<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 333-71051
------------------------
DOBSON/SYGNET COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
OKLAHOMA 73-1547216
<S> <C>
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
<TABLE>
<CAPTION>
13439 NORTH BROADWAY EXTENSION
SUITE 200
OKLAHOMA CITY, OKLAHOMA 73114
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
(405) 529-8500
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
At August 6, 1999, there were 100 shares of the registrant's $1.00 par value
Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Item
1...... Condensed Consolidated Financial Statements (Unaudited):
DOBSON/SYGNET COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998....................................... 3
Condensed Consolidated Statement of Operations for the Three
and Six Months Ended June 30, 1999.......................... 4
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1999.................................. 5
Notes to Condensed Consolidated Financial Statements........ 6
SYGNET WIRELESS, INC. (THE PREDECESSOR COMPANY)
Condensed Consolidated Statement of Operations for the Three
and Six Months Ended June 30, 1998.......................... 9
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1998.................................. 10
Notes to Condensed Consolidated Financial Statements........ 11
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities and Use of Proceeds................... 20
Item 3. Defaults Upon Senior Securities............................. 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,061,284 $ 20,262,977
Restricted cash and investments........................... 21,966,851 20,781,187
Accounts receivable, net.................................. 18,650,834 13,125,357
Other current assets...................................... 1,799,452 4,027,597
------------ ------------
Total current assets.................................... 45,478,421 58,197,118
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 52,032,455 46,994,471
------------ ------------
OTHER ASSETS:
Restricted investments.................................... 34,635,000 45,505,000
Cellular license acquisition costs, net................... 701,282,304 710,758,631
Deferred financing costs, net............................. 47,783,665 49,346,454
Customer list, net........................................ 39,871,405 44,489,138
Other..................................................... 1,046,331 1,447,106
------------ ------------
Total other assets...................................... 824,618,705 851,546,329
------------ ------------
Total assets............................................ $922,129,581 $956,737,918
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 13,776,144 $ 2,075,441
Accrued expenses.......................................... 7,731,528 15,799,582
Deferred revenue and customer deposits.................... 2,762,865 2,437,021
Current portion of long-term debt......................... 1,500,000 --
------------ ------------
Total current liabilities............................... 25,770,537 24,302,407
------------ ------------
ACCOUNTS PAYABLE--AFFILIATE................................. 10,619,048 3,990,363
LONG-TERM DEBT, net of current portion...................... 600,500,000 607,000,000
DEFERRED CREDITS............................................ 165,276,932 181,499,173
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 500 shares authorized and
100 shares issued and outstanding....................... 100 100
Additional paid-in capital................................ 145,000,000 145,000,000
Retained deficit.......................................... (25,037,036) (1,063,762)
------------ ------------
Total stockholder's equity.............................. 119,963,064 143,936,338
------------ ------------
Total liabilities and stockholder's deficit............. $922,129,581 $956,737,918
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, 1999 JUNE 30, 1999
------------------- ----------------
<S> <C> <C>
OPERATING REVENUE:
Service revenue........................................... $ 18,644,193 $ 36,769,037
Roaming revenue........................................... 8,943,003 16,749,880
Equipment sales and other................................. 1,393,887 3,109,909
------------ ------------
Total operating revenue................................. 28,981,083 56,628,826
------------ ------------
OPERATING EXPENSES:
Cost of service........................................... 1,880,165 4,558,615
Cost of equipment......................................... 2,403,807 5,154,020
Marketing and selling..................................... 5,405,698 9,709,876
General and administrative................................ 5,025,646 10,569,198
Depreciation and amortization............................. 17,546,677 35,492,525
------------ ------------
Total operating expenses................................ 32,261,993 65,484,234
------------ ------------
OPERATING INCOME............................................ (3,280,910) (8,855,408)
INTEREST EXPENSE............................................ (15,958,886) (32,069,525)
OTHER INCOME, net........................................... 942,579 2,258,357
------------ ------------
LOSS BEFORE INCOME TAXES.................................... (18,297,217) (38,666,576)
INCOME TAX BENEFIT.......................................... 6,952,946 14,693,302
------------ ------------
NET LOSS.................................................... $(11,344,271) $(23,973,274)
============ ============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER COMMON
SHARE..................................................... $ (113,443) $ (239,733)
============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............ 100 100
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
4
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. (23,973,274)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization......................... 35,492,525
Amortization of financing costs....................... 2,933,303
Deferred income taxes................................. (16,222,241)
Changes in current assets and liabilities--
Accounts receivable................................... (5,525,477)
Other current assets.................................. 2,228,145
Accounts payable...................................... 11,700,704
Accrued expenses...................................... (8,068,054)
Deferred revenues and customer deposits............... 325,845
-------------
Net cash used in operating activities............... (1,108,524)
=============
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (12,025,974)
Purchase of cellular licenses and properties.............. (14,410,474)
Increase in payable--affiliate............................ 6,628,685
-------------
Net cash used in investing activities............... (19,807,763)
=============
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt.............................. (11,000,000)
Proceeds from long-term debt.............................. 6,000,000
Maturities of restricted investments, net of interest..... 9,684,336
Deferred financing costs.................................. (969,742)
-------------
Net cash provided by financing activities........... 3,714,594
-------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (17,201,693)
CASH AND CASH EQUIVALENTS, beginning of year................ 20,262,977
-------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 3,061,284
=============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
5
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets of Dobson/Sygnet Communications
Company ("the Company") as of June 30, 1999 and December 31, 1998, the condensed
consolidated statement of operations for the three and six months ended
June 30, 1999 and the condensed consolidated statement of cash flows for the six
months ended June 30, 1999 are unaudited. In the opinion of management, such
financial statements include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of financial position,
results of operations, and cash flows for the periods presented.
The condensed balance sheet data at December 31, 1998 was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The financial statements presented
herein should be read in connection with the Company's December 31, 1998
consolidated financial statements included in the Company's Form S-4 for the
registration of $200 million of Senior Notes due 2008.
1. ORGANIZATION:
The Company was incorporated under the name Front Nine Holdings, Inc. as an
Oklahoma corporation on July 23, 1998. Subsequently, the Company changed its
name to Dobson/Sygnet Communications Company (the "Company") and amended its
certificate of incorporation on December 2, 1998 to reflect this change. The
Company is a wholly owned subsidiary of Dobson Communications Corporation
("Dobson Communications").
2. ACQUISITIONS:
On December 23, 1998, the Company acquired Sygnet Wireless, Inc. for
$337.5 million. The newly acquired Sygnet markets include cellular systems in
Ohio, Pennsylvania and New York covering an estimated population base of
2.4 million people.
The acquisition of Sygnet Wireless, Inc. was accounted for as a purchase
and, accordingly, the results of operations have been included in the
accompanying condensed consolidated statements of operations from the date of
acquisition. The unaudited pro forma information set forth below includes the
acquisition as if the purchase occurred at the beginning of 1998. 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 acquisition been consummated at that time:
<TABLE>
<CAPTION>
THREE
MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
(UNAUDITED, IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
Operating revenue................................ $ 25,423 $ 47,045
Net loss......................................... (15,152) (30,229)
Net loss per common share........................ $(152,520) $(302,290)
</TABLE>
6
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LONG-TERM DEBT:
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Revolving credit facilities.................... $402,000,000 $407,000,000
Dobson/Sygnet Senior Notes..................... 200,000,000 200,000,000
------------ ------------
Total debt................................. 602,000,000 607,000,000
Less--current maturities....................... (1,500,000) --
------------ ------------
Total long term debt....................... $600,500,000 $607,000,000
============ ============
</TABLE>
REVOLVING CREDIT FACILITIES
On December 23, 1998, the Company obtained $430 million of senior secured
credit facilities from NationsBank, N.A., consisting of a $50 million reducing
revolving credit facility and $380 million of term loans. As of June 30, 1999,
the Company had $402 million outstanding at a weighted average interest rate of
8.5%. The Company's obligations under the credit facilities are secured by all
current and future assets of the Company. Initial proceeds were used primarily
to finance the acquisition of Sygnet Wireless, Inc. described in Note 2. The
Company expects to use the remaining availability to finance capital
expenditures and general operations. The facilities will terminate in 2007.
The credit facilities 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.
SENIOR NOTES
On December 23, 1998, the Company issued $200 million of 12.25% Senior Notes
maturing in 2008. The net proceeds were used to finance the acquisition of
Sygnet Wireless, Inc. described in Note 2 and to purchase securities pledged to
secure payment of the first six semi-annual interest payments on the senior
notes, which begin on June 15, 1999. The pledged securities are reflected as
restricted cash and investments in the Company's condensed consolidated balance
sheet. The senior notes are redeemable at the option of the Company in whole or
in part, on or after December 15, 2003, initially at 106.125%. Prior to
December 15, 2001, the Company may redeem up to 35% of the principal amount of
the senior notes at 112.25% with proceeds from equity offerings, provided that
at least $130 million remains outstanding.
INTEREST RATE SWAP
In March 1999, the Company entered into an interest rate swap that
effectively fixed the interest rate on $110.0 million of the principal
outstanding on the Company's credit facilities at approximately 5.48% plus a
factor based on our leverage (approximately 8.78% at June 30, 1999). The term of
the interest rate swap is 24 months.
4. RESTRICTED CASH AND INVESTMENTS:
Restricted cash and investments consist of interest pledge deposits for the
senior notes. The senior notes interest pledge deposit of approximately
$56.6 million includes the initial deposit of $67.7 million, net of interest
earned and payments issued to bondholders.
7
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDER'S EQUITY:
On December 23, 1998, the Company received an equity contribution of
$145 million from its parent company, Dobson Communications. This contribution
was used to finance the acquisition of Sygnet Wireless, Inc. described
previously in Note 2.
6. RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133 will be effective for
fiscal years beginning after June 15, 2000. Under SFAS 133, the Company would
record an asset of $.2 million relating to its interest rate hedge valuation at
June 30, 1999. The Company has not determined the timing or method of adoption
of SFAS 133.
8
<PAGE>
SYGNET WIRELESS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
<S> <C> <C>
Revenue:
Subscriber revenue........................................ $ 16,527,822 $ 31,411,821
Roamer revenue............................................ 7,033,678 12,195,942
Equipment sales and other................................. 1,861,857 3,437,612
------------ ------------
Total revenue............................................... 25,423,357 47,045,375
Costs and expenses:
Cost of services.......................................... 2,308,874 4,544,755
Cost of equipment sales................................... 2,720,656 4,961,044
General and administrative................................ 4,828,235 9,458,926
Selling and marketing..................................... 3,023,564 5,799,814
Depreciation and amortization............................. 6,715,221 14,519,847
------------ ------------
Total costs and expenses.................................... 19,596,550 39,284,386
Income from operations...................................... 5,826,807 7,760,989
Other:
Interest expense, net..................................... (7,297,760) (14,367,680)
Other..................................................... (214,443) (276,743)
------------ ------------
Net loss.................................................... $ (1,685,396) $ (6,883,434)
============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
9
<PAGE>
SYGNET WIRELESS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net Loss.................................................... $(6,883,434)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 8,176,381
Amortization.............................................. 6,343,466
Loss on disposal of assets................................ 83,378
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,154,012)
Inventory............................................... 230,802
Prepaid and deferred expenses........................... (416,097)
Accounts payable and accrued expenses................... (353,464)
Accrued interest payable................................ (333,300)
-----------
Net cash provided by operating activities............. 4,693,720
INVESTING ACTIVITIES
Purchases of property and equipment......................... (9,917,769)
Proceeds from sale of assets................................ 400,500
-----------
Net cash used in investing activities................. (9,517,269)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 14,000,000
Principal payments on long-term debt........................ (9,401,000)
-----------
Net cash provided by financing activities............. 4,599,000
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (224,549)
CASH AND CASH EQUIVALENTS, beginning of period.............. 860,086
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 635,537
===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
10
<PAGE>
SYGNET WIRELESS, INC. (THE PREDECESSOR COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated statement of operations
for the three and six months ended June 30, 1998 and statement of cash flows for
the six months ended June 30, 1998 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 Predecessor company management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 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 Sygnet Wireless, Inc.'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. RECLASSIFICATIONS
Certain amounts have been reclassified on the consolidated statement of
operations to conform with presentation adopted by Sygnet Wireless, Inc. in the
fourth quarter of 1998.
3. SUBSEQUENT EVENT
On December 23, 1998, a wholly-owned subsidiary of Dobson Communications
Corp. ("Dobson"), acquired all outstanding capital stock of Sygnet
Wireless, Inc. for $337.5 million in cash. In connection with the purchase, all
outstanding senior notes issued by Sygnet Wireless, Inc. were tendered for a
total price of $1,181.61 for each $1,000 in principal. The bank credit facility
of Sygnet Wireless, Inc. was repaid and terminated.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We own and operate cellular telephone systems serving a large cluster of
properties with a population of approximately 2.4 million and 199,457
subscribers located in northeastern Ohio, western Pennsylvania and western New
York. Our cellular systems are located in Youngstown, Ohio, 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 financial condition and results of our operations.
On December 23, 1998, we acquired all of the outstanding capital stock of
Sygnet Wireless, Inc. for $337.5 million. The operations as described in the
paragraph above and in the paragraphs below are substantially that of the
predecessor.
REVENUE
Our cellular revenues consist of service, roaming and equipment sales
revenues. There has been an industry trend of declining average revenue per
minute, as competition among service providers has led to reductions in rates
for airtime and subscriptions and other charges. We believe that the impact of
this trend will be mitigated by increases in the number of cellular
telecommunications subscribers and the number of minutes of usage per
subscriber. There has also been a broad trend in the cellular telecommunications
industry of declining average revenue per subscriber. We believe that the
downward trend is primarily the result of the addition of new lower usage
customers who utilize cellular services for personal convenience, security or as
a backup for their traditional landline telephone.
Roaming accounted for 30.9%, 27.7%, 29.6% and 25.9% of our cellular revenue
for the three months ended June 30, 1999 and 1998 and the six months ended
June 30, 1999 and 1998, respectively. While the industry trend is to reduce
roaming rates, we believe that our roaming rates are generally lower than rates
offered by others in or near our 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. Our roaming yield (roaming revenue,
which includes airtime, toll charges and surcharges, divided by roaming minutes
of use) was $.48, $.63, $.53, and $.62 per minute for the three months ended
June 30, 1999 and 1998 and the six months ended June 30, 1999 and 1998,
respectively.
In recent years, we and other cellular providers, have increased the use of
discounts on phone equipment and free phone promotions, as competition between
service providers has intensified. As a result, we have incurred, and expect to
continue to incur, losses on equipment sales, which have resulted in increased
marketing and selling costs per gross additional subscriber. While we expect to
continue these discounts and promotions, we believe that the use of such
promotions will result in increased revenue from increases in the number of our
cellular subscribers.
COSTS AND EXPENSES
Our primary operating expense categories include cost of service, cost of
equipment, marketing and selling, general and administrative and depreciation
and amortization.
Our cost of service consists primarily of costs to operate and maintain our
facilities utilized in providing service to customers and amounts paid to
third-party cellular providers for providing service to our subscribers.
Our cost of equipment represents the cost associated with telephone
equipment and accessories sold to customers.
Our marketing and selling costs include advertising, compensation paid to
sales personnel and independent agents and all other costs to market and sell
cellular products and services and costs related to
12
<PAGE>
customer retention. We pay commissions to direct sales personnel for new
business generated. Independent sales agents receive commissions for generating
new sales and ongoing sales to existing customers.
Our general and administrative costs include all infrastructure costs such
as customer support, billing, collections, and corporate administration.
RESULTS OF OPERATIONS
In the text below, our financial results for the second quarter of 1999 are
compared to the financial results of Sygnet Wireless, Inc. ("Predecessor
Company") for the second quarter of 1998. Also, the financial statement numbers
have been rounded; however, the percentage changes are based on the actual
financial statements.
THREE MONTHS ENDED JUNE 30, 1999 FOR THE COMPANY COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998 FOR THE PREDECESSOR COMPANY
OPERATING REVENUE. For the three months ended June 30, 1999, total
operating revenue increased $3.6 million, or 14.0%, to $29.0 million from
$25.4 million for the comparable period in 1998. Total service, roaming and
equipment revenue represented 64.3%, 30.9% and 4.5%, respectively, of total
operating revenue during the three months ended June 30, 1999 and 65.0%, 27.7%,
and 5.7%, respectively, of total operating revenue during the three months ended
June 30, 1998.
The following table sets forth the components of our revenue for the three
months ended June 30, 1999 and the Predecessor Company's revenue for the three
months ended June 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
<S> <C> <C>
1999 1998
------- -------
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue...................................... $18,644 $16,528
Roaming revenue...................................... 8,943 7,033
Equipment sales and other............................ 1,394 1,862
------- -------
Total............................................ $28,981 $25,423
======= =======
</TABLE>
Service revenue increased $2.1 million, or 12.8%, to $18.6 million in the
three months ended June 30, 1999 from $16.5 million in the same period of 1998.
This increase was primarily attributable to increased penetration and usage. Our
subscriber base increased 26.9% to 199,457 at June 30, 1999 from the Predecessor
Company's subscriber base of 157,220 at June 30, 1998. The average monthly
service revenue per subscriber decreased to $32 from $35 for the three months
ended June 30, 1999 compared to the same period in 1998.
Roaming revenue increased $1.9 million, or 27.2%, to $8.9 million in the
three months ended June 30, 1999 from $7.0 million for the comparable period of
1998. Of this increase, $1.3 million was attributable to roaming revenue earned
from new PCS agreements with third-party cellular providers. The remaining,
$.6 million was primarily attributable to increased roaming minutes due to
expanded coverage areas and increased usage in our markets.
Equipment sales and other revenue of $1.4 million in the three months ended
June 30, 1999 represented a decrease of $.5 million, or 26.7%, from
$1.9 million in the same period of 1998, as a result of a decrease in other
revenue for the three months ended June 30, 1999.
COST OF SERVICE. For the three months ended June 30, 1999, the total cost
of service decreased 18.6% to $1.9 million from $2.3 million for the comparable
period in 1998. In addition, as a percentage of service
13
<PAGE>
and roaming revenue, cost of cellular service decreased to 6.8% for the three
months ended June 30, 1999 from 9.8% for the same period in 1998. These
decreases are primarily the result of a reduction in rates charged by
third-party cellular providers for providing service to our subscribers.
COST OF EQUIPMENT. For the three months ended June 30, 1999, cost of
equipment decreased $.3 million, or 11.6% to $2.4 million during 1999 from
$2.7 million in the same period of 1998.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$2.4 million, or 78.8%, to $5.4 million for the three month period ended
June 30, 1999 from $3.0 million in the comparable period of 1998. This increase
resulted mainly from an increase in new subscribers added period to period which
caused higher compensations and commission expenses as well as an increase in
advertising and promotional expenses. The number of gross subscribers added in
the second quarter of 1999 was 18,875. The number of gross subscribers added in
the second quarter of 1998 was 15,043.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $.2 million, or 4.1%, to $5.0 million for the three month period ended
June 30, 1999 from $4.8 million for the same period in 1998. As a percentage of
total operating revenue, general and administrative costs decreased to 17.3%
from 19.0% for the three month period ended June 30, 1999 compared to the same
three month period in 1998. In addition, the Company's average monthly general
and administrative costs per subscriber remained constant at $8 for the three
months ended June 30, 1999 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended June 30,
1999, depreciation and amortization expense increased $10.8 million, or 161.3%
to $17.5 million in the three months ended June 30, 1999 from $6.7 million in
the same period of 1998. Depreciation and amortization of cellular license
acquisition costs, and the customer list which were acquired in our acquisition
of Sygnet Wireless, Inc. accounted for substantially all of the increase in the
second quarter 1999 compared to the same period in 1998.
INTEREST EXPENSE. For the three months ended June 30, 1999, interest
expense increased $8.7 million, or 118.7%, to $16.0 million in the three months
ended June 30, 1999 from $7.3 million in the same period of 1998. The increase
was primarily a result of increased borrowings in December 1998 to finance our
acquisition of Sygnet Wireless, Inc.
SIX MONTHS ENDED JUNE 30, 1999 FOR THE COMPANY COMPARED TO SIX MONTHS ENDED
JUNE 30, 1998 FOR THE PREDECESSOR COMPANY
OPERATING REVENUE. For the six months ended June 30, 1999, total operating
revenue increased $9.6 million, or 20.4%, to $56.6 million from $47.0 million
for the comparable period in 1998. Total service, roaming and equipment revenue
represented 64.9%, 29.6% and 5.1%, respectively, of total operating revenue
during the six months ended June 30, 1999 and 66.8%, 25.9%, and 5.6%,
respectively, of total operating revenue during the six months ended June 30,
1998.
14
<PAGE>
The following table sets forth the components of our revenue for the six
months ended June 30, 1999 and the Predecessor Company's revenue for the six
months ended June 30, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
<S> <C> <C>
1999 1998
------- -------
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue......................................... $36,769 $31,412
Roaming revenue......................................... 16,750 12,196
Equipment sales and other............................... 3,110 3,437
------- -------
Total............................................... $56,629 $47,045
======= =======
</TABLE>
Service revenue increased $5.4 million, or 17.1%, to $36.8 million in the
six months ended June 30, 1999 from $31.4 million in the same period of 1998.
This increase was primarily attributable to increased penetration and usage. Our
subscriber base increased 26.9% to 199,457 at June 30, 1999 from the Predecessor
Company's subscriber base of 157,220 at June 30, 1998. The average monthly
service revenue per subscriber decreased to $32 from $34 for the six months
ended June 30, 1999 compared to the same period in 1998.
Roaming revenue increased $4.5 million, or 37.3%, to $16.7 million in the
six months ended June 30, 1999 from $12.2 million for the comparable period of
1998. Of this increase, $2.5 million was attributable to roaming revenue earned
from new PCS agreements with third-party cellular providers. The remaining, $2.0
million was primarily attributable to increased roaming minutes due to expanded
coverage areas and increased usage in our markets.
Equipment sales and other revenue of $3.1 million in the six months ended
June 30, 1999 represented an decrease of $.3 million, or 9.5%, from
$3.4 million in the same period of 1998, as a result of a decrease in other
revenue for the six months ended June 30, 1999.
COST OF SERVICE. For the six months ended June 30, 1999, the total cost of
service increased $.1 million to $4.6 million from $4.5 million for the
comparable period in 1998. In addition, as a percentage of service and roaming
revenue, cost of cellular service decreased to 8.5% for the six months ended
June 30, 1999 from 10.4% for the same period in 1998. These decreases are
primarily the result of a reduction in rates charged by third-party cellular
providers for providing service to our subscribers.
COST OF EQUIPMENT. For the six months ended June 30, 1999, cost of
equipment increased $.2 million, or 3.9% to $5.2 million during 1999 from
$5.0 million in the same period of 1998, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$3.9 million, or 67.4%, to $9.7 million for the six month period ended June 30,
1999 from $5.8 million in the comparable period of 1998. This increase resulted
mainly from an increase in new subscribers added period to period which caused
higher compensations and commission expenses as well as an increase in
advertising and promotional expenses. The number of gross subscribers added in
the six month period ended June 30, 1999 was 34,135. The number of gross
subscribers added in the six month period ended June 30, 1998 was 27,885.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $1.1 million, or 11.7%, to $10.6 million for the six month period
ended June 30, 1999 from $9.5 million for the same period in 1998. As a
percentage of total operating revenue, general and administrative costs
decreased to 18.7% from 20.1% for the six month period ended June 30, 1999
compared to the same period of 1998. In addition, the Company's average monthly
general and administrative costs per subscriber remained constant at $9 for the
six months ended June 30, 1999 and 1998.
15
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. For the six months ended June 30,
1999, depreciation and amortization expense increased $21.0 million, or 144.4%
to $35.5 million in the six months ended June 30, 1999 from $14.5 million in the
same period of 1998. Depreciation and amortization of cellular license
acquisition costs, and the customer list which were acquired in our acquisition
of Sygnet Wireless, Inc. accounted for substantially all of the increase in the
second quarter 1999 compared to the same period in 1998.
INTEREST EXPENSE. For the six months ended June 30, 1999, interest expense
increased $17.7 million, or 123.2%, to $32.1 million in the six months ended
June 30, 1999 from $14.4 million in the same period of 1998. The increase was
primarily a result of increased borrowings in December 1998 to finance our
acquisition of Sygnet Wireless, Inc.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the year 2000 or process data that
includes it, potentially causing data miscalculations, inaccuracies, operational
malfunctions or failures.
In April 1998, our parent, Dobson Communications, established a
multi-disciplined team to perform a Year 2000 impact analysis for Dobson
Communications and its subsidiaries. The team consists of representatives from
each of the lines of business of Dobson Communications, 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 our automated systems and
services and an impact analysis that identified significant risk areas by line
of business, specific compliance requirements and costs and estimated completion
dates for affected systems. We have been in contact with all of the vendors of
products and services that we believe are critical to our operations. The
representations from our vendors pertaining to Year 2000 compliance have come in
writing directly to us, in contracts, and by accessing Year 2000 information
available at their Web sites. While all of the vendors have provided some type
of assurance that their products will be Year 2000 compliant, not all have
provided us expressly with a "Year 2000 Compliance Statement" and/or a "Year
2000 Warranty." Our focus with our vendors has been directed toward what
assurances of Year 2000 compliance they can provide in the form of documented
Year 2000 planning and testing and third party audits.
From an information systems standpoint, we have historically relied on
outsourcing relationships for most of our business and operational support
applications. In addition, we use packaged software from outside vendors for
those applications that we have outsourced. As a result, we have focused on
identifying third party systems and services that are not currently Year 2000
compliant and oversight of third party compliance efforts.
The results of the impact analysis revealed that for most of 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. However, there are two critical systems that will not be
replaced until third quarter 1999. Those systems are one Ericsson switching
system in New York and portions of our ITDS billing system. The Ericsson
switching equipment will be replaced with Year 2000 compliant Nortel equipment.
We expect to complete this replacement in the third quarter of 1999. In the
first quarter of 1999, we decided to replace our current billing system vendor,
ITDS, with a new vendor, H.O. Systems, which is Year 2000 compliant. We are in
the process of implementing the H.O. Systems software throughout our markets and
expect to complete the implementation in the third quarter of 1999. We estimate
total costs of approximately $.25 million to upgrade or replace those systems
that are not Year 2000 compliant and will
16
<PAGE>
not be upgraded through existing maintenance or service agreements. The
estimated costs for Year 2000 compliance do not include the costs of upgrading
the New York system or replacing the billing vendor for that system, as those
decisions were made for business reasons outside of the Year 2000 issue and
would have been made regardless of whether the systems currently in place were
Year 2000 compliant. All of our automated systems and services are or will be
Year 2000 compliant by the end of the third quarter of 1999.
Our contingency planning is being addressed in two parts. First, possible
disruptions to operations after the rollover to the Year 2000 are being
addressed as a part of our overall disaster recovery plan, which will be
completed by the end of 1999. Second, specific Year 2000 related contingencies
that are not covered in the disaster recovery plan will be covered in a separate
Year 2000 contingency plan, which will also be completed by the end 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, if a critical vendor does not
provide adequate assurance that its product is Year 2000 compliant through test
plans, test results or third party audit results, we will either replace the
product with one that has provided proof of compliance or will conduct our own
Year 2000 tests.
In the event any of our vendors has represented that it is Year 2000
compliant and, in fact, it is not, we would have no recourse against this vendor
other than an action for damages for either breach of contract or, in the
absence of a contractual obligation, for negligence if we could establish that
the vendor had a legal duty to us to be Year 2000 compliant. If we are unable to
provide systems and services to our customers, because either their own systems
or those of our vendors are not Year 2000 compliant, our reasonably likely worst
case scenario is that we would experience a reduction in our operating revenues
which could adversely affect our ability to meet our operating and financial
obligations.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company with no direct operations and no significant assets
other than the stock of our subsidiaries. We depend on the cash flows of our
subsidiaries to meet their obligations, including their obligations to pay
interest and principal on their indebtedness. Our subsidiaries are separate
legal entities that have no obligation to pay any amounts owed by us or to make
any funds available to us. The ability of our subsidiaries to distribute funds
to us is and will be restricted by the terms of existing and future indebtedness
including our credit facilities.
Our operations require substantial capital to acquire, construct and expand
cellular telephone systems and to fund operating requirements. We have financed
our operations through bank debt and the sale of debt.
At June 30, 1999, we had working capital of $19.7 million (a ratio of
current assets to current liabilities of 1.8:1) and an unrestricted cash balance
of $3.1 million, which compares to working capital of $33.9 million (a ratio of
current assets to current liabilities of 2.4:1) and an unrestricted cash balance
of $20.3 million at December 31, 1998.
Our net cash used in operating activities totaled $(1.1) million for the six
month period ended June 30, 1999, while the net cash provided by operating
activities totaled $4.7 million for the same period of 1998. The decrease of
$5.8 million was primarily due to our net loss for the period and deferred
income taxes offset by depreciation and amortization.
Net cash used in investing activities, which totaled $(19.8) million and
$(9.5) million for the six months ended June 30, 1999 and 1998, respectively,
primarily increased as a result of our acquisition of Sygnet Wireless, Inc.
17
<PAGE>
Net cash provided by financing activities was $3.7 million the six month
period ended June 30, 1999 compared to $4.6 million for the same period of 1998.
Financing activity for the six months ended June 30, 1999 consisted primarily of
$11.7 million of maturities of restricted investments and proceeds from long-
term debt of $6.0 million offset by repayments of long-term debt totaling
$11.0 million and interest from restricted investments of $2.0 million.
In March 1999, we entered into an interest rate swap that effectively fixed
the interest rate on $110.0 million of the principal outstanding on the credit
facilities at approximately 5.48% plus a factor based on our leverage
(approximately 8.78% at June 30, 1999). The term of the interest rate swap is
24 months.
Our capital expenditures were $9.3 million for the six months ended
June 30, 1999 and we expect our capital expenditures (excluding cost of
acquisitions) to be approximately $16 million for all of 1999. Of the amount
expected to be made in 1999, $8 million is expected to be made to upgrade the
New York system to TDMA IS-136. The amount and timing of capital expenditures
may vary depending on the rate at which we expand and develop our cellular
systems and whether we consummate additional acquisitions. In addition, we
expect to borrow $6.0 million under our credit facilities to close the
acquisition of Pennsylvania 2 RSA.
Our credit facilities aggregate $430.0 million, consisting of a
$50.0 million revolving credit facility and $380.0 million of term loan
facilities. As of June 30, 1999 we had $402.0 million outstanding under the
facilities at a weighted average interest rate of 8.5%. Obligations under our
new facilities are secured by a pledge of the capital stock of our subsidiary as
well as a lien on substantially all of our assets and those of our operating
subsidiary. The credit facilities require that we maintain certain financial
ratios. The failure to maintain such ratios would constitute an event of
default, notwithstanding our ability to meet debt service obligations. To date,
we believe that we have maintained the required financial ratios. Our ability to
borrow under our credit facilities will be limited by the requirement that, on a
quarterly basis beginning December 31, 2000, the amount available under our
credit facilities will reduce until they terminate. Our outstanding
$200.0 million senior notes bear an interest rate of 12.25% and mature in 2008.
We used approximately $67.7 million of the net proceeds from the issuance of
these notes to purchase securities pledged to secure the first six semi-annual
interest payments, which begin June 15, 1999.
We, through the Predecessor Company, are a party to an agreement to purchase
the FCC license for, and certain assets related to, Pennsylvania 2 RSA for
$6.0 million. Because the seller's title to the license remains subject to
administrative and judicial review, the closing of such acquisition has been
delayed. Pending such closing, we are managing the operation of the cellular
system in the market under the supervision and control of the seller.
Although we cannot provide any assurance, we believe that, assuming
successful implementation of our strategy, including the further development of
our cellular systems and significant and sustained growth in our cash flow,
borrowings under the credit facilities, and cash flow from operations, will be
sufficient to consummate our acquisition of Pennsylvania 2 RSA and are expected
to be sufficient to satisfy our currently expected capital expenditures, working
capital and debt service obligations. However, we will need to refinance the
credit facilities, and the senior notes at their maturities. Our 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 our control. The actual amount and timing of
our future capital requirements may differ materially from our estimates as a
result of, among other things, the demand for our services and regulatory,
technological and competitive developments. Sources of additional financing may
include commercial bank borrowings, vendor financing and the sale of equity or
debt securities. We cannot assure you that any such financing will be available
on acceptable terms or at all.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including planned capital
expenditures and acquisitions, are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These plans involve a number of risks and uncertainties. Important factors
that could cause actual capital expenditures, acquisition activity or our
performance to differ materially from the plans include, without limitation, our
ability to satisfy the financial covenants of our outstanding debt and preferred
stock instruments and to raise additional capital; our ability to manage our
rapid growth successfully and to compete effectively in its cellular, fiber and
resale businesses against competitors with greater financial, technical,
marketing and other resources; changes in end-user requirements and preferences;
the development of other technologies and products that may gain more commercial
acceptance than those of ours; and adverse regulatory changes. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. We undertake no obligation to update or revise
these forward-looking statements to reflect events or circumstances after the
date hereof including, without limitation, changes in our business strategy or
planned capital expenditures, or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in interest rates. Market risk is
the potential loss arising from adverse changes in market prices and rates,
including interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes. The objective of our financial
risk management is to minimize the negative impact of interest rate fluctuations
on our earnings and equity. In March 1999, we entered into an interest rate swap
that effectively fixed the interest rate on $110.0 million of the principal
outstanding on our credit facilities. Increases in interest expense related to
the interest rate swap for the six months ended June 30, 1999 was reflected in
income and were immaterial.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. Based
on our market risk sensitive instruments outstanding at June 30, 1999, we have
determined that there was no material market risk exposure to our consolidated
financial position, results of operations or cash flows as of such date.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule--Six Months Ended June 30, 1999
</TABLE>
(b) Reports on Form 8-K
Not applicable
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: November 18, 1999 DOBSON/SYGNET COMMUNICATIONS COMPANY
/s/ EVERETT R. DOBSON
--------------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 18, 1999
/s/ BRUCE R. KNOOIHUIZEN
--------------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,061,284
<SECURITIES> 0
<RECEIVABLES> 19,545,324
<ALLOWANCES> (894,490)
<INVENTORY> 1,620,986
<CURRENT-ASSETS> 45,478,421
<PP&E> 58,487,745
<DEPRECIATION> (6,455,290)
<TOTAL-ASSETS> 922,129,581
<CURRENT-LIABILITIES> 25,770,537
<BONDS> 600,500,000
0
0
<COMMON> 100
<OTHER-SE> (119,963,064)
<TOTAL-LIABILITY-AND-EQUITY> 922,129,581
<SALES> 3,109,909
<TOTAL-REVENUES> 56,628,826
<CGS> 5,154,020
<TOTAL-COSTS> 65,484,234
<OTHER-EXPENSES> (2,258,357)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,069,525
<INCOME-PRETAX> (38,666,576)
<INCOME-TAX> (14,693,302)
<INCOME-CONTINUING> (23,973,274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,973,274)
<EPS-BASIC> (239,733)
<EPS-DILUTED> (239,733)
</TABLE>
