOR EQUIPMENT (CONTINUED)
balance due Ericsson, Inc. of $1,497,616. The original contract for the
equipment has been adjusted to include sales tax of $123,553 for a total balance
due to Ericsson, Inc. of $1,621,169. This obligation will become due in full if
one of the following conditions are met: when the system reaches 25,000
subscribers; or if the switch is moved from its present location; or if the
switch is taken out of service; or prior to or as an item of closing of the sale
of the system to another business entity. Due to the subsequent sale of the
system as discussed in Note 9, management fulfilled the obligation for the
upgrade to the switch in April, 1998, therefore this obligation is classified as
a current liability at March 31, 1998 on the balance sheet.
NOTE 6--ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and March 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Accounts receivable--roamer...................................... $ 114,270 $ 186,440
Accounts receivable--subscriber.................................. 1,216,190 1,303,430
Accounts receivable--other....................................... 27,001 116,053
Less allowance for doubtful accounts............................. (126,000) (162,000)
------------ ------------
Total............................................................ $1,231,461 $1,443,923
------------ ------------
------------ ------------
</TABLE>
NOTE 7--RETIREMENT PLAN
The Partnership maintains a 401(k) profit sharing plan for its employees.
After meeting eligibility requirements on age and months of service, all
employees are covered. Contributions to the plan consist of the salary reduction
each eligible employee has elected to defer. Additional contributions to the
plan are at the discretion of management. Contributions for the three months
ended March 31, 1997 and 1998 were $5,500 and $8,715, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Partnership is committed under operating leases principally for
facilities, cell sites and office space with remaining terms from one to nine
years with options for additional periods. Certain leases provide for payment by
the lessee of taxes, maintenance and insurance.
F-81
<PAGE>
CELLULAR 2000 (A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, MARCH 31, 1997 AND 1998
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
The statement of income includes rental expense for operating leases of
approximately $101,200 for the three months ended March 31, 1997 and $107,161
for the three months ended March 31, 1998. The partnership's future minimum
lease commitments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT
PERIOD LEASES RENTALS
- -------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Nine months ended 12-31-98.......................................... $ 314,385 $ 2,855
Year ended 12-31-99................................................. 346,501 1,586
Year ended 12-31-00................................................. 326,523
Year ended 12-31-01................................................. 226,151
Year ended 12-31-02................................................. 133,050
Year ended 12-31-03................................................. 126,851
Thereafter.......................................................... 305,525
------------ -----------
Total............................................................... $ 1,652,135 $ 4,441
------------ -----------
------------ -----------
</TABLE>
The Partnership had a management agreement with Rural Cellular Management
(RCM) which terminated on September 1, 1995. Prior to termination, the monthly
management fee was based upon the most current population of the Rural Service
Area (RSA) multiplied by $.1042. In 1996, the Partnership paid $45,350 to RCM
which represented a correction in the calculation of the prior year's management
fee paid. On August 24, 1996, the Partnership and RCM agreed upon a termination
fee of $4,000,000 in settlement of the management agreement. As of December 31,
1996, the partnership had paid $2,500,000 to RCM. The balance of the termination
fee, $1,500,000, was paid in August, 1997.
NOTE 9--SUBSEQUENT EVENT
On November 17, 1997, the shareholders of Cellular 2000 Telephone Co.
entered into a definitive agreement to sell their stock in Cellular 2000
Telephone Co. and to transfer the Federal Communications Commission (FCC)
Operating Licenses to Dobson Cellular of California, Inc. (Dobson). Cellular
2000 Telephone Co. owns 75.018 percent of the outstanding partnership interests
of Cellular 2000 (A Partnership), and thereby owns a controlling interest in the
Partnership. The financial statements do not reflect any expenses incurred or
expected to be incurred related to the sale. The FCC has consented to the
transfer of control of the Partnership's FCC licenses to Dobson and has granted
authorization to Dobson to operate the cellular telephone system. The sale
closed in April, 1998.
On March 19, 1998, RSA 339, Inc. entered into a definitive agreement to sell
their minority interest in the Partnership to Dobson. RSA 339, Inc. owns the
remaining 24.982 percent of the outstanding partnership interests of the
Partnership. The sale closed in April, 1998.
F-82
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sygnet Wireless, Inc.
We have audited the accompanying consolidated balance sheets of Sygnet
Wireless, Inc. as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sygnet
Wireless, Inc. at December 31, 1996 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
February 6, 1998
F-83
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 2,257,748 $ 860,086
Accounts receivable, less allowance for doubtful accounts of $809,800 at
December 31, 1997 and $1,168,800 at December 31, 1996........................ 8,857,028 10,711,627
Inventory...................................................................... 1,696,952 1,867,445
Prepaid expenses............................................................... 531,171 309,460
-------------- --------------
Total current assets......................................................... 13,342,899 13,748,618
Other assets:
Cellular licenses--net......................................................... 252,271,468 245,866,235
Customer lists--net............................................................ 24,535,885 19,382,087
Deferred financing costs--net.................................................. 10,068,956 8,982,430
-------------- --------------
Total other assets........................................................... 286,876,309 274,230,752
Property and equipment--net...................................................... 43,958,969 53,007,015
-------------- --------------
Total assets................................................................. $ 344,178,177 $ 340,986,385
-------------- --------------
-------------- --------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................... $ 2,826,629 $ 3,264,206
Deferred revenue............................................................... 1,679,873 2,058,066
Accrued expenses and other liabilities......................................... 2,744,789 4,196,230
Interest payable............................................................... 6,940,623 6,749,755
-------------- --------------
Total current liabilities.................................................... 14,191,914 16,268,257
Long-term debt................................................................... 312,250,000 305,500,000
Redeemable Series A Senior Cumulative Nonvoting Preferred Stock, $.01 par,
aggregate redemption value of $20,690,411, 500,000 shares authorized, 200,000
shares issued and outstanding and warrants..................................... 19,718,028 --
Shareholders' equity (deficit):
Common shares, $.01 par, Class A, 1 vote per share; 60,000,000 shares
authorized; 4,010,653 shares issued and outstanding as of December 31, 1997;
2,653 shares issued and outstanding as of December 31, 1996.................. 27 40,107
Common shares, $.01 par, Class B, 10 votes per share; 10,000,000 shares
authorized; 5,159,977 shares issued and outstanding as of December 31, 1997;
6,167,977 shares issued and outstanding as of December 31, 1996.............. 61,679 51,599
Additional paid-in capital..................................................... 5,812,211 47,598,498
Retained deficit............................................................... (7,605,730) (28,222,124)
Note receivable from officer/shareholder....................................... (249,952) (249,952)
-------------- --------------
Total shareholders' equity (deficit)............................................. (1,981,765) 19,218,128
-------------- --------------
Total liabilities, redeemable preferred stock and shareholders' equity
(deficit)...................................................................... $ 344,178,177 $ 340,986,385
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-84
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
REVENUE:
Subscriber revenue............................................... $ 17,191,291 $ 31,084,883 $ 52,638,712
Roamer revenue................................................... 4,175,809 9,687,284 26,992,584
Equipment sales.................................................. 1,529,284 2,416,769 4,323,052
Other revenue.................................................... 1,680,544 1,607,245 1,679,412
------------- ------------- --------------
Total revenue.................................................. 24,576,928 44,796,181 85,633,760
COSTS AND EXPENSES:
Cost of services................................................. 3,365,954 5,508,386 10,048,416
Cost of equipment sales.......................................... 4,163,890 5,816,144 9,663,251
General and administrative....................................... 5,563,887 9,852,004 16,975,592
Selling and marketing............................................ 3,082,492 6,080,308 10,841,059
Depreciation and amortization.................................... 3,486,554 10,038,439 28,718,937
------------- ------------- --------------
Total costs and expenses....................................... 19,662,777 37,295,281 76,247,255
------------- ------------- --------------
INCOME FROM OPERATIONS............................................. 4,914,151 7,500,900 9,386,505
OTHER:
Interest expense................................................. 2,660,248 11,173,688 29,901,678
Other expense, net............................................... 303,867 194,723 101,221
------------- ------------- --------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM............................ 1,950,036 (3,867,511) (20,616,394)
Extraordinary loss on extinguishment of debt....................... -- (1,420,864) --
------------- ------------- --------------
NET (LOSS) INCOME.................................................. $ 1,950,036 $ (5,288,375) $ (20,616,394)
------------- ------------- --------------
------------- ------------- --------------
Earnings per share information (pro forma for 1996):
Loss before preferred stock dividend and accretion............... (5,288,375) $ (20,616,394)
Preferred stock dividend and accretion........................... $ (718,028) $ (2,121,423)
------------- --------------
Net loss applicable to common shareholders....................... $ (6,006,403) $ (22,737,817)
------------- --------------
------------- --------------
Net loss per share applicable to common shareholders
Before extraordinary item...................................... $ (.74) $ (2.93)
Extraordinary item............................................. (.23) --
------------- --------------
Net loss....................................................... $ (.97) $ (2.93)
------------- --------------
------------- --------------
Weighted average common shares outstanding......................... 6,170,630 7,773,370
------------- --------------
------------- --------------
</TABLE>
See accompanying notes.
F-85
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATERD STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
WILCOM CORPORATION SYGNET COMMUNICATIONS, INC.
COMMON STOCK COMMON STOCK
---------------------------------------------- ---------------------------------------------
TYPE A TYPE B TYPE A TYPE B
---------------------- ---------------------- -------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1995..... 500 $ 12,500 2,500 $ 62,500 209,362 $ 209,362 1,046,801 $ 1,046,801
Net Income......................
Dividends declared..............
Type A common stock
repurchased...................
Type B common stock
repurchased...................
----- --------- ----------- --------- --------- --------- ---------- -----------
Balance as of December 31, 1995... 500 12,500 2,500 62,500 209,362 209,362 1,046,801 1,046,801
Net loss........................
Dividends declared..............
Corporate merger................ (500) (12,500) (2,500) (62,500) 4,360 4,360 21,800 21,800
Retirement of treasury stock.... (8,024) (40,173)
Sygnet Wireless
capitalization................ (205,698) (213,722) (1,028,428) (1,068,601)
Capital contribution of
S Corporation earnings........
Preferred stock dividend........
Accretion of preferred stock....
Exchange of common shares.......
----- --------- ----------- --------- --------- --------- ---------- -----------
Balance as of December 31, 1996... -- -- -- -- -- -- -- --
Net loss........................
Preferred Stock dividend........
Accretion of Preferred Stock....
Stock option compensation.......
Excess of redemption price over
carring value of Preferred
Stock.........................
Net Proceeds from issuance of
stock to Boston Venture.......
Exchange of Common Shares.......
----- --------- ----------- --------- --------- --------- ---------- -----------
Balance as of December 31,
1997.......................... -- $ -- -- $ -- -- $ -- -- $ --
----- --------- ----------- --------- --------- --------- ---------- -----------
----- --------- ----------- --------- --------- --------- ---------- -----------
<CAPTION>
SYGNET WIRELESS, INC.
------------------------------------------- NOTE
RECEIVABLE TREASURY
CLASS A CLASS B ADDITIONAL RETAINED FROM STOCK
-------------------- --------------------- PAID-IN EARNINGS OFFICER/ ---------
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDER SHARES
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
<S> <C>
Balance as of January 1, 1995..... -- $ -- -- $ -- $ 4,170,368 $ (482,842) $ (249,952) --
Net Income...................... 1,950,036
Dividends declared.............. (713,519)
Type A common stock
repurchased................... 8,024
Type B common stock
repurchased................... 40,173
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
Balance as of December 31, 1995... -- -- -- -- 4,170,368 753,675 (249,952) 48,197
Net loss........................ (5,288,375)
Dividends declared.............. (261,625)
Corporate merger................ 48,840
Retirement of treasury stock.... (1,718,991) (48,197)
Sygnet Wireless
capitalization................ 6,170,630 61,706 1,220,617
Capital contribution of
S Corporation earnings........ 2,809,405 (2,809,405)
Preferred stock dividend........ (690,411)
Accretion of preferred stock.... (27,617)
Exchange of common shares....... 2,653 27 (2,653) (27)
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
Balance as of December 31, 1996... 2,653 27 6,167,977 61,679 5,812,211 (7,605,730) (249,952) --
Net loss........................ (20,616,394)
Preferred Stock dividend........ (1,149,040)
Accretion of Preferred Stock.... (46,849)
Stock option compensation....... 306,000
Excess of redemption price over
carring value of Preferred
Stock......................... (925,534)
Net Proceeds from issuance of
stock to Boston Venture....... 3,000,000 30,000 43,601,710
Exchange of Common Shares....... 1,008,000 10,080 (1,008,000) (10,080)
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
Balance as of December 31,
1997.......................... 4,010,653 $ 40,107 5,159,977 $ 51,599 $47,598,498 $(28,222,124) $ (249,952) $ --
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
--------- --------- ---------- --------- ----------- ------------ ------------ ---------
<CAPTION>
AMOUNT
-----------
Balance as of January 1, 1995..... $ --
Net Income......................
Dividends declared..............
Type A common stock
repurchased................... $ (312,936)
Type B common stock
repurchased................... $(1,406,055)
-----------
Balance as of December 31, 1995... $(1,718,991)
Net loss........................
Dividends declared..............
Corporate merger................
Retirement of treasury stock.... 1,718,991
Sygnet Wireless
capitalization................
Capital contribution of
S Corporation earnings........
Preferred stock dividend........
Accretion of preferred stock....
Exchange of common shares.......
-----------
Balance as of December 31, 1996... --
Net loss........................
Preferred Stock dividend........
Accretion of Preferred Stock....
Stock option compensation.......
Excess of redemption price over
carring value of Preferred
Stock.........................
Net Proceeds from issuance of
stock to Boston Venture.......
Exchange of Common Shares.......
-----------
Balance as of December 31,
1997.......................... $ --
-----------
-----------
</TABLE>
See accompanying notes
F-86
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1995 1996 1997
-------------- --------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income............................................... $ 1,950,036 $ (5,288,375) $ (20,616,394)
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation.................................................. 2,765,816 5,948,693 16,018,841
Amortization.................................................. 720,738 4,089,746 12,700,096
Compensation expense from issuance of stock options........... -- -- 306,000
Loss on disposal of equipment................................. 161,222 177,633 102,955
Extraordinary loss on extinguishment of debt.................. -- 1,420,864 --
Changes in operating assets and liabilities:
Accounts receivable......................................... (2,838,833) (184,315) (1,854,599)
Inventory................................................... (184,951) (287,900) (170,493)
Prepaid and deferred expenses............................... 7,951 28,649 232,548
Accounts payable and accrued expenses....................... (589,925) 2,424,406 2,866,653
Accrued interest payable.................................... 452,933 6,481,912 (190,868)
-------------- --------------- --------------
Net cash provided by operating activities....................... 2,444,987 14,811,313 9,394,739
INVESTING ACTIVITIES
Acquisitions of Horizon and Erie................................ (40,533,104) (254,150,136) (599,442)
Purchases of property and equipment............................. (9,056,098) (10,049,999) (25,575,837)
Proceeds from sale of equipment................................. 513,730 -- 405,995
-------------- --------------- --------------
Net cash used in investing activities........................... (49,075,472) (264,200,135) (25,769,284)
FINANCING ACTIVITIES
Dividends paid.................................................. (1,158,980) (261,625) --
Proceeds from long-term debt.................................... 51,986,188 320,750,000 30,500,000
Principal payments on long-term debt............................ (750,000) (78,000,000) (37,250,000)
Increase in financing costs..................................... (1,716,230) (10,290,097) (65,376)
Net proceeds from issuance of preferred stock................... -- 19,000,000 --
Redemption of preferred stock................................... -- -- (21,839,451)
Net proceeds from issuance of common stock...................... -- -- 43,631,710
Purchase of treasury stock...................................... (1,718,991) -- --
-------------- --------------- --------------
Net cash provided by financing activities....................... 46,641,987 251,198,278 14,976,883
(Decrease) increase in cash and cash equivalents................ 11,502 1,809,456 (1,397,662)
Cash and cash equivalents at beginning of year.................. 436,790 448,292 2,257,748
-------------- --------------- --------------
Cash and cash equivalents at end of year........................ $ 448,292 $ 2,257,748 $ 860,086
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
See accompanying notes
F-87
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
These financial statements include the combined financial statements of
Sygnet Communications, Inc. ("Sygnet") and Wilcom Corporation ("Wilcom") through
August 31, 1996, the effective date of the merger described below, and the
consolidated accounts of Sygnet Wireless, Inc. and its wholly-owned subsidiary
Sygnet Communications, Inc. ("Sygnet") (hereinafter collectively referred to as
the "Company") thereafter. The Company owns and operates cellular telephone
systems serving one large cluster with an approximate population of 2.4 million
in Northeastern Ohio, Western Pennsylvania and Western New York.
On August 19, 1996, the shareholders of Sygnet and Wilcom effected a
corporate restructuring whereby Wilcom was merged into Sygnet and shareholders
of Wilcom received 8.72 shares of Sygnet common stock for each share of Wilcom
common stock held as of August 31, 1996, the effective date of the merger. This
merger was a business combination between entities under common control whereby
the assets and liabilities so transferred were accounted for at historical cost
in a manner similar to that in pooling-of-interest accounting. Also, in
conjunction with this merger, the shareholders of Sygnet amended the articles of
incorporation to change Sygnet's name to Sygnet Wireless, Inc.
Prior to the restructuring, Sygnet and Wilcom had been operating their
cellular business through three partnerships (Youngstown Cellular Telephone
Company ("YCTC")), Erie Cellular Telephone Company ("Erie"), and Wilcom
Cellular) and Sharon--Youngstown Cellular, Inc. ("Sharon"). As a result of the
restructuring and merger, Sharon was renamed Sygnet and is the wholly-owned
subsidiary and operating company of Sygnet Wireless, Inc. The existence of YCTC,
Erie, and Wilcom Cellular terminated on October 1, 1996 when all partnership
interests transferred to Sygnet.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which is required to be adopted effective January 1, 1998. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Reclassification of financial statements for earlier periods presented is
required. The impact of Statement No. 130 on the Company's financial statements
is not expected to be material.
In June 1997, the FASB also issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which is required to be
adopted effective January 1, 1998. This Statement changes the way companies
report selected segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The impact of Statement No. 131 on the
Company's financial statement disclosures is not expected to be material.
3. ACQUISITIONS
On October 9, 1996, the Company acquired certain cellular licenses,
property, equipment, customer lists, current assets and current liabilities of
Horizon Cellular Telephone Company of Chautauqua L.P., Horizon Cellular
Telephone Company of Crawford L.P., and Horizon Cellular Telephone Company of
Indiana L.P. (hereinafter collectively referred to as "Horizon") for cash of
$252.9 million. The acquired systems provide cellular service to an estimated
population of 1.4 million in contiguous markets in Western Pennsylvania and
Western New York.
F-88
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
3. ACQUISITIONS (CONTINUED)
On September 30, 1995, Sygnet, as a general partner, purchased 95.46% of
Erie for cash of $40.53 million. On November 30, 1995, Sharon purchased 4.54% of
Erie for $1.92 million, which was paid on February 12, 1996.
The above transactions were accounted for as purchases and, accordingly, the
results of operations of the companies acquired have been included in the
consolidated financial statements since the dates of acquisition.
Cash paid for acquisitions is summarized below:
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
Current assets acquired....................................... $ 923,234 $ 3,613,696
Property and equipment........................................ 1,349,195 18,986,400
Cellular licenses............................................. 40,289,743 207,223,616
Customer lists................................................ 25,700,000
Current liabilities assumed................................... (108,878) (774,134)
------------- --------------
Net assets and liabilities acquired........................... 42,453,294 254,749,578
Amounts payable in future periods............................. (1,920,190) (599,442)
------------- --------------
Cash paid..................................................... $ 40,533,104 $ 254,150,136
------------- --------------
------------- --------------
</TABLE>
The pro forma unaudited condensed combined results of operations for the
year ended December 31, 1996 as if the purchase occurred on January 1, 1996 are
as follows:
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
Revenue....................................................................... $ 69,851,000
--------------
--------------
Loss before extraordinary item................................................ $ (15,283,000)
--------------
--------------
Net loss...................................................................... $ (16,704,000)
--------------
--------------
Pro forma net loss per share applicable to common shareholders................ $ (3.25)
--------------
--------------
</TABLE>
4. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its wholly-owned subsidiary. Intercompany balances and transactions
have been eliminated in the consolidated financial statements.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
F-89
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory consisting of merchandise purchased for resale is stated at the
lower of cost or market determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives calculated under the straight-line or double-declining
balance methods.
INTANGIBLE ASSETS
The FCC issues licenses that enable cellular carriers to provide cellular
service in specific geographic areas. The FCC grants licenses for a term of up
to 10 years and generally grants renewals if the licensee has complied with its
obligations under the Communications Act of 1934. In 1993, the FCC adopted
specific standards to apply to cellular renewals, concluding it will award a
renewal to a cellular licensee that meets certain standards of past performance.
Historically, the FCC has granted license renewals routinely. The Company
believes that it has met, and will continue to meet all requirements necessary
to secure renewal of its cellular licenses.
The Company has acquired cellular licenses and customer lists through its
acquisition of interests in various cellular systems. The cost of licenses and
customer lists acquired was $231,003,426 in 1996. The Company uses a 40 year
useful life to amortize its licenses under the straight-line method. Purchased
cellular and paging customer lists are being amortized over 5 years under the
straight-line method. The components of intangible assets at December 31 are
summarized below:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Cellular licenses............................................ $ 255,849,696 $ 255,849,696
Customer lists............................................... 25,819,792 25,819,792
-------------- --------------
281,669,488 281,669,488
Accumulated amortization..................................... (4,862,135) (16,421,166)
-------------- --------------
$ 276,807,353 $ 265,248,322
-------------- --------------
-------------- --------------
</TABLE>
Amortization expense was $523,768, $3,652,470 and $11,559,031 in 1995, 1996
and 1997, respectively.
The ongoing value and remaining useful lives of intangible and other
long-term assets are subject to periodic evaluation and the Company currently
expects the carrying amounts to be fully recoverable. When events and
circumstances indicate that intangible and other long-term assets might be
impaired, an undiscounted cash flow methodology would be used to determine
whether an impairment loss would be recognized.
REVENUE RECOGNITION
The Company earns revenue primarily by providing cellular services to its
customers (Subscriber Revenue) and from the usage of its system by the customers
of other cellular carriers (Roamer Revenue). Access revenue for Subscriber
Revenue is billed one month in advance. Revenue is recognized as service is
rendered. Subscriber acquisition costs (primarily commissions and loss on
equipment sales) are expensed when incurred.
F-90
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized over the terms of the bank
credit facility and senior notes. Accumulated amortization was $266,084 and
$1,409,754 at December 31, 1996 and 1997, respectively. Amortization expense was
$196,170, $437,276 and $1,141,065 in 1995, 1996 and 1997, respectively. Upon
entering into a new bank credit facility in October 1996, an extraordinary loss
of $1,420,864 was incurred to write-off unamortized financing costs under the
extinguished bank credit agreement as described in Note 6.
ADVERTISING COSTS
Advertising costs are recorded as expense when incurred. Advertising expense
was $933,498, $1,225,151 and $1,841,138 in 1995, 1996 and 1997, respectively.
NET LOSS PER COMMON SHARE
In 1997, the Company adopted FASB Statement No. 128, EARNINGS PER SHARE,
which replaced the computation of primary and fully diluted earnings per share
with basic and diluted earnings per share. No restatement of prior year earnings
per share amounts was necessary since the impact was not significant.
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the period. The pro forma net loss per share
for 1996 is based on the number of common shares outstanding, as if the
corporate restructuring described in Note 1 occurred at the beginning of the
year. The effect of stock options is not included in the computation of dilutive
earnings per share since it is anti-dilutive.
Losses applicable to common shareholders include adjustments for Preferred
Stock dividends and accretions and the excess of the redemption price paid over
the carrying value of the Preferred Stock. Earnings per share for 1995 is not
presented because such data prior to the restructuring described in Note 1 is
not meaningful.
STOCK COMPENSATION
The Company accounts for its stock-based employee compensation arrangements
based on the intrinsic value of the equity instruments granted, as set forth in
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
SIGNIFICANT CONCENTRATIONS
In connection with providing cellular services to customers of other
cellular carriers, the Company has contractual agreements with those carriers
which provide for agreed upon billing rates between the parties. Approximately
62%, 48% and 43% of the Company's Roamer Revenue was earned from two cellular
carriers in 1995, 1996 and 1997, respectively.
F-91
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the management
of interest rate exposure and are accounted for on an accrual basis. Income and
expense are recorded in the same category as that arising from the related
liability being hedged (i.e., adjustments to interest expense).
The Company uses variable interest rate credit facilities to finance
acquisitions and operations of the Company. The Company may reduce its exposure
to fluctuations in interest rates by creating offsetting positions through the
use of derivative financial instruments. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives. The notional amount of interest rate swaps is
the underlying principal amount used in determining the interest payments
exchanged over the life of the swap. The notional amount is not a measure of the
Company's exposure through its use of derivatives.
The Company may be exposed to credit loss in the event of nonperformance by
the counterparties to its interest rate swap agreements. The Company anticipates
the counterparties will be able to fully satisfy its obligations under the
agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996 and 1997, the carrying value of cash equivalents,
accounts receivable, the interest rate swap and the long-term bank debt
approximated fair value. The fair value of the long-term unsecured senior notes,
calculated based on quoted market prices, was $112,750,000 and $118,800,000 at
December 31, 1996 and 1997, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Land, building and improvements............... 5-19 years $ 7,296,770 $ 10,575,573
Cellular system and equipment................. 2.5-19 years 41,498,865 57,010,440
Customer premise equipment.................... 3 years 1,690,906 665,935
Office furniture and equipment................ 3-10 years 4,341,459 9,257,464
Cell site construction in progress............ 1,076,817 1,522,275
-------------- --------------
55,904,817 79,031,687
Accumulated depreciation...................... (11,945,848) (26,024,672)
-------------- --------------
$ 43,958,969 $ 53,007,015
-------------- --------------
-------------- --------------
</TABLE>
At December 31, 1997, the Company had purchase commitments of approximately
$9.3 million for equipment.
F-92
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
6. LONG-TERM DEBT
On September 19, 1996, the Company issued $110,000,000 11 1/2% unsecured
Senior Notes due October 1, 2006 (the Notes). The Notes pay interest
semiannually on April 1 and October 1 of each year commencing April 1, 1997. The
Notes are redeemable at the option of the Company at redemption prices
(expressed as a percentage of principal amount) ranging from 105.75% in 2001 to
100.00% in 2005 and thereafter. Among other things, the Notes contain certain
covenants which limit additional indebtedness, payment of dividends, sale of
assets or stock, changes in control and transactions with related parties. The
proceeds from the Notes were used to repay amounts borrowed under a $75 million
bank credit agreement and to finance the acquisition of Horizon described in
Note 3.
On October 9, 1996, Sygnet entered into a new financing agreement (the Bank
Credit Facility) with a commercial bank group. The Bank Credit Facility is a
senior secured reducing revolver that provides Sygnet the ability to borrow up
to $300.0 million through June 30, 1999. Mandatory reductions in the revolver
occur quarterly thereafter through June 30, 2005, when the Bank Credit Facility
terminates. The Bank Credit Facility is secured by certain assets and the stock
of Sygnet. The Bank Credit Facility provides for various borrowing rate options
based on either a fixed spread over the London Interbank Offered Rate (LIBOR) or
the prime rate. Interest payments are made quarterly. As of December 31, 1997,
$195.5 million was outstanding under the Bank Credit Facility.
Among other things, the Bank Credit Facility contains financial covenants
which require the maintenance of debt service ratios and the hedging of interest
rate risk and limit distributions to shareholders and sales of assets. In
connection with these covenants, the Company has a three year interest rate swap
with a total underlying notional amount of $80 million. The swap agreements
converted the interest rate on $80 million notional amount of the credit
facility from a variable rate based upon a three month LIBOR (5.81% at December
31, 1997) to fixed rates ranging from 5.79% to 6.03%. Amounts paid or received
under these agreements are recognized as adjustments to interest expense.
There are no future minimum payments based upon the borrowing levels at
December 31, 1997 for the next five years.
Interest paid was $2,202,345, 4,691,776 and $30,076,031 in 1995, 1996 and
1997 respectively.
7. LEASES
The Company has entered into various operating leases for land and office
facilities. Leases for tower sites provide for periodic extensions of lease
periods with future lease payments indexed to the consumer price index.
F-93
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
7. LEASES (CONTINUED)
Minimum future rental payments under operating leases having remaining terms
in excess of one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................... $1,777,262
1999........................................... 1,445,209
2000........................................... 1,182,204
2001........................................... 817,668
2002........................................... 505,431
Thereafter..................................... 6,657,092
----------
Total.......................................... $12,384,866
----------
----------
</TABLE>
Rent expense was approximately $460,800, $906,042 and $2,077,644 in 1995,
1996 and 1997, respectively.
8. RETIREMENT PLAN
The Company sponsors a 401(k) retirement and profit sharing plan which
covers substantially all its employees. Eligible employees can contribute from
1% to 15% of their compensation. The Company, at its discretion, may match a
portion of the employee's contribution. The Company may also, at its discretion,
make additional profit sharing contributions to the plan. Total pension expense
was $114,000, $181,000 and $293,000 in 1995, 1996 and 1997, respectively.
9. REDEEMABLE PREFERRED STOCK AND WARRANTS
On April 3, 1997, 100,000 shares of Series A Senior Cumulative Nonvoting
Preferred Stock (Preferred Stock) were redeemed by the Company at a cost of
$10,000,000 which was funded by the Bank Credit Facility. On June 20, 1997, the
remaining 118,394.51 shares of Preferred Stock were redeemed by the Company at a
cost of $11,839,451. This redemption was funded by the Common Stock Sale
described in Note 10.
The Preferred Stock had a redemption value of $100 per share and was
recorded at fair value on the date of issuance less issuance costs. Dividends
were cumulative from the date of issuance, accrued quarterly in arrears and were
payable in shares of Preferred Stock. The dividend rates increased annually from
15% in 1997 to 21% in 2000 and thereafter. As of December 31, 1996, the Company
accrued stock dividends in the amount of $690,411 (which represented 6,904
shares). The Preferred Stock included the potential issuance of warrants to
purchase shares of the Company's Class A Common Stock. For financial reporting
purposes, the estimated fair value of the warrants was included with the
Preferred Stock in the accompanying balance sheet and the excess of the
redemption value of the Preferred Stock over the carrying value was accreted by
periodic charges to additional paid-in capital over the life of the issue. No
warrants were issued.
The Company has authorized 5 million shares of Nonvoting Preferred Stock,
par value $.01 per share, of which 500,000 are designated as Series A Senior
Cumulative Nonvoting Preferred Stock.
F-94
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
9. REDEEMABLE PREFERRED STOCK AND WARRANTS (CONTINUED)
The Company has also authorized 10 million shares of Voting Preferred Stock,
par value $.01 per share, none of which are issued as of December 31, 1997.
10. SHAREHOLDERS' EQUITY
On June 20, 1997, the Company issued and sold 3,000,000 shares of Class A
Common Stock, $.01 par value, to Boston Ventures Limited Partnership V (Boston
Ventures) at a price of $15 per share (Common Stock Sales). The proceeds of
$43.6 million, net of issuance fees of $1.4 million, were used to redeem the
remaining outstanding Preferred Stock as described in Note 9, and to reduce
amounts outstanding under the Bank Credit Facility. As a condition of the Common
Stock Sales, Boston Ventures appointed two representatives on the Company's
eleven member board of directors.
In August 1997, Boston Ventures purchased 1,000,000 shares of Class B Common
Stock from shareholders pursuant to a tender offer which upon purchase based on
the requirements of the corporate restructuring described in Note 1, became
Class A Common Stock.
On August 28, 1996, the Company approved a plan to recapitalize the Company
whereby the Sygnet common stock Type A (205,698 shares) and Type B (1,028,428
shares) were converted into 6,170,630 shares of Sygnet Wireless, Inc. Class B
common stock in a 5 for 1 split, effective on September 20, 1996. These shares
are entitled to ten votes per share.
On January 5, 1995, Sygnet repurchased 8,024 Type A shares for $39.00 per
share and 40,173 Type B shares for $35.00 per share from a shareholder for
approximately $1,719,000. These shares were accounted for at cost and held as
treasury stock until August 28, 1996 when they were retired.
Under the most restrictive of the covenants discussed in Note 6, the Company
could not declare any additional dividends on its common stock at December 31,
1997.
On December 29, 1994, the Company received a promissory note from an
officer/shareholder for $249,952 for the purchase of common shares from a
shareholder. The note requires annual payment of interest at 8.23% with
principal repayment commencing on December 31, 1998 through December 31, 2001.
11. INCOME TAXES
On August 31, 1996, Sygnet and Wilcom terminated their status as Subchapter
S Corporations. As a result of this termination, application of the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, requires deferred income taxes to be provided for differences in the
basis for tax purposes and for financial accounting purposes of recorded assets
and liabilities. As a result of the termination of their Subchapter S
Corporation status, Sygnet and Wilcom contributed their undistributed earnings
to additional paid-in capital. At December 31, 1997, the Company has net
operating loss carryforwards of $28.7 million that expire in 2011 and 2012. For
financial reporting purposes, a valuation allowance of $7,747,300 has been
recognized to offset the net deferred tax assets which primarily relate to the
net operating loss carryforward.
F-95
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
11. INCOME TAXES (CONTINUED)
Amounts for deferred tax assets and liabilities at December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.................................................. $ 787,200 $ --
Amortization.................................................. 1,271,800 3,593,000
------------- -------------
Total deferred tax liabilities.................................. 2,059,000 3,593,000
Deferred tax assets:
AMT credit carryforward....................................... 63,400 63,400
Allowance for doubtful accounts............................... 397,400 275,300
Depreciation.................................................. 958,400
Net operating loss carryforward............................... 2,550,000 9,756,800
Other......................................................... 201,700 390,400
------------- -------------
3,212,500 11,444,300
Valuation allowance............................................. (1,153,500) (7,851,300)
------------- -------------
Total deferred tax assets....................................... 2,059,000 3,593,000
------------- -------------
Net deferred tax assets......................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The components of the income tax provision (benefit) in the consolidated
statements of operations for the year ended December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Cumulative effect of conversion from S to C corporation
status........................................................ $ 745,000 $ --
Deferred income tax (benefit)................................... (1,898,500) (6,697,800)
Valuation allowance............................................. 1,153,500 6,697,800
------------- -------------
Total provision for income tax (benefit)........................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
12. STOCK OPTION PLAN
The Company has stock option plans that provide for the purchase of Class A
common stock by employees and directors of the Company. Under the stock option
plans the Company is authorized to issue 1,250,000 options for the purchase of
shares of Class A common stock (1,000,000 for employees and 250,000 for
non-employee directors). These options vest over a period ranging from grant
date to five years, are exercisable based upon the terms of the grants and
expire at the end of ten years. The Company applies APBO No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES and related Interpretations in accounting for the
plan, which requires that for certain options granted, the Company recognizes as
compensation expense the excess of the deemed fair value for accounting purposes
of the common stock over the exercise price of the options. For the majority of
options, no compensation cost has been recognized. Had compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's net loss and net loss per share would not have been
materially different from the amounts reported.
F-96
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
12. STOCK OPTION PLAN (CONTINUED)
For pro forma calculations the fair value of each option is estimated on the
date of grant using the Minimum Value option-pricing model with the following
weighted-average assumptions used for grants in both 1996 and 1997: risk-free
interest rates ranging from 5.9% to 6.9% and average expected lives ranging from
5.25 to 7.5 years for issued options.
A summary of the status of the company's stock option plan as of December
31, 1996 and 1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1996 1997
----------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........... -- $ -- 533,200 $ 10.00
Granted.................................... 533,200 10.00 183,000 10.31
Exercised.................................. -- -- -- --
Canceled................................... -- -- --
---------- ------ ---------- ------
Outstanding at year end.................... 533,200 10.00 716,200 $ 10.08
---------- ------ ---------- ------
---------- ------ ---------- ------
Options exercisable at year end............ -- 651,200
Weighted-average fair value of options
granted during the year.................. $ -- $ 7.80
Weighted-average remaining contractual
life..................................... 9.68 8.87
</TABLE>
At December 31, 1997, there were 533,800 options available for future grant.
F-97
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1997 1998
-------------- --------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 860,086 $ 467,124
Accounts receivable, less allowance for doubtful accounts of $565,862 at
September 30, 1998 and $809,800 at December 31, 1997......................... 10,711,627 13,506,769
Inventory...................................................................... 1,867,445 1,539,169
Prepaid expenses............................................................... 309,460 929,915
-------------- --------------
Total current assets......................................................... 13,748,618 16,442,977
Other assets:
Cellular licenses--net......................................................... 245,866,235 241,062,311
Customer lists--net............................................................ 19,382,087 15,527,090
Deferred financing costs--net.................................................. 8,982,430 8,126,156
-------------- --------------
Total other assets........................................................... 274,230,752 264,715,557
Property, plant and equipment--net............................................... 53,007,015 52,137,706
-------------- --------------
Total assets................................................................. $ 340,986,385 $ 333,296,240
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 3,264,206 $ 1,807,017
Deferred revenue............................................................... 2,058,066 2,381,739
Accrued expenses and other liabilities......................................... 4,196,230 4,591,172
Interest payable............................................................... 6,749,755 9,533,632
-------------- --------------
Total current liabilities.................................................... 16,268,257 18,313,560
Long-term debt................................................................... 305,500,000 302,644,000
Shareholders' equity:
Common shares, $.01 par, Class A, 1 vote per share, 60,000,000 shares
authorized, 4,734,091 shares issued and outstanding as of September 30, 1998;
4,010,653 shares issued and outstanding as of December 31, 1997.............. 40,107 47,341
Common shares, $.01 par, Class B, 10 votes per share; 10,000,000 shares
authorized, 4,436,539 shares issued and outstanding as of September 30, 1998;
5,159,977 shares issued and outstanding as of December 31, 1997.............. 51,599 44,365
Additional paid-in capital....................................................... 47,598,498 47,598,498
Retained deficit................................................................. (28,222,124) (35,101,572)
Note receivable from officer/shareholder......................................... (249,952) (249,952)
-------------- --------------
Total shareholders' equity................................................... 19,218,128 12,338,680
-------------- --------------
Total liabilities and shareholders' equity................................... $ 340,986,385 $ 333,296,240
-------------- --------------
-------------- --------------
</TABLE>
NOTE: THE BALANCE SHEET AT DECEMBER 31, 1997 HAS BEEN DERIVED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS AT THAT DATE BUT DOES NOT INCLUDE ALL OF THE
INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
FOR COMPLETE FINANCIAL STATEMENTS.
F-98
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Revenue:
Subscriber revenue.............................................................. $ 38,531,124 $ 46,738,516
Roamer revenue.................................................................. 19,868,262 24,752,828
Equipment sales................................................................. 3,050,594 4,252,652
Other revenue................................................................... 1,307,703 1,190,063
-------------- --------------
Total revenue..................................................................... 62,757,683 76,934,059
Costs and expenses:
Cost of services................................................................ 7,175,048 9,004,943
Cost of equipment sales......................................................... 6,806,047 7,789,947
General and administrative...................................................... 11,666,527 14,664,517
Selling and marketing........................................................... 7,465,863 9,056,770
Depreciation and amortization................................................... 21,142,930 21,343,437
-------------- --------------
Total costs and expenses.......................................................... 54,256,415 61,859,614
-------------- --------------
Income from operations............................................................ 8,501,268 15,074,445
Other:
Interest expense, net........................................................... 22,558,545 21,612,673
Other........................................................................... (6,174) 341,220
-------------- --------------
Net income (loss)................................................................. $ (14,051,103) $ (6,879,448)
-------------- --------------
-------------- --------------
Earnings per share information:
Net income (loss)............................................................... $ (14,051,103) $ (6,879,448)
Preferred stock dividend and accretion.......................................... (2,121,472) --
-------------- --------------
Net income (loss) applicable to common shareholders............................. $ (16,172,575) $ (6,879,448)
-------------- --------------
-------------- --------------
Net income (loss) per share applicable to common shareholders................... $ (2.21) $ (.75)
-------------- --------------
-------------- --------------
Common shares outstanding......................................................... 7,302,498 9,170,630
-------------- --------------
-------------- --------------
</TABLE>
F-99
<PAGE>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ (14,051,103) $ (6,879,448)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................... 11,614,565 11,828,239
Amortization.................................................................... 9,528,365 9,515,198
Loss (gain) on disposal of assets............................................... (14,358) 109,104
Changes in operating assets and liabilities:
Accounts receivable........................................................... (2,269,177) (2,795,142)
Inventory..................................................................... 413,076 328,276
Prepaid and deferred expenses................................................. 188,487 (620,455)
Accounts payable and accrued expenses......................................... 732,773 (738,574)
Accrued interest payable...................................................... 982,713 2,783,877
-------------- --------------
Net cash provided by operating activities......................................... 7,125,341 13,531,075
INVESTING ACTIVITIES
Business acquisition.............................................................. (599,442) --
Purchases of property and equipment............................................... (16,979,123) (11,468,537)
Proceeds from sale of assets...................................................... 20,995 400,500
-------------- --------------
Net cash used in investing activities............................................. (17,557,570) (11,068,037)
FINANCING ACTIVITIES
Proceeds from long-term debt...................................................... 23,500,000 16,894,000
Principal payments on long-term debt.............................................. (35,250,000) (19,750,000)
Increase in financing costs....................................................... (308,666) --
Redemption of preferred stock..................................................... (21,839,451) --
Net proceeds from sale of common stock............................................ 43,875,000 --
-------------- --------------
Net cash (used in) provided by financing activities............................... 9,976,883 (2,856,000)
Decrease in cash and cash equivalents............................................. (455,346) (392,962)
Cash and cash equivalents at beginning of period.................................. 2,257,748 860,086
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 1,802,402 $ 467,124
-------------- --------------
-------------- --------------
</TABLE>
F-100
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
These financial statements include the consolidated accounts of Sygnet
Wireless, Inc. (the "Company") and its wholly-owned subsidiary Sygnet
Communications, Inc. ("Sygnet"). The Company owns and operates cellular
telephone systems serving one large cluster with an approximate population of
2.4 million in Northeastern Ohio, Western Pennsylvania and Western New York.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended December 31, 1997 (File No. 333-10161)
filed with the Securities and Exchange Commission.
2. AGREEMENT AND PLAN OF MERGER
On July 28, 1998, the Company entered into an Agreement and Plan of Merger
("Merger") with a subsidiary of Dobson Communications Corporation ("Dobson")
pursuant to which Dobson will acquire all outstanding shares of common stock of
the Company for an aggregate amount of $337.5 million, or approximately $34.51
per share. The agreement is pending regulatory approval and is expected to close
in the fourth quarter of 1998.
3. LONG-TERM DEBT
The Company has $110.0 million 11 1/2% unsecured Senior Notes due October 1,
2006 (the "Notes"). The Notes pay interest semiannually on April 1 and October 1
of each year. The Notes are redeemable at the option of the Company at
redemption prices (expressed as a percentage of principal amount) ranging from
105.75% in 2001 to 100.00% in 2005 and thereafter. Among other things, the Notes
contain certain covenants which limit additional indebtedness, payment of
dividends, sale of assets or stock, changes in control and transactions with
related parties.
Sygnet has a financing agreement (the "Bank Credit Facility") with a
commercial bank group. The Bank Credit Facility is a senior secured reducing
revolver that provides Sygnet the ability to borrow up to $300.0 million through
June 30, 1999. Mandatory reductions in the revolver occur quarterly thereafter
through June 30, 2005, when the Bank Credit Facility terminates. The Bank Credit
Facility is secured by certain assets and the stock of Sygnet. The Bank Credit
Facility provides for various borrowing rate options based on either a fixed
spread over the London Interbank Offered Rate (LIBOR) or the prime rate. As of
September 30, 1998, the amount outstanding under the Bank Credit Facility is
$192.6 million.
4. REDEEMABLE PREFERRED STOCK AND WARRANTS
On April 3, 1997, 100,000 shares of Series A Senior Cumulative Nonvoting
Preferred Stock ("Preferred Stock"), were redeemed by the Company at a cost of
$10.0 million which was funded by the Bank Credit Facility. On June 20, 1997,
the remaining 118,394.51 shares of Preferred Stock were redeemed by
F-101
<PAGE>
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. REDEEMABLE PREFERRED STOCK AND WARRANTS (CONTINUED)
the Company at a cost of $11,839,451. This redemption was funded by the Common
Stock Sale described in Note 5.
The Preferred Stock had a redemption value of $100 per share and was
recorded at fair value on the date of issuance less issuance costs. Dividends
were cumulative from the date of issuance, accrued quarterly in arrears and were
payable in shares of Preferred Stock. The dividend rates increased annually from
15% in 1997 to 21% in 2000 and thereafter. The Preferred Stock included the
potential issuance of warrants to purchase shares of the Company's Class A
Common Stock. For financial reporting purposes, the estimated fair value of the
warrants was included with the Preferred Stock in the accompanying balance sheet
and the excess of the redemption value of the Preferred Stock over the carrying
value was accreted by periodic charges to additional paid-in capital over the
life of the issue. No warrants were issued.
The Company has authorized 5 million shares of Nonvoting Preferred Stock,
par value $.01 per share, of which 500,000 are designated as Series A Senior
Cumulative Nonvoting Preferred Stock.
5. SHAREHOLDERS EQUITY
On June 20, 1997, the Company issued and sold 3,000,000 shares of Class A
Common Stock, $.01 par value, to Boston Ventures Limited Partnership V ("Boston
Ventures") at a price of $15 per share ("Common Stock Sale"). The proceeds of
$43.9 million, net of issuance fees, were used to redeem the remaining
outstanding Preferred Stock as described in Note 4, and to reduce amounts
outstanding under the Bank Credit Facility. As a condition of the Common Stock
Sale, Boston Ventures has two representatives on the Company's eleven member
board of directors.
In August 1997, Boston Ventures purchased 1,000,000 shares of Class B Common
Stock from shareholders pursuant to a tender offer which, upon purchase, became
Class A Common Stock.
6. COMMITMENTS AND CONTINGENCIES
In accordance with the Merger (see Note 2), the Company may be liable to pay
severance benefits and incentive compensation for an approximate amount of $1.9
million to certain employees if the Merger occurs and certain other conditions
are met before December 31, 1998.
On June 8, 1998, the Company entered into an agreement with Pinellas
Communications to purchase the license to operate a cellular telephone system in
the Rural Service Area PA-2. The purchase price is $6.0 million and the
transaction is expected to close in the fourth quarter of 1998.
F-102
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Oklahoma General Corporation Act under which the Company
is incorporated, Article VII of the Company's Amended and Restated Certificate
of Incorporation provides for indemnification of each of the Company's officers
and directors against (a) expenses, including attorney's fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with any action, suit or proceeding brought by reason of his being or
having been a director, officer, employee or agent of the Company, or of any
other corporation, partnership, joint venture, or other enterprise at the
request of the Company, other than an action by or in the right of the Company,
provided that he acted in good faith and in a manner he reasonably believed to
be in the best interest of the Company, and with respect to any criminal action,
he had no reasonable cause to believe that his conduct was unlawful and (b)
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of any action or suit by or in the
right of the Company brought by reason of his being or having been a director,
officer, employee or agent of the Company, or any other corporation,
partnership, joint venture, or other enterprise at the request of the Company,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the Company; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged liable to the Company, unless and
only to the extent that the court in which such action or suit was decided has
determined that the person is fairly and reasonably entitled to indemnification
for such expenses which the court shall deem proper. The Company's bylaws
provide for similar indemnification. These provisions may be sufficiently broad
to indemnify such persons for liabilities arising under the Securities Act of
1933, as amended.
The Company's directors and officers are also insured against claims arising
out of the performance of their duties in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
2.1 Asset Purchase Agreement dated as of November 19, 1996 as amended by
Amendment No. 1 thereto effective as of January 17, 1997 and Amendment
No. 2 thereto dated February 6, 1997, among Horizon Cellular Telephone
Company of Hagerstown L.P., Cumberland Cellular Partnership and Dobson
Cellular of Maryland, Inc., and Dobson Operating Company. (9)
2.2 Asset Purchase Agreement dated September 25, 1996 among Maryland
Wireless Communications L.P., Wendy C. Coleman, Dobson Cellular of
Maryland, Inc. and Dobson Operating Company. (1) [10.5.2]
2.3.1 Purchase Agreement dated February 28, 1997 among Aztel, Inc. Gila River
Telecommunications, Inc., US West New Vector Group, Inc., Tohono
O'odham Utility Authority and Dobson Cellular of Arizona, Inc. (1) [10.5.3]
2.3.2 First Amendment to Purchase Agreement dated August 29, 1997. (2) [2.1.1]
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
2.4 Stock Purchase Agreement dated September 30, 1997 among Dobson Operating
Company, Associated TTI Limited Partnership and Hinton CATV relating
to the Company's purchase of the ATTI stock. (2) [2.2]
2.5 Asset Purchase Agreement dated October 9, 1997 between Texas 16 Cellular
Telephone Company and Dobson Cellular of Texas, Inc. (3) [2.1]
2.6.1 Stock Purchase Agreement dated November 17, 1997 as amended by Amendment
No. 1 thereto effective as of March 18, 1998 between Cellular 2000
Telephone Co. and its shareholders listed therein and Dobson Cellular
of California, Inc. (4) [2.6.1]
2.6.2 Stock Purchase Agreement dated March 19, 1998 between RSA 339, Inc. and
AT&T Wireless Services, Inc. and Dobson Cellular of California, Inc. (5) [2.6.2]
2.7 Stock Purchase Agreement dated March 25, 1998 between Santa Cruz
Cellular Telephone, Inc. and its shareholders and optionholders listed
therein and Dobson Cellular of California, Inc. (5) [2.7]
2.8 Agreement and Plan of Merger dated July 28, 1998 between Sygnet
Wireless, Inc. and Dobson/Sygnet Operating Company (formerly known as
Front Nine Operating Company) (without schedules). (6) [2.0]
2.9 Asset Purchase Agreement dated August 20, 1998, between Ohio Wireless
Communications, L.L.C. and Dobson Cellular of Sandusky. (9)
2.10 Asset Purchase Agreement dated as of September 2, 1998 between A-1
Cellular of Texas, L.P. and Dobson Cellular of Navarro, Inc. (9)
2.11 Asset Purchase Agreement dated November 24, 1998 between First Cellular
of Maryland, Inc. and Dobson Cellular of Maryland, Inc. (9)
2.12 Agreement to furnish unfiled schedules. (9)
3.1 Registrant's Amended and Restated Certificate of Incorporation. (6) [3.1]
3.2 Registrant's Amended and Restated Bylaws. (6) [3.2]
3.3 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class A Preferred Stock. (6) [3.3]
3.4 Certificate of Designation for the Registrant's Class B Preferred Stock. (5) [3.1]
3.5 Certificate of Designation for the Registrant's Class C Preferred Stock. (5) [3.1]
3.6 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class D Preferred Stock. (6) [3.4]
3.7 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class E Preferred Stock. (6) [3.5]
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
3.8 Certificate of Designation for the Registrant's Class F Preferred Stock. (6) [3.6]
3.9 Certificate of Designation for the Registrant's Class G Preferred Stock. (6) [3.7]
3.10 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class H Preferred Stock. (6) [3.8]
3.11 Certificate of Designation for the Registrant's 12 1/4% Senior
Exchangeable Preferred Stock Mandatorily Redeemable 2008. (6) [3.9]
4.1 Third Amended and Restated Credit Agreement among the Agents and Lenders
named therein and Dobson Operating Company dated March 25, 1998. (4) [4.1]
4.2 $120 million Revolving Credit Agreement among Dobson Cellular Operations
Company and the Agents and Lenders named therein dated as of March 25,
1998. (4) [4.2]
4.3 $80 million 364-Day Revolving Credit and Term Loan Agreement among
Dobson Cellular Operations Company and the Agents and Lenders named
therein dated as of March 25, 1998. (4) [4.3]
4.4 Credit Agreement among the Agents and Lenders named therein and
Dobson/Sygnet Operating Company, dated as of December 23, 1998. (9)
4.5 $17.5 million Term Loan Agreement between Dobson Tower Company and
NationsBank, N.A. dated as of December 23, 1998. (9)
4.6 Telephone Loan Contract dated as of November 7, 1958 between Dobson
Telephone Company, Inc. and United States of America. (1) [4.2]
4.7 Telephone Loan Contract dated as of March 19, 1956 between McLoud
Telephone Company and United States of America. (1) [4.3]
4.8 Telephone Loan Contract dated as of January 15, 1993 between Dobson
Telephone Company, Inc., Rural Telephone Bank and United States of
America. (1) [4.4]
4.9 Restated Mortgage, Security Agreement and Financing Statement dated as
of May 15, 1993 between Dobson Telephone Company and United States of
America. (1) [4.5]
4.10 Indenture dated as of February 28, 1997 between the Registrant, as
Issuer, and United States Trust Company of New York, as Trustee. (1) [4.6]
4.11 Escrow and Security Agreement dated February 28, 1997 among the
Registrant as Pledgor, and Morgan Stanley & Co. Incorporated, Alex.
Brown & Sons Incorporated, First Union Capital Markets, and
NationsBanc Capital Markets, Inc., as Placement Agents, and United
States Trust Company of New York, as Trustee. (1) [4.9]
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
4.12 Registration Rights Agreement dated January 16, 1998 between the
Registrant and Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery
Securities LLC. (4) [4.11]
4.13 Agreement to furnish unfiled debt instruments. (4) [4.12]
4.14 Indenture dated as of June 12, 1998 between Logix Communications
Enterprises, Inc. (f/k/a Dobson Wireline Company), as Issuer, and
United States Trust Company of New York, as Trustee. (7) [4.5]
4.15 Escrow and Security Agreement dated June 12, 1998 among Logix
Communications Enterprises, Inc. (f/k/a Dobson Wireline Company), as
Pledgor, and Morgan Stanley & Co. Incorporated, NationsBanc Montgomery
Securities LLC as Placement Agents, and United States Trust Company of
New York, as Trustee. (7) [4.6]
4.16 Registration Rights Agreement dated June 12, 1998 between Logix
Communications Enterprises, Inc. (f/k/a Dobson Wireline Company) and
Morgan Stanley & Co. Incorporated and NationsBanc Montgomery
Securities LLC. (7) [4.7]
4.17 Indenture dated December 23, 1998 between Dobson/Sygnet Communications
Company, as Issuer, and United States Trust Company of New York, as
Trustee. (6) [4.1]
4.18 Pledge Agreement dated December 23, 1998 between Dobson/ Sygnet
Communications Company, as Pledgor, and NationsBanc Montgomery
Securities LLC, Lehman Brothers Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc. and TD Securities (USA) Inc.,
as Initial Purchasers, and United States Trust Company of New York, as
Trustee. (9)
4.19 Registration Rights Agreement dated December 23, 1998 between
Dobson/Sygnet Communications Company and NationsBanc Montgomery
Securities LLC, Lehman Brothers Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc. and TD Securities (USA) Inc. (9)
4.20 Registration Rights Agreement dated December 23, 1998 between the
Registrant and NationsBanc Montgomery Securities LLC. (9)
4.21 Certificate of Designation relating to Senior Preferred Stock is
contained in Exhibit 3.9 and incorporated herein by reference. (6) [3.9]
4.22 Preferred Stock Certificate. (9)
5 Opinion of McAfee & Taft A Professional Corporation. (8)
10.1.1* Registrant's 1996 Stock Option Plan, as amended. (8)
10.1.2* 1998 Stock Option Plan of Logix Communications Enterprises, Inc. (f/k/a
Dobson Wireline Company). (9)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
10.2.1 Promissory Note dated February 10, 1997 of G. Edward Evans in the amount
of $300,000 in favor of Western Financial Services Corp. (1) [10.2.1]
10.2.2 Stock Purchase Agreement dated September 30, 1997 among Dobson Operating
Company, Associated TTI Limited Partnership and Hinton CATV Company,
Inc. (5) [10.2.3]
10.2.3 Stock Purchase Agreement, dated as of March 26, 1998, between the
shareholders of American Telco Inc. and American Telco Network
Services, Inc. and Logix Communications Enterprises, Inc. (f/k/a
Dobson Wireline Company). (10) [2.1]
10.2.4 First Amendment to Stock Purchase Agreement among American Telco Inc.
and American Telco Network Services, Inc. and Logix Communications
Enterprises, Inc. (f/k/a Dobson Wireline Company). (10) [2.2]
10.2.5 Stock Purchase Agreement, dated December 23, 1998 among the Registrant,
the Fleet Investors and the other entities listed therein. (9)
10.2.6 Asset Purchase Agreement dated December 23, 1998 by and between Sygnet
Communications, Inc. and Dobson Tower Company. (9)
10.2.7 Master Site License Agreement dated December 23, 1998 by and between
Sygnet Communications, Inc. and Dobson Tower Company. (9)
10.3.1* Letter dated June 3, 1996 from Registrant to Bruce R. Knooihuizen
describing employment arrangement. (1) [10.3.2]
10.3.2* Letter dated October 15, 1996 from Fleet Equity Partners to Justin L.
Jaschke regarding director compensation. (1) [10.3.3]
10.3.3* Letter dated December 26, 1996 from Registrant to G. Edward Evans
describing employment arrangement. (1) [10.3.1]
10.3.4* Letter dated September 16, 1997 from Registrant to William J. Hoffman,
Jr. describing employment arrangement. (5) [10.3.4]
10.3.5* Letter dated October 28, 1997 from Registrant to R. Thomas Morgan
describing employment arrangement. (5) [10.3.5]
10.3.6 Letter dated August 25, 1998 from Registrant to Richard D. Sewell, Jr.
describing employment arrangement. (9)
10.3.7* Consulting Agreement dated December 21, 1998 between Registrant and
Albert H. Pharis, Jr. (9)
10.4.1 North American Cellular Network Services Agreement dated August 26, 1992
between North American Cellular Network, Inc. and Dobson Cellular
Systems, Inc. (1) [10.4.2]
10.4.2 Agreement for DS-3 service dated December 16, 1993 between Logix
Communications Corporation (f/k/a Dobson Fiber Company) and NTS
Communications, Inc. and Addendum thereto dated June 1, 1994. (1) [10.4.1]
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
10.4.3 Services Agreement dated September 25, 1996 among Dobson Cellular of
Maryland, Inc., Maryland Wireless Communications Limited Partnership,
Wendy Coleman and Washington/ Baltimore Cellular One Limited
Partnership. (1) [10.5.2]
10.4.4 General Purchase Agreement dated January 13, 1998 between Lucent
Technologies, Inc. and Dobson Cellular Systems, Inc. (5) [10.4.7]
10.4.5 Operating Agreement dated January 16, 1998 between AT&T Wireless
Services, Inc. and Dobson Cellular Systems, Inc. (9)
10.4.6 Fourth Amended General Purchase Agreement dated January 5, 1999 between
Northern Telecom Inc. and Registrant. (4) [10.4.8]
10.5.1 Assignment Agreement dated January 23, 1997 between Texas 16 Cellular
Telephone Company, Inc. and Dobson Cellular of Texas, Inc. re Cellular
One License Agreement. (9)
10.5.2 Form of Cellular One License Agreements dated February 25, 1997 between
Cellular One Group and Dobson Cellular of Enid, Inc., Dobson Cellular
of Woodward, Inc. and Dobson Cellular of Kansas/Missouri, Inc. (1) [10.4.5]
10.5.3 Trademark Sublicense Agreement dated February 28, 1997 between AirTouch
Communications, Inc. (f/k/a WMC Partners L.P.) and Dobson Cellular of
Arizona, Inc. (1) [10.4.3]
10.5.4 Affiliation Agreement dated February 28, 1997 among Registrant, Dobson
Cellular of Arizona, Inc. and AirTouch Communications, Inc. (f/k/a WMC
Partners, L.P.). (1) [10.4.4]
10.5.5 Letter Agreement dated September 30, 1997 between U.S. West, New Vector
Group, Inc. and Gila River Cellular General Partnership, by Dobson
Cellular of Arizona, Inc. regarding License Agreement for post closing
use of "U.S. West Cellular" brand and "AirTouch" brand. (9)
10.5.6 Trademark Sub-License Agreement dated October 1, 1997 between AirTouch
Communications, Inc. (f/k/a WMC Partners, L.P.) and Gila River
Cellular General Partnership. (9)
10.5.7 Agreement dated April 1, 1998 between Cellular 2000 Telephone Co. and
Dobson Cellular of California re Cellular One License Agreement. (9)
10.5.8 Agreement dated June 16, 1998 between Santa Cruz Cellular Telephone,
Dobson Cellular of California and the other parties listed therein re
Cellular One License Agreement. (9)
10.5.9 Affiliation Agreement, Trademark License Agreement, Intercarrier Roamer
Service Agreement, Amendment to Intercarrier Roamer Service Agreement
made as of July 31, 1998 by and among Dobson Cellular Communications
Corporation, Dobson Cellular of Imperial, Inc. and AirTouch Cellular. (9)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
10.5.10 Affiliation Agreement dated as of August 28, 1998 by and among Dobson
Communications Corporation, Dobson Cellular of Sandusky, Inc., New
Par, on behalf of itself and its subsidiaries and affiliates, d/b/a
AirTouch Cellular. (9)
10.6 Non-Recourse Term Loan Agreement dated September 30, 1997 between the
Company and Gila River Telecommunications Subsidiary, Inc., as
borrower, with respect to $6.1 million loan. (2) [10.7]
10.7 Second Amended and Restated Partnership Agreement of Gila River Cellular
General Partnership dated September 30, 1997. (2) [10.8]
10.8.1 Investment and Transaction Agreement, dated December 23, 1998, among the
Registrant, Dobson CC Limited Partnership and J. W. Childs Equity
Partners II, L.P. (without exhibits). (9)
10.8.2 Stockholder and Investor Rights Agreement, dated December 23, 1998 among
the Registrant and the shareholders listed therein (without exhibits). (9)
10.8.3 Investors Agreement, dated December 23, 1998, among the Registrant, and
certain shareholders of Sygnet Wireless, Inc. and their affiliates
listed therein. (9)
12 Ratio of earnings to combined fixed charges and preferred stock
dividends. (9)
21 Subsidiaries. (9)
23.1 Consent of McAfee & Taft A Professional Corporation will be contained in
Exhibit 5 hereto. (8) [5]
23.2 Consent of Arthur Andersen LLP (Oklahoma City--DCC). (8)
23.3 Consent of Ernst & Young LLP (Philadelphia--Horizon). (8)
23.4 Consent of Arthur Andersen LLP (Denver--Gila River). (8)
23.5 Consent of Holliday, Lemons, Thomas & Cox, P.C. (8)
23.6 Consent of Ernst & Young LLP (Cleveland--Sygnet). (8)
24 Power of Attorney. (9)
27 Financial Data Schedule. (9)
99.1 Letter of Transmittal. (9)
99.2 Notice of Guaranteed Delivery. (9)
99.3 Company letter. (9)
99.4 Client letter. (9)
99.5 Instruction to Beneficial Holders. (9)
99.6 Guidelines for Certification of Taxpayer Identification Number. (9)
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement.
(1) Filed as an exhibit to the Company's Registration Statement of Form S-4
(Registration No. 333-23769), as the exhibit number indicated in brackets
and incorporated by reference herein.
II-7
<PAGE>
(2) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
October 15, 1997 and amended on November 6, 1997, as the exhibit number
indicated in brackets and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
February 10, 1998, as the exhibit number indicated in brackets and
incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report as Form 10-K for the year
ended December 31, 1997 as the exhibit number indicated in brackets and
incorporated by reference herein.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-50107), as the exhibit number indicated in brackets
and incorporated by reference herein.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
January 7, 1999, as the exhibit number indicated in brackets and
incorporated by reference herein.
(7) Filed as an exhibit to Logix Communications Enterprises, Inc.'s Registration
Statement on Form S-4 (Registration No. 333-58693), as the exhibit number
indicated in brackets and incorporated by reference herein.
(8) Filed herewith.
(9) Previously filed as an exhibit to this Registration Statement.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K on June 30,
1998, as the exhibit number indicated in brackets and incorporated by
reference herein.
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other
II-8
<PAGE>
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registration pursuant to the provisions described under Item 20, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnifications against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oklahoma
City, State of Oklahoma, on the 11th day of February, 1999.
<TABLE>
<S> <C> <C>
DOBSON COMMUNICATIONS CORPORATION
By: /s/ Everett R. Dobson*
-----------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on the 11th day of February, 1999.
NAME TITLE
- ------------------------------ ----------------------------------------
/s/ Everett R. Dobson* Chairman of the Board, President and
- ------------------------------ Chief Executive Officer (Principal
Everett R. Dobson Executive Officer) and Director
/s/ Stephen T. Dobson* Secretary and Director
- ------------------------------
Stephen T. Dobson
/s/ Bruce R. Knooihuizen Vice President and Chief Financial
- ------------------------------ Officer (Principal Financial Officer)
Bruce R. Knooihuizen
/s/ Trent LeForce* Corporate Controller (Principal
- ------------------------------ Accounting Officer)
Trent LeForce
/s/ Russell L. Dobson* Director
- ------------------------------
Russell L. Dobson
/s/ Justin L. Jaschke* Director
- ------------------------------
Justin L. Jaschke
/s/ Albert H. Pharis, Jr.* Director
- ------------------------------
Albert H. Pharis, Jr.
/s/ Dana L. Schmaltz* Director
- ------------------------------
Dana L. Schmaltz
<TABLE>
<S> <C> <C> <C>
*By: /s/ Bruce R. Knooihuizen
-------------------------
Bruce R. Knooihuizen
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------------------------ ------------------
<C> <S> <C>
2.1 Asset Purchase Agreement dated as of November 19, 1996 as amended by
Amendment No. 1 thereto effective as of January 17, 1997 and Amendment
No. 2 thereto dated February 6, 1997, among Horizon Cellular Telephone
Company of Hagerstown L.P., Cumberland Cellular Partnership and Dobson
Cellular of Maryland, Inc., and Dobson Operating Company. (9)
2.2 Asset Purchase Agreement dated September 25, 1996 among Maryland
Wireless Communications L.P., Wendy C. Coleman, Dobson Cellular of
Maryland, Inc. and Dobson Operating Company. (1) [10.5.2]
2.3.1 Purchase Agreement dated February 28, 1997 among Aztel, Inc. Gila River
Telecommunications, Inc., US West New Vector Group, Inc., Tohono
O'odham Utility Authority and Dobson Cellular of Arizona, Inc. (1) [10.5.3]
2.3.2 First Amendment to Purchase Agreement dated August 29, 1997. (2) [2.1.1]
2.4 Stock Purchase Agreement dated September 30, 1997 among Dobson Operating
Company, Associated TTI Limited Partnership and Hinton CATV relating
to the Company's purchase of the ATTI stock. (2) [2.2]
2.5 Asset Purchase Agreement dated October 9, 1997 between Texas 16 Cellular
Telephone Company and Dobson Cellular of Texas, Inc. (3) [2.1]
2.6.1 Stock Purchase Agreement dated November 17, 1997 as amended by Amendment
No. 1 thereto effective as of March 18, 1998 between Cellular 2000
Telephone Co. and its shareholders listed therein and Dobson Cellular
of California, Inc. (4) [2.6.1]
2.6.2 Stock Purchase Agreement dated March 19, 1998 between RSA 339, Inc. and
AT&T Wireless Services, Inc. and Dobson Cellular of California, Inc. (5) [2.6.2]
2.7 Stock Purchase Agreement dated March 25, 1998 between Santa Cruz
Cellular Telephone, Inc. and its shareholders and optionholders listed
therein and Dobson Cellular of California, Inc. (5) [2.7]
2.8 Agreement and Plan of Merger dated July 28, 1998 between Sygnet
Wireless, Inc. and Dobson/Sygnet Operating Company (formerly known as
Front Nine Operating Company) (without schedules). (6) [2.0]
2.9 Asset Purchase Agreement dated August 20, 1998, between Ohio Wireless
Communications, L.L.C. and Dobson Cellular of Sandusky. (9)
2.10 Asset Purchase Agreement dated as of September 2, 1998 between A-1
Cellular of Texas, L.P. and Dobson Cellular of Navarro, Inc. (9)
</TABLE>
<PAGE>
<TABLE>
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<C> <S> <C>
2.11 Asset Purchase Agreement dated November 24, 1998 between First Cellular
of Maryland, Inc. and Dobson Cellular of Maryland, Inc. (9)
2.12 Agreement to furnish unfiled schedules. (9)
3.1 Registrant's Amended and Restated Certificate of Incorporation. (6) [3.1]
3.2 Registrant's Amended and Restated Bylaws. (6) [3.2]
3.3 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class A Preferred Stock. (6) [3.3]
3.4 Certificate of Designation for the Registrant's Class B Preferred Stock. (5) [3.1]
3.5 Certificate of Designation for the Registrant's Class C Preferred Stock. (5) [3.1]
3.6 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class D Preferred Stock. (6) [3.4]
3.7 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class E Preferred Stock. (6) [3.5]
3.8 Certificate of Designation for the Registrant's Class F Preferred Stock. (6) [3.6]
3.9 Certificate of Designation for the Registrant's Class G Preferred Stock. (6) [3.7]
3.10 Certificate of Amendment to the Certificate of Designation of the
Registrant's Class H Preferred Stock. (6) [3.8]
3.11 Certificate of Designation for the Registrant's 12 1/4% Senior
Exchangeable Preferred Stock Mandatorily Redeemable 2008. (6) [3.9]
4.1 Third Amended and Restated Credit Agreement among the Agents and Lenders
named therein and Dobson Operating Company dated March 25, 1998. (4) [4.1]
4.2 $120 million Revolving Credit Agreement among Dobson Cellular Operations
Company and the Agents and Lenders named therein dated as of March 25,
1998. (4) [4.2]
4.3 $80 million 364-Day Revolving Credit and Term Loan Agreement among
Dobson Cellular Operations Company and the Agents and Lenders named
therein dated as of March 25, 1998. (4) [4.3]
4.4 Credit Agreement among the Agents and Lenders named therein and
Dobson/Sygnet Operating Company, dated as of December 23, 1998. (9)
4.5 $17.5 million Term Loan Agreement between Dobson Tower Company and
NationsBank, N.A. dated as of December 23, 1998. (9)
4.6 Telephone Loan Contract dated as of November 7, 1958 between Dobson
Telephone Company, Inc. and United States of America. (1) [4.2]
4.7 Telephone Loan Contract dated as of March 19, 1956 between McLoud
Telephone Company and United States of America. (1) [4.3]
</TABLE>
<PAGE>
<TABLE>
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4.8 Telephone Loan Contract dated as of January 15, 1993 between Dobson
Telephone Company, Inc., Rural Telephone Bank and United States of
America. (1) [4.4]
4.9 Restated Mortgage, Security Agreement and Financing Statement dated as
of May 15, 1993 between Dobson Telephone Company and United States of
America. (1) [4.5]
4.10 Indenture dated as of February 28, 1997 between the Registrant, as
Issuer, and United States Trust Company of New York, as Trustee. (1) [4.6]
4.11 Escrow and Security Agreement dated February 28, 1997 among the
Registrant as Pledgor, and Morgan Stanley & Co. Incorporated, Alex.
Brown & Sons Incorporated, First Union Capital Markets, and
NationsBanc Capital Markets, Inc., as Placement Agents, and United
States Trust Company of New York, as Trustee. (1) [4.9]
4.12 Registration Rights Agreement dated January 16, 1998 between the
Registrant and Morgan Stanley & Co. Incorporated, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery
Securities LLC. (4) [4.11]
4.13 Agreement to furnish unfiled debt instruments. (4) [4.12]
4.14 Indenture dated as of June 12, 1998 between Logix Communications
Enterprises, Inc. (f/k/a Dobson Wireline Company), as Issuer, and
United States Trust Company of New York, as Trustee. (7) [4.5]
4.15 Escrow and Security Agreement dated June 12, 1998 among Logix
Communications Enterprises, Inc. (f/k/a Dobson Wireline Company), as
Pledgor, and Morgan Stanley & Co. Incorporated, NationsBanc Montgomery
Securities LLC as Placement Agents, and United States Trust Company of
New York, as Trustee. (7) [4.6]
4.16 Registration Rights Agreement dated June 12, 1998 between Logix
Communications Enterprises, Inc. (f/k/a Dobson Wireline Company) and
Morgan Stanley & Co. Incorporated and NationsBanc Montgomery
Securities LLC. (7) [4.7]
4.17 Indenture dated December 23, 1998 between Dobson/Sygnet Communications
Company, as Issuer, and United States Trust Company of New York, as
Trustee. (6) [4.1]
4.18 Pledge Agreement dated December 23, 1998 between Dobson/ Sygnet
Communications Company, as Pledgor, and NationsBanc Montgomery
Securities LLC, Lehman Brothers Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc. and TD Securities (USA) Inc.,
as Initial Purchasers, and United States Trust Company of New York, as
Trustee. (9)
4.19 Registration Rights Agreement dated December 23, 1998 between
Dobson/Sygnet Communications Company and NationsBanc Montgomery
Securities LLC, Lehman Brothers Inc., First Union Capital Markets, a
division of Wheat First Securities, Inc. and TD Securities (USA) Inc. (9)
</TABLE>
<PAGE>
<TABLE>
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4.20 Registration Rights Agreement dated December 23, 1998 between the
Registrant and NationsBanc Montgomery Securities LLC. (9)
4.21 Certificate of Designation relating to Senior Preferred Stock is
contained in Exhibit 3.9 and incorporated herein by reference. (6) [3.9]
4.22 Preferred Stock Certificate. (9)
5 Opinion of McAfee & Taft A Professional Corporation. (8)
10.1.1* Registrant's 1996 Stock Option Plan, as amended. (8)
10.1.2* 1998 Stock Option Plan of Logix Communications Enterprises, Inc. (f/k/a
Dobson Wireline Company). (9)
10.2.1 Promissory Note dated February 10, 1997 of G. Edward Evans in the amount
of $300,000 in favor of Western Financial Services Corp. (1) [10.2.1]
10.2.2 Stock Purchase Agreement dated September 30, 1997 among Dobson Operating
Company, Associated TTI Limited Partnership and Hinton CATV Company,
Inc. (5) [10.2.3]
10.2.3 Stock Purchase Agreement, dated as of March 26, 1998, between the
shareholders of American Telco Inc. and American Telco Network
Services, Inc. and Logix Communications Enterprises, Inc. (f/k/a
Dobson Wireline Company). (10) [2.1]
10.2.4 First Amendment to Stock Purchase Agreement among American Telco Inc.
and American Telco Network Services, Inc. and Logix Communications
Enterprises, Inc. (f/k/a Dobson Wireline Company). (10) [2.2]
10.2.5 Stock Purchase Agreement, dated December 23, 1998 among the Registrant,
the Fleet Investors and the other entities listed therein. (9)
10.2.6 Asset Purchase Agreement dated December 23, 1998 by and between Sygnet
Communications, Inc. and Dobson Tower Company. (9)
10.2.7 Master Site License Agreement dated December 23, 1998 by and between
Sygnet Communications, Inc. and Dobson Tower Company. (9)
10.3.1* Letter dated June 3, 1996 from Registrant to Bruce R. Knooihuizen
describing employment arrangement. (1) [10.3.2]
10.3.2* Letter dated October 15, 1996 from Fleet Equity Partners to Justin L.
Jaschke regarding director compensation. (1) [10.3.3]
10.3.3* Letter dated December 26, 1996 from Registrant to G. Edward Evans
describing employment arrangement. (1) [10.3.1]
10.3.4* Letter dated September 16, 1997 from Registrant to William J. Hoffman,
Jr. describing employment arrangement. (5) [10.3.4]
10.3.5* Letter dated October 28, 1997 from Registrant to R. Thomas Morgan
describing employment arrangement. (5) [10.3.5]
10.3.6 Letter dated August 25, 1998 from Registrant to Richard D. Sewell, Jr.
describing employment arrangement. (9)
10.3.7* Consulting Agreement dated December 21, 1998 between Registrant and
Albert H. Pharis, Jr. (9)
</TABLE>
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<TABLE>
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10.4.1 North American Cellular Network Services Agreement dated August 26, 1992
between North American Cellular Network, Inc. and Dobson Cellular
Systems, Inc. (1) [10.4.2]
10.4.2 Agreement for DS-3 service dated December 16, 1993 between Logix
Communications Corporation (f/k/a Dobson Fiber Company) and NTS
Communications, Inc. and Addendum thereto dated June 1, 1994. (1) [10.4.1]
10.4.3 Services Agreement dated September 25, 1996 among Dobson Cellular of
Maryland, Inc., Maryland Wireless Communications Limited Partnership,
Wendy Coleman and Washington/ Baltimore Cellular One Limited
Partnership. (1) [10.5.2]
10.4.4 General Purchase Agreement dated January 13, 1998 between Lucent
Technologies, Inc. and Dobson Cellular Systems, Inc. (5) [10.4.7]
10.4.5 Operating Agreement dated January 16, 1998 between AT&T Wireless
Services, Inc. and Dobson Cellular Systems, Inc. (9)
10.4.6 Fourth Amended General Purchase Agreement dated January 5, 1999 between
Northern Telecom Inc. and Registrant. (4) [10.4.8]
10.5.1 Assignment Agreement dated January 23, 1997 between Texas 16 Cellular
Telephone Company, Inc. and Dobson Cellular of Texas, Inc. re Cellular
One License Agreement. (9)
10.5.2 Form of Cellular One License Agreements dated February 25, 1997 between
Cellular One Group and Dobson Cellular of Enid, Inc., Dobson Cellular
of Woodward, Inc. and Dobson Cellular of Kansas/Missouri, Inc. (1) [10.4.5]
10.5.3 Trademark Sublicense Agreement dated February 28, 1997 between AirTouch
Communications, Inc. (f/k/a WMC Partners L.P.) and Dobson Cellular of
Arizona, Inc. (1) [10.4.3]
10.5.4 Affiliation Agreement dated February 28, 1997 among Registrant, Dobson
Cellular of Arizona, Inc. and AirTouch Communications, Inc. (f/k/a WMC
Partners, L.P.). (1) [10.4.4]
10.5.5 Letter Agreement dated September 30, 1997 between U.S. West, New Vector
Group, Inc. and Gila River Cellular General Partnership, by Dobson
Cellular of Arizona, Inc. regarding License Agreement for post closing
use of "U.S. West Cellular" brand and "AirTouch" brand. (9)
10.5.6 Trademark Sub-License Agreement dated October 1, 1997 between AirTouch
Communications, Inc. (f/k/a WMC Partners, L.P.) and Gila River
Cellular General Partnership. (9)
10.5.7 Agreement dated April 1, 1998 between Cellular 2000 Telephone Co. and
Dobson Cellular of California re Cellular One License Agreement. (9)
10.5.8 Agreement dated June 16, 1998 between Santa Cruz Cellular Telephone,
Dobson Cellular of California and the other parties listed therein re
Cellular One License Agreement. (9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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<C> <S> <C>
10.5.9 Affiliation Agreement, Trademark License Agreement, Intercarrier Roamer
Service Agreement, Amendment to Intercarrier Roamer Service Agreement
made as of July 31, 1998 by and among Dobson Cellular Communications
Corporation, Dobson Cellular of Imperial, Inc. and AirTouch Cellular. (9)
10.5.10 Affiliation Agreement dated as of August 28, 1998 by and among Dobson
Communications Corporation, Dobson Cellular of Sandusky, Inc., New
Par, on behalf of itself and its subsidiaries and affiliates, d/b/a
AirTouch Cellular. (9)
10.6 Non-Recourse Term Loan Agreement dated September 30, 1997 between the
Company and Gila River Telecommunications Subsidiary, Inc., as
borrower, with respect to $6.1 million loan. (2) [10.7]
10.7 Second Amended and Restated Partnership Agreement of Gila River Cellular
General Partnership dated September 30, 1997. (2) [10.8]
10.8.1 Investment and Transaction Agreement, dated December 23, 1998, among the
Registrant, Dobson CC Limited Partnership and J. W. Childs Equity
Partners II, L.P. (without exhibits). (9)
10.8.2 Stockholder and Investor Rights Agreement, dated December 23, 1998 among
the Registrant and the shareholders listed therein (without exhibits). (9)
10.8.3 Investors Agreement, dated December 23, 1998, among the Registrant, and
certain shareholders of Sygnet Wireless, Inc. and their affiliates
listed therein. (9)
12 Ratio of earnings to combined fixed charges and preferred stock
dividends. (9)
21 Subsidiaries. (9)
23.1 Consent of McAfee & Taft A Professional Corporation will be contained in
Exhibit 5 hereto. (8) [5]
23.2 Consent of Arthur Andersen LLP (Oklahoma City--DCC). (8)
23.3 Consent of Ernst & Young LLP (Philadelphia--Horizon). (8)
23.4 Consent of Arthur Andersen LLP (Denver--Gila River). (8)
23.5 Consent of Holliday, Lemons, Thomas & Cox, P.C. (8)
23.6 Consent of Ernst & Young LLP (Cleveland--Sygnet). (8)
24 Power of Attorney. (9)
27 Financial Data Schedule. (9)
99.1 Letter of Transmittal. (9)
99.2 Notice of Guaranteed Delivery. (9)
99.3 Company letter. (9)
99.4 Client letter. (9)
99.5 Instruction to Beneficial Holders. (9)
99.6 Guidelines for Certification of Taxpayer Identification Number. (9)
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement.
(1) Filed as an exhibit to the Company's Registration Statement of Form S-4
(Registration No. 333-23769), as the exhibit number indicated in brackets
and incorporated by reference herein.
<PAGE>
(2) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
October 15, 1997 and amended on November 6, 1997, as the exhibit number
indicated in brackets and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
February 10, 1998, as the exhibit number indicated in brackets and
incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report as Form 10-K for the year
ended December 31, 1997 as the exhibit number indicated in brackets and
incorporated by reference herein.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-50107), as the exhibit number indicated in brackets
and incorporated by reference herein.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed on
January 7, 1999, as the exhibit number indicated in brackets and
incorporated by reference herein.
(7) Filed as an exhibit to Logix Communications Enterprises, Inc.'s Registration
Statement on Form S-4 (Registration No. 333-58693), as the exhibit number
indicated in brackets and incorporated by reference herein.
(8) Filed herewith.
(9) Previously filed as an exhibit to this Registration Statement.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K on June 30,
1998, as the exhibit number indicated in brackets and incorporated by
reference herein.
<PAGE>
[LETTERHEAD]
FEBRUARY 11, 1999
Dobson Communications Corporation
13439 N. Broadway Extension, Suite 200
Oklahoma City, OK
Re: 12 1/4% Senior Exchangeable Preferred Stock
Ladies and Gentlemen:
We have acted as special counsel to Dobson Communications Corporation
("Dobson" or the "Company") in connection with the issuance and sale of 64,646
shares of the Company's 12 1/4% Senior Exchangeable Preferred Stock (which,
together with all accrued and paid dividends in kind are referred to herein as
the "Old Shares") and the registration under the Securities Act of 1933 of up to
67,148 shares of the Company's 12 1/4% Senior Exchangeable Preferred Stock (the
"New Shares"). The New Shares are to be offered in exchange for all outstanding
Old Shares (the "Exchange Offer") as more fully set forth in the prospectus
which forms are a part of the Company's Registration Statement on Form S-4, as
amended (Registration No. 333-71633); (the "Registration Statement").
In this connection we have examined the Company's Amended and Restated
Certificate of Incorporation (including the Certificate of Designation creating
the 12 1/4% Senior Exchangeable Preferred Stock) and Amended and Restated
Bylaws, minutes of certain meetings of the Company's Board of Directors and have
made such other investigations of fact and law as we deem necessary to render
the opinions set forth herein.
Based on the foregoing, we are of the opinion that the New Shares to be
exchanged for the Old Shares in the Exchange Offer, when issued in accordance
therewith, will be validly issued, fully paid and non-assessable.
We hereby consent to the reference to our firm in the Prospectus under the
caption "Legal Matters."
Very truly yours,
/S/ MCAFEE & TAFT
A Professional Corporation
<PAGE>
DOBSON COMMUNICATIONS CORPORATION
1996 STOCK OPTION PLAN
1. PURPOSE. The purpose of the Dobson Communications Corporation 1996
Stock Option Plan (the "Plan") is to encourage key employees of Dobson
Communications Corporation (the "Company") and of any present or future
parent or subsidiary of the Company (collectively, "Related
Corporations"), by providing opportunities to participate in the
ownership of the Company and its future growth through (a) the grant of
options which qualify as "incentive stock option" ("ISO") under Section
422(b) of the Internal Revenue Code of 1986, as amended (the "Code");
and (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"). Both ISOs and Non-Qualified Options are
referred to hereafter individually as an "Option" and collectively as
"Options." As used herein, the terms "parent" and "subsidiary" mean
"parent corporation" and "subsidiary corporation," respectively, as
those terms are defined in Section 424 of the Code.
2. ADMINISTRATION OF THE PLAN
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or by a
committee appointed by the Board (the "Committee"). Hereinafter,
all references in this Plan to the "Committee" shall mean the Board
if no Committee has been appointed. Subject to ratification of the
grant or authorization of each Option by the Board (if so required
by applicable state law), and subject to the terms of the Plan, the
Committee shall have the authority to (i) determine to whom (from
among the class of employees eligible under paragraph 3 to receive
ISOs) ISOs shall be granted, and to whom (from among the class of
individuals and entities eligible under paragraph 3 to receive
Non-Qualified Options) Non-Qualified Options shall be granted; (ii)
determine the time or times at which Options shall be granted; (iii)
determine the purchase price of shares subject to each Option, which
prices shall not be less than the minimum price specified in
paragraph 6; (iv) determine whether each Option granted shall be an
ISO or a Non-Qualified Option; (v) determine (subject to paragraph
7) the time or times when each Option shall become exercisable and
the duration of the exercise period; (vi) determine whether
restrictions such as repurchase options are to be imposed on shares
subject to Options and the nature of such restrictions, if any, and
(vii) interpret the Plan and prescribe and rescind rules and
regulations relating to it. If the Committee determines to issue
Non-Qualified Option, it shall take
<PAGE>
whatever actions it deems necessary, under Section 422 of the Code
and the regulations promulgated thereunder, to ensure that such
Option is not treated as an ISO. The interpretation and
construction by the Committee of any provisions of the Plan or of
any Option granted under it shall be final unless otherwise
determined by the Board. The Committee may from time to time adopt
such rules and regulations for carrying out the Plan as it may deem
advisable. No member of the Board or the Committee shall be liable
for any action or determination made in good faith with respect to
the Plan or any Option granted under it.
B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it
may determine. A majority of the Committee shall constitute a
quorum and acts of a majority of the members of the Committee at a
meeting at which a quorum is present, or acts reduced to or approved
in writing by all the members of the Committee, shall be the valid
acts of the Committee. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter directly administer the Plan.
3. ELIGIBLE EMPLOYEES. Options may be granted only to employees and
Directors of the Company or any Related Corporation. The Committee may
take into consideration a recipient's individual circumstances in
determining whether to grant an Option. The granting of any Option to
any individual shall neither entitle that individual to, nor disqualify
him from, participating in any other grant of Options.
4. STOCK. The stock subject to Options shall be authorized but unissued
shares of Class B Non-Voting Common Stock of the Company, par value
$1.00 per share (the "common Stock"). The aggregate number of shares
which may be issued pursuant to the Plan is 30,166, subject to
adjustment as provided in paragraph 13. If any Option granted under the
Plan shall expire or terminate for any reason without having been
exercised in full or shall cease for any reason to be exercisable in
whole or in part, the unpurchased shares subject to such Option shall
again be available for grants of Options under the Plan.
5. GRANTING OF OPTIONS. Options may be granted under the Plan at any time
after June 1, 1996, and prior to June 1, 2006. The date of grant of an
Option under the Plan will be the date specified by the Committee at the
time it grants the
<PAGE>
Option; provided, however, that such date shall not be prior to the date
on which the Committee acts to approve the grant.
6. MINIMUM OPTION PRICE: ISO LIMITATIONS.
A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share
specified in the agreement relating to each Non-Qualified Option
granted under the Plan shall in no event be less than the minimum
legal consideration required therefore under the laws of Oklahoma or
the laws of any jurisdiction in which the Company or its successors
in interest may be organized.
B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be
less than the fair market value per share of Common Stock on the
date of such grant. In the case of an ISO to be granted to an
employee owning stock possessing more than 10 percent (10%) of the
total combined voting power of all classes of stock of the Company
or any Related Corporation, the price per share specified in the
agreement relating to such ISO shall not be less than one hundred
ten percent (110%) of the fair market value per share of Common
Stock on the date of grant. For purposes of determining stock
ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee
may be granted Options treated as ISOs only to the extent that, in
the aggregate under this Plan and all incentive stock option plans
of the Company and any Related Corporation, ISOs do not become
exercisable for the first time by such employee during any calendar
year with respect to stock having a fair market value (determined at
the time the ISOs were granted) in excess of $100,000. The Company
intends to designate any Options granted in excess of such
limitation as Non-Qualified Options.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly
traded, "fair market value" shall be determined as of the last
business day for which the prices or quotes discussed in this
sentence are available prior to the date such Option is granted and
shall mean (i) the average (on that date) of the high and low prices
of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded
on a national securities exchange; or (ii) the last reported sale
price (on that date) of the Common Stock on the
<PAGE>
NASDAQ National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or
average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Common
Stock is not reported on the NASDAQ National Market. If the Common
Stock is not publicly traded at the time an Option is granted under
the Plan, "fair market value" shall mean the fair value of the
Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including,
without limitation, recent sale and offer prices of the Common Stock
in private transactions negotiated at arm's length
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each
Option shall expire on the date specified by the Committee, but not more
than (i) ten years from the date of grant in the case of Options
generally and (ii) five years from the date of grant in the case of ISOs
granted to an employee owning stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Company or any Related Corporation, as determined under paragraph 6(B).
Subject to earlier termination as provided in paragraphs 9 and 10, the
term of each ISO shall be the term set forth in the original instrument
granting such ISO, except with respect to any part of such ISO that is
converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the date
of grant or shall become exercisable thereafter in such installments
as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or
termination of the Option, unless otherwise specified by the
Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the
total number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes
exercisable; provided that the
<PAGE>
Committee shall not, without the consent of an optionee, accelerate
the permitted exercise date of any installment of any Option granted
to any employee as an ISO (and not previously converted into a
Non-Qualified Option pursuant to paragraph 16) if such acceleration
would violate the annual vesting limitation contained in Section
422(d) of the Code, as described in paragraph 6(c).
E. EARLY EXERCISE. An Option may, but need not, include a provision
whereby the optionee may elect at any time while an employee or
Director to exercise all or any of the installments included in the
grant of an Option prior to full vesting. Any unvested shares
received pursuant to such early exercise may be subject to a
repurchase right in favor of the Company or to any other restriction
the Committee determines to be appropriate.
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the
Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his or
her ISOs shall become exercisable, and his or her ISOs shall terminate
on the earlier of (a) ninety (90) days after the date of termination of
his or her employment, or (b) their specified expiration dates, except
to the extent that such ISOs (or unexercised installments thereof) have
been converted into Non-Qualified Options pursuant to paragraph 16. For
purposes of this paragraph 9, employment shall be considered as
continuing uninterrupted during any bona fide leave of absence (such as
those attributable to illness, military obligations or governmental
service) provided that the period of such leave does not exceed 90 days
or, if longer, any period during which such optionee's right to
reemployment is guaranteed by statute. A bona fide leave of absence
with the written approval of the Committee shall not be considered an
interruption of employment under this paragraph 9, provided that such
written approval contractually obligates the Company or any Related
Corporation to continue the employment of the optionee after the
approved period of absence. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and
Related Corporations, so long as the optionee continues to be an
employee of the Company or any Related Corporation. Nothing in the Plan
shall be deemed to give any grantee of any Option the right to be
retained in employment by the Company or any Related Corporation for any
period of time.
10. DEATH; DISABILITY
<PAGE>
A. DEATH. If an ISO optionee ceases to be employed by the Company and
all Related Corporations by reason of his or her death, any ISO
owned by such optionee may be exercised, to the extent otherwise
exercisable on the date of his death, by his estate, personal
representative or beneficiary who has acquired the ISO by will or by
the laws of descent and distribution, until the earlier of (i) the
specified expiration date of the ISO or (ii) twelve months from the
date of the optionee's death.
B. DISABILITY. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her disability,
such optionee shall have the right to exercise any ISO held by him
or her on the date of termination of employment, for the number of
shares for which he or she could have exercised it on that date,
until the earlier of the specified expiration date of the ISO or
twelve months from the date of the termination of the optionee's
employment. For the purposes of the Plan, the term "disability"
shall mean "permanent and total disability" as defined in Section
22(e)(3) of the Code or any successor statute.
11. ASSIGNABILITY. No Option shall be assignable or transferable by the
grantee except by will, by the laws of descent and distribution or, in
the case of Non-Qualified Options only, pursuant to a valid domestic
relations order. Except as set forth in the previous sentence, during
the lifetime of a grantee each Option shall be exercisable only by such
grantee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee
may from time to time approve. Such instruments shall conform to the
terms and conditions set forth in paragraphs 6 through 11 hereof and may
contain such other provisions as the Committee deems advisable which are
not inconsistent with the Plan, including restrictions applicable to
shares of Common Stock issuable upon exercise of Options. The Committee
may specify that any Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other
termination and cancellation provisions as the Committee may determine.
The Committee may from time to time confer authority and responsibility
on one or more of its own members and/or one or more officers of the
Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action
necessary or advisable from time to time to carry out the terms of such
instruments.
<PAGE>
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee
hereunder shall be adjusted as hereinafter provided, unless otherwise
specifically provided in the written agreement between the optionee and
the Company relating to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of common stock of
the Company shall be subdivided or combined into a greater or
smaller number or shares or if the Company shall issue any shares of
its common stock as a stock dividend on its outstanding Common
Stock, the number of shares of Common Stock deliverable upon the
exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or
stock dividend.
B. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than in
connection with a transaction described in subparagraph C below)
pursuant to which securities of the Company or of another
corporation are issued with respect to the outstanding shares of
Common Stock, an optionee upon exercising an Option shall be
entitled to receive for the purchase price paid upon such exercise
the securities he would have received if he had exercised his Option
prior to such recapitalization or reorganization.
C. CHANGE IN CONTROL EVENTS. In the event any Change in Control Event
(as defined below) occurs, each Option then outstanding shall,
immediately prior to such Change in Control Event (except as set
forth in subparagraph E below), be nonforfeitable and exercisable in
full. A Change in Control Event shall mean any of the following:
1. Any transaction in which shares of voting securities of the
Company are sold or transferred by the Company or shareholders
of the Company as a result of which those persons and entities
who own voting securities of the Company prior to such
transaction own less than fifty percent (50%) of the outstanding
voting securities of the Company after such transaction;
2. The merger or consolidation of the Company with or into another
entity as a result of which less than fifty percent (50%) of the
outstanding voting securities of the surviving or resulting
entity are owned by those persons and entities who own
<PAGE>
voting securities of the Company prior to such merger or
consolidation; or
3. The sale of all or substantially all of the Company's assets to
an entity of which less than fifty percent (50%) of the
outstanding voting securities of such entity are owned by those
persons and entities who own voting securities of the Company at
the time of such asset sale.
The existence of any Option shall not in any way prevent any Related
Corporation from engaging in any of the transactions described in this
subparagraph C, nor shall it confer any rights upon the holder of any such
Option to participate in any such transaction, except those expressly
conferred by the Plan and the agreement pursuant to which such Option shall
have been granted. Nothing contained in this Plan shall prevent the
assumption of an Option, or the substitution of a new option for an Option,
by any corporation, or the parent or subsidiary of any corporation, that
becomes the employer of an optionee by reason of a merger, consolidation or
acquisition; provided, however, that with respect to an ISO, the following
additional conditions are applicable:
1. the excess of the aggregate fair market value of the shares
subject to the Option immediately after the substitution or
assumption over the aggregate option price of such shares is not
more than the excess of the aggregate fair market value of the
shares subject to the Option immediately before such
substitution or assumption over the aggregate option price of
such shares; and
2. the new option or the assumption of the old Option does not give
the optionee additional benefits that the optionee did not have
under the old Option.
D. MODIFICATION OF ISOs. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B, or C with respect
to ISOs shall be made only after the Committee, after consulting
with counsel for the Company, determines whether such adjustments
would constitute a "modification" of such ISOs (as that term is
defined in Section 424 of the Code) or would cause any adverse tax
consequences for the holders of such ISOs. If the Committee
determines that such adjustments made with respect to ISOs would
constitute a modification of such ISOs or would cause adverse tax
consequences to the holders, it may refrain from making such
adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company,
<PAGE>
each Option will terminate immediately prior to the consummation of
such proposed action or at such other time and subject to such other
conditions as shall be determined by the Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares subject to Options. No
adjustments shall be made for dividends paid in cash or in property
other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of
such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs A, B, or C above, the class and aggregate number of
shares set forth in paragraph 4 hereof that are subject to Options
which previously have been or subsequently may be granted under the
Plan shall also be appropriately adjusted to reflect the events
described in such subparagraphs. The Committee or the Successor
Board shall determine the specific adjustments to be made under this
paragraph 13 and, subject to paragraph 2, its determination shall be
conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part of installment
thereof) shall be exercised by giving written notice to the Company at
its principal office address, or to such transfer agent as the Company
shall designate. Such notice shall identify the Option being exercised
and specify the number of shares as to which such Option is being
exercised, accompanied by (i) an instrument of accession providing that
the optionee agrees to be bound by the terms, rights and obligations
applicable to "Shareholders" under that certain Shareholders' Agreement
dated as of March 19, 1996, by and among the Company and its
stockholders signatory thereto, as amended from time to time, and (ii)
full payment of the purchase price therefor either (a) in United States
dollars in cash or by check, (b) at the discretion of the Committee,
through delivery of shares of Common Stock having a fair market value
equal as of the date of the exercise to the cash exercise price of the
Option including withholding of shares of Common Stock otherwise
deliverable upon exercise of an Option, but only to the extent such
exercise of an Option would not result in an accounting compensation
charge with respect to the shares used to pay the exercise price unless
otherwise determined
<PAGE>
by the Committee, (c) at the discretion of the Committee, by delivery of
the grantee's personal recourse note bearing interest payable not less
than annually at no less than 100% of the lowest applicable Federal
rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the
delivery of an assignment to the Company of a sufficient amount of the
proceeds from the sale of the Common Stock acquired upon exercise of the
Option and an authorization to the broker or selling agent to pay that
amount to the Company, which sale shall be at the participant's
direction at the time of exercise, or (e) at the discretion of the
Committee, by any combination of (a), (b), (c) and (d) above. If the
Committee exercises its discretion to permit payment of the exercise
price of an ISO by means of the methods set forth in clauses (b), (c),
(d) or (e) of the preceding sentence, such discretion shall be exercised
in writing at the time of the grant of the ISO in questions. The holder
of an Option shall not have the rights of a shareholder with respect to
the shares covered by such Option until the date of issuance of a stock
certificate to such holder for such shares. Except as expressly
provided above in paragraph 13 with respect to changes in capitalization
and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on June
1, 1996, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at
the next meeting of Stockholders or, in lieu thereof, by written
consent. If the approval of stockholders is not obtained prior to June
1, 1997, any grants of ISOs under the Plan made prior to that date will
be rescinded. The Plan shall expire at the end of the day on June 1,
2006 (except as to Options outstanding on that date). Subject to the
provisions of paragraph 5 above, Options may be granted under the Plan
prior to the date of stockholder approval of the Plan. The Board may
terminate or amend the Plan in any respect at any time, except that,
without the approval of the stockholders obtained within 12 months
before or after the Board adopts a resolution authorizing any of the
following actions: (a) the total number of shares that may be issued
under the Plan may not be increased (except by adjustment
pursuant to paragraph 13); (b) the benefits accruing to participants
under the Plan may not be materially increased; (c) the requirements as
to eligibility for grants of ISOs may not be modified; (d) the
provisions of paragraph 3 regarding eligibility for grants of ISOs may
not be modified; (e) the provisions of paragraph 6(B) regarding the
exercise price at which shares may be offered pursuant to ISOs may not
be modified (except by adjustment
<PAGE>
pursuant to paragraph 13); (f) the expiration date of the Plan may not
be extended; and (g) the Board may not take any action which would cause
the Plan to fail to comply with Rule 16b-3. Except as otherwise
provided in this paragraph 15, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without such
grantee's consent, under any Option previously granted to such grantee.
16. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS. The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such
optionee's ISOs (or any installments or portions of installments
thereof) that have not been exercised on the date of conversion into
Non-Qualified Options at any time prior to the expiration of such ISOs,
regardless of whether the optionee is an employee of the Company or a
Related Corporation at the time of such conversion. Such actions may
include, but shall not be limited to, extending the exercise period or
reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent
of the optionee) may impose such conditions on the exercise of the
resulting Non-Qualified Options as the Committee in its discretion may
determine, provided that such conditions shall not be inconsistent with
this Plan. Nothing in the Plan shall be deemed to give any optionee the
right to have such optionee's ISOs converted into Non-Qualified Options,
and no such conversion shall occur until and unless the Committee takes
appropriate action.
17. CANCELLATION OF OPTIONS. The Board may, in its sole discretion, in
cases involving a serious breach of conduct by an employee or former
employee, or activity of a former employee in competition with the
business of the Company or a Related Corporation, cancel any Option,
whether vested or not, in whole or in part. Such cancellation shall be
effective as of the date specified by the Board. Without limitation,
activities which shall constitute a serious breach of conduct include:
(i) the disclosure or misuse of confidential information or trade
secrets; (ii) activities in violation of the policies of the Company or
any Related Corporation, including without limitation, the Company's
insider trading policy; (iii) the violation or breach of any material
provision in any employment contract or agreement among the employee and
any Related Corporation; (iv) engaging in conduct relating to the
optionee's employment with the Company or any Related Corporation for
which either criminal or civil penalties may be sought; and (v) engaging
in activities which adversely affects or which are contrary or harmful
to the interest of the Company, any Related Corporation or its business
operations. The determination of whether an employee or former employee
has engaged in a
<PAGE>
serious breach of conduct or activity in competition with the business
of a Related Corporation shall be determined by the Board in good faith
and in its sole discretion.
18. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted under the Plan shall be used
for general corporate purposes.
19. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in
writing immediately after he makes a Disqualifying Disposition (as
described in Sections 421, 422, and 424 of the Code and regulations
thereunder) of any stock acquired pursuant to the exercise of ISOs
granted under the Plan. A Disqualifying Disposition is generally any
disposition occurring on or before the later of (a) the date two years
following the date the ISO was granted or (b) the date one year
following the date the ISO was exercised.
20. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the making of a Disqualifying Disposition (as
defined in paragraph 19), the vesting or transfer of restricted stock or
securities acquired on the exercise of an Option hereunder, or the
making of a distribution or their payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that
constitute compensation includible in gross income. The Committee in
its discretion may condition the exercise of an Option, the vesting or
transferability of restricted stock or securities acquired by exercising
an Option, on the grantee's making satisfactory arrangement for such
withholding. Such arrangement may include payment by the grantee's
delivery of previously held shares of Common Stock or the withholding
from the shares of Common Stock otherwise deliverable upon exercise of
an Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.
21. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the
authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be
required to send tax information statements to employees and former
employees that exercise Options under the Plan, and the Company may be
required to file tax information returns reporting the income received
by grantees of Options in connection with the Plan.
22. GOVERNING LAW. The validity and construction of the Plan
<PAGE>
and the instruments evidencing Options shall be governed by the laws of
Oklahoma, or the laws of any jurisdiction in which the Company or its
successors in interest may be organized.
The undersigned hereby certify that they are all the Directors of Dobson
Communications Corporation entitled to vote on the foregoing matters and
hereby consent to the foregoing Stock Option Plan of 1996.
Russell L. Dobson, Director
<PAGE>
Everett R. Dobson, Director
Stephen T. Dobson, Director
Justin L. Jaschke, Director
Thadeus J. Mocarski, Director
<PAGE>
1998-1 AMENDMENT TO THE DOBSON COMMUNICATIONS CORPORATION
1996 STOCK OPTION PLAN
A. Section 4 of the Dobson Communications Corporation 1996 Stock
Option Plan (the "Plan") is hereby amended to read as follows:
"4. STOCK. The stock subject to Options and which may be issued
pursuant to the Plan shall be (i) 30,166 authorized but unissued
shares of Class B Non-Voting Common Stock of the Company, par value
$.001 per share (the 'Class B Stock'), and (ii) 30,166 authorized but
unissued shares of Class C Non-Voting Common Stock, par value $.001
per share (the 'Class C Stock') (the Class B Stock and the Class C
Stock are sometimes together referred to herein as the 'Common
Stock'). The number of such shares is subject to adjustment as
provided in paragraph 13. If any Option granted under the Plan shall
expire or terminate for any reason without having been exercised in
full or shall cease for any reason to be exercisable in whole or in
part, the unpurchased shares subject to such Option shall again be
available for grants of Options under the Plan."
B. Section 14 of the Dobson Communications Corporation 1996 Stock
Option Plan (the "Plan") is hereby amended to read as follows:
"14. MEANS OF EXERCISING OPTIONS. An Option (or any part of
installment thereof) shall be exercised by giving written notice
to the Company at its principal office address, or to such
transfer agent as the Company shall designate. Such notice shall
identify the Option being exercised and specify the number of
shares as to which such Option is being exercised, accompanied by
(i) an instrument of accession providing that the optionee agrees
to be bound by the terms, rights and obligations applicable to
'Shareholders' under that certain Shareholders' Agreement dated
as of March 19, 1996, by and among the Company and its
stockholders signatory thereto, as amended from time to time, and
(ii) full payment of the purchase price therefor either (a) in
United States dollars in cash or by check, (b) at the discretion
of the Committee, through delivery of shares of Common Stock
having a fair market value equal as of the date of the exercise
to the cash exercise price of the Option including
<PAGE>
withholding of shares of Common Stock otherwise deliverable upon
exercise of an Option, but only to the extent such exercise of an
Option would not result in an accounting compensation charge with
respect to the shares used to pay the exercise price unless
otherwise determined by the Committee, (c) at the discretion of the
Committee, by delivery of the grantee's personal recourse note
bearing interest payable not less than annually at no less than 100%
of the lowest applicable Federal rate, as defined in Section 1274(d)
of the Code, (d) at the discretion of the Committee and consistent
with applicable law, through the delivery of an assignment to the
Company of a sufficient amount of the proceeds from the sale of the
Common Stock acquired upon exercise of the Option and an
authorization to the broker or selling agent to pay that amount to
the Company, which sale shall be at the participant's direction at
the time of exercise, or (e) at the discretion of the Committee, by
any combination of (a), (b), (c) and (d) above. If the Committee
exercises its discretion to permit payment of the exercise price of
an ISO by means of the methods set forth in clauses (b), (c), (d) or
(e) of the preceding sentence, such discretion shall be exercised in
writing at the time of the grant of the ISO in questions. The
holder of an Option shall not have the rights of a shareholder with
respect to the shares covered by such Option until the date of
issuance of a stock certificate to such holder for such shares.
Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall
be made for dividends or similar rights for which the record date is
before the date such stock certificate is issued."
Except as otherwise provided in this 1998-1 Amendment to the Dobson
Communications Corporation 1996 Stock Option Plan ("Amendment"), the Plan is
hereby ratified and confirmed in all respects. This Amendment shall be
effective as of December 21, 1998.
-2-
<PAGE>
-3-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the consolidated financial statements of Dobson Communications
Corporation (and all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
February 11, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 27, 1997, with respect to the combined
financial statements of The Cellular Telephone Business of Selected Systems of
Horizon Cellular Telephone Company, L.P. included in Amendment No. 1 to the
Registration Statement (Form S-4 file No. 333-71633) and related Prospectus of
Dobson Communications Corporation for the registration of 67,148 shares of its
12 1/4% Senior Exchangeable Preferred Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 11, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) as it relates to Gila River Cellular
General Partnership included in or made a part of this registration statement.
It should be noted that we have not audited any financial statements of Gila
River Cellular General Partnership subsequent to December 31, 1996 or performed
any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 11, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 13, 1998, on the financial statements of Cellular 2000 (A
Partnership) (and all references to our Firm) included in Amendment No. 1 to the
Registration Statement on Form S-4, No. 333-71633 and related Prospectus of
Dobson Communications Corporation for the registration of up to 67,148 shares of
its 12 1/4% Senior Preferred Stock.
HOLLIDAY, LEMONS & COX, P.C.
(formerly Holliday, Lemons, Thomas &
Cox, P.C.)
Texarkana, Texas
February 11, 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 6, 1998, with respect to the consolidated
financial statements of Sygnet Wireless, Inc. included in Amendment No. 1 to the
Registration Statement (Form S-4 File No. 333-71633) and related Prospectus of
Dobson Communications Corporation for the registration of 67,148 shares of its
12 1/4% Senior Exchangeable Preferred Stock.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 10, 1999
