<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / 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)
13439 NORTH BROADWAY EXTENSION 73114
SUITE 200
OKLAHOMA CITY, OKLAHOMA
(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 November 12, 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 September 30,
1999 and December 31, 1998.................................. 3
Condensed Consolidated Statement of Operations for the Three
and Nine Months Ended September 30, 1999.................... 4
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended September 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 Nine Months Ended September 30, 1998.................... 9
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended September 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,774,300 $ 20,262,977
Restricted cash and investments........................... 23,136,174 20,781,187
Accounts receivable, net.................................. 18,220,825 13,125,357
Other current assets...................................... 3,829,480 4,027,597
------------ ------------
Total current assets.................................... 46,960,779 58,197,118
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 54,247,490 46,994,471
------------ ------------
OTHER ASSETS:
Restricted investments.................................... 34,635,000 45,505,000
Cellular license acquisition costs, net................... 683,578,515 710,758,631
Deferred financing costs, net............................. 46,794,686 49,346,454
Customer list, net........................................ 37,562,539 44,489,138
Other..................................................... 935,629 1,447,106
------------ ------------
Total other assets...................................... 803,506,369 851,546,329
------------ ------------
Total assets............................................ $904,714,638 $956,737,918
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,488,656 $ 2,075,441
Accrued expenses.......................................... 10,505,636 15,799,582
Deferred revenue and customer deposits.................... 3,334,456 2,437,021
Current portion of long-term debt......................... 1,750,000 --
------------ ------------
Total current liabilities............................... 21,078,748 24,302,407
------------ ------------
ACCOUNTS PAYABLE--AFFILIATE................................. 9,065,820 3,990,363
LONG-TERM DEBT, net of current portion...................... 604,250,000 607,000,000
DEFERRED INCOME TAXES....................................... 159,607,360 181,499,173
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.......................................... (34,287,390) (1,063,762)
------------ ------------
Total stockholder's equity.............................. 110,712,710 143,936,338
------------ ------------
Total liabilities and stockholder's deficit............. $904,714,638 $956,737,918
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
OPERATING REVENUE:
Service revenue.......................................... $ 19,357,451 $ 56,126,488
Roaming revenue.......................................... 11,654,977 28,404,857
Equipment sales and other................................ 1,359,934 4,469,843
------------ ------------
Total operating revenue................................ 32,372,362 89,001,188
------------ ------------
OPERATING EXPENSES:
Cost of service.......................................... 2,022,347 6,580,962
Cost of equipment........................................ 3,241,716 8,395,736
Marketing and selling.................................... 5,736,966 15,446,842
General and administrative............................... 4,985,972 15,555,170
Depreciation and amortization............................ 15,972,203 51,464,728
------------ ------------
Total operating expenses............................... 31,959,204 97,443,438
------------ ------------
OPERATING INCOME (LOSS).................................... 413,158 (8,442,250)
INTEREST EXPENSE........................................... (16,506,529) (48,576,054)
OTHER INCOME, net.......................................... 1,173,445 3,431,802
------------ ------------
LOSS BEFORE INCOME TAXES................................... (14,919,926) (53,586,502)
INCOME TAX BENEFIT......................................... 5,669,572 20,362,874
------------ ------------
NET LOSS................................................... $ (9,250,354) $(33,223,628)
============ ============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER COMMON
SHARE.................................................... $ (92,504) $ (332,236)
============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 100 100
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. (33,223,628)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization......................... 51,464,728
Amortization of financing costs....................... 3,930,490
Deferred income taxes................................. (21,891,813)
Other................................................. 116,147
Changes in current assets and liabilities--
Accounts receivable................................... (5,095,468)
Other current assets.................................. (745,393)
Accounts payable...................................... 3,413,215
Accrued expenses...................................... (5,293,946)
Deferred revenues and customer deposits............... 897,435
-------------
Net cash used in operating activities............... (6,428,233)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (15,235,302)
Purchase of cellular licenses and properties.............. (9,596,898)
Increase in payable--affiliate............................ 5,075,457
Other..................................................... 4,000
-------------
Net cash used in investing activities............... (19,752,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt.............................. (17,000,000)
Proceeds from long-term debt.............................. 16,000,000
Maturities of restricted investments...................... 9,970,000
Deferred financing costs.................................. (1,277,701)
-------------
Net cash provided by financing activities........... 7,692,299
-------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (18,488,677)
CASH AND CASH EQUIVALENTS, beginning of year................ 20,262,977
-------------
CASH AND CASH EQUIVALENTS, end of year...................... 1,774,300
=============
</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 September 30, 1999 and December 31, 1998, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 1999 and the condensed consolidated statement of cash flows
for the nine months ended September 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. ACQUISITION:
On December 23, 1998, the Company acquired all outstanding capital stock of
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 the 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 acquisition been consummated at
that time:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Operating revenue........................... $ 28,683 $ 75,728
Net loss.................................... (14,163) (44,392)
Net loss per common share................... $ (142) $ (444)
</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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Revolving credit facilities................. $406,000,000 $407,000,000
Dobson/Sygnet Senior Notes.................. 200,000,000 200,000,000
------------ ------------
Total debt.............................. 606,000,000 607,000,000
Less--current maturities.................... (1,750,000) --
------------ ------------
Total long term debt.................... $604,250,000 $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 September 30,
1999, the Company had $406 million outstanding at a weighted average interest
rate of 8.7%. 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 began 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 8.76% at September 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 $57.8
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 $.1 million relating to its interest rate hedge valuation at
September 30, 1999. The Company has not determined the timing or method of
adoption of SFAS 133.
8
<PAGE>
SYGNET WIRELESS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue:
Subscriber revenue......................................... $ 17,339,610 $ 48,751,431
Roamer revenue............................................. 8,520,977 20,716,919
Equipment sales and other.................................. 2,005,103 5,442,715
------------ ------------
Total revenue.............................................. 27,865,690 74,911,065
Costs and expenses:
Cost of services........................................... 2,437,194 6,981,949
Cost of equipment sales.................................... 2,828,903 7,789,947
General and administrative................................. 5,205,591 14,664,517
Selling and marketing...................................... 3,256,956 9,056,770
Depreciation and amortization.............................. 6,823,590 21,343,437
------------ ------------
Total costs and expenses................................... 20,552,234 59,836,620
------------ ------------
Income from operations..................................... 7,313,456 15,074,445
Other:
Interest expense, net...................................... (7,244,992) (21,612,672)
Other...................................................... (64,478) (341,221)
------------ ------------
Net income (loss).......................................... $ 3,986 $ (6,879,448)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE>
SYGNET WIRELESS, INC. (PREDECESSOR COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net Loss.................................................... $ (6,879,448)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 11,828,239
Amortization.............................................. 9,515,198
Loss on disposal of assets................................ 109,104
Changes in operating assets and liabilities:
Accounts receivable..................................... (2,795,142)
Inventory............................................... 328,276
Prepaid and deferred expenses........................... (620,455)
Accounts payable and accrued expenses................... (738,574)
Accrued interest payable................................ 2,783,877
------------
Net cash provided by operating activities............. 13,531,075
INVESTING ACTIVITIES
Purchases of property and equipment......................... (11,468,537)
Proceeds from sale of assets................................ 400,500
------------
Net cash used in investing activities....................... (11,068,037)
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 16,894,000
Principal payments on long-term debt........................ (19,750,000)
------------
Net cash used in financing activities................. (2,856,000)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (392,962)
CASH AND CASH EQUIVALENTS, beginning of period.............. 860,086
------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 467,124
============
</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
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated statements of operations
for the three and nine months ended September 30, 1998 and statement of cash
flows for the nine months ended September 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 nine months
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 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 approximately
211,300 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 36.0%, 30.6%, 31.9% and 27.7% of our cellular revenue
for the three months ended September 30, 1999 and 1998 and the nine months ended
September 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 roaming revenue in the future. Our roaming yield
(roaming revenue, which includes airtime, toll charges and surcharges, divided
by roaming minutes of use) was $.42, $.58, $.48, and $.57 per minute for the
three months ended September 30, 1999 and 1998 and the nine months ended
September 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.
12
<PAGE>
Our marketing and selling costs include advertising, compensation paid to
sales personnel and independent agents and all other costs to market and sell
cellular products and services and costs related to customer retention. We pay
commissions to direct sales personnel for new business generated. Independent
sales agents receive commissions for generating new sales and ongoing sales to
existing customers.
Our general and administrative costs include all infrastructure costs such
as customer support, billing, collections, and corporate administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
RESULTS OF OPERATIONS
In the text below, our financial results for the third quarter of 1999 are
compared to the financial results of Sygnet Wireless, Inc. ("Predecessor
Company") for the third quarter of 1998. Also, the financial statement numbers
have been rounded; however, the percentage changes are based on the actual
financial statement numbers.
THREE MONTHS ENDED SEPTEMBER 30, 1999 FOR THE COMPANY COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1998 FOR THE PREDECESSOR COMPANY
OPERATING REVENUE. For the three months ended September 30, 1999, total
operating revenue increased $4.5 million, or 16.2%, to $32.4 million from $27.9
million for the comparable period in 1998. Total service, roaming and equipment
revenue represented 59.8%, 36.0% and 4.2%, respectively, of total operating
revenue during the three months ended September 30, 1999 and 62.2%, 30.6%, and
7.2%, respectively, of total operating revenue during the three months ended
September 30, 1998.
The following table sets forth the components of our revenue for the three
months ended September 30, 1999 and the Predecessor Company's revenue for the
three months ended September 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
<S> <C> <C>
1999 1998
-------- --------
($ IN THOUSANDS)
Operating revenue:
Service revenue...................................... $19,357 $17,340
Roaming revenue...................................... 11,655 8,521
Equipment sales and other............................ 1,360 2,005
------- -------
Total.............................................. $32,372 $27,866
======= =======
</TABLE>
Service revenue increased $2.1 million, or 11.6%, to $19.4 million in the
three months ended September 30, 1999 from $17.3 million in the same period of
1998. This increase was primarily attributable to increased penetration and
usage. Our subscriber base increased 26.6% to approximately 211,300 at September
30, 1999 from the Predecessor Company's subscriber base of approximately 166,900
at September 30, 1998. The average monthly service revenue per subscriber
decreased to $31 from $34 for the three months ended September 30, 1999 compared
to the same period in 1998.
Roaming revenue increased $3.2 million, or 36.8%, to $11.7 million in the
three months ended September 30, 1999 from $8.5 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 $1.9 million was primarily attributable to increased roaming minutes
due to expanded coverage areas and increased usage in our markets.
13
<PAGE>
Equipment sales and other revenue of $1.4 million in the three months ended
September 30, 1999 represented a decrease of $.6 million, or 32.2%, from $2.0
million in the same period of 1998, as a result of a decrease in other revenue
for the three months ended September 30, 1999.
COST OF SERVICE. For the three months ended September 30, 1999, the total
cost of service decreased 17.0% to $2.0 million from $2.4 million for the
comparable period in 1998. In addition, as a percentage of service and roaming
revenue, cost of cellular service decreased to 6.5% for the three months ended
September 30, 1999 from 9.4% 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 three months ended September 30, 1999, cost of
equipment increased $.4 million, or 14.6% to $3.2 million during 1999 from $2.8
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 $2.4
million, or 76.1%, to $5.7 million for the three month period ended September
30, 1999 from $3.3 million in the comparable period of 1998. This increase
resulted mainly from 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. The number of gross subscribers added in
the third quarter of 1999 was approximately 20,700. The number of gross
subscribers added in the third quarter of 1998 was approximately 16,000.
GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
September 30, 1999, general and administrative cost decreased $.2 million, or
4.2%, to $5.0 million from $5.2 million for the comparable period in 1998. As a
percentage of total operating revenue, general and administrative costs
decreased to 15.4% from 18.7% for the three month period ended September 30,
1999 compared to the same three month period in 1998. In addition, the Company's
average monthly general and administrative costs per subscriber decreased to $8
from $11 for the three months ended September 30, 1999 and 1998. These decreases
in general and administrative costs were a result of efficiencies gained from
the integration with our parent, Dobson Communications.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $9.2 million, or 134.1% to $16.0 million in the three months
ended September 30, 1999 from $6.8 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 third quarter 1999
compared to the same period in 1998.
INTEREST EXPENSE. For the three months ended September 30, 1999, interest
expense increased $9.3 million, or 127.8%, to $16.5 million from $7.2 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 FOR THE COMPANY COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1998 FOR THE PREDECESSOR COMPANY
OPERATING REVENUE. For the nine months ended September 30, 1999, total
operating revenue increased $14.1 million, or 18.8%, to $89.0 million from $74.9
million for the comparable period in 1998. Total service, roaming and equipment
revenue represented 63.1%, 31.9% and 5.0%, respectively, of total operating
revenue during the nine months ended September 30, 1999 and 65.1%, 27.6% and
7.3%, respectively, of total operating revenue during the nine months ended
September 30, 1998.
14
<PAGE>
The following table sets forth the components of our revenue for the nine
months ended September 30, 1999 and the Predecessor Company's revenue for the
nine months ended September 30, 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue......................................... $56,126 $48,751
Roaming revenue......................................... 28,405 20,717
Equipment sales and other............................... 4,470 5,443
------- -------
Total................................................. $89,001 $74,911
======= =======
</TABLE>
Service revenue increased $7.3 million, or 15.1%, to $56.1 million in the
nine months ended September 30, 1999 from $48.8 million in the same period of
1998. This increase was primarily attributable to increased penetration and
usage. Our subscriber base increased 26.6% to approximately 211,300 at September
30, 1999 from the Predecessor Company's subscriber base of approximately 166,900
at September 30, 1998. The average monthly service revenue per subscriber
decreased to $32 from $34 for the nine months ended September 30, 1999 compared
to the same period in 1998.
Roaming revenue increased $7.7 million, or 37.1%, to $28.4 million in the
nine months ended September 30, 1999 from $20.7 million for the comparable
period of 1998. Of this increase, $3.7 million was attributable to roaming
revenue earned from new PCS agreements with third-party cellular providers. The
remaining $4.0 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 $4.5 million in the nine months ended
September 30, 1999 represented an decrease of $.9 million, or 17.9%, from $5.4
million in the same period of 1998, as a result of a decrease in other revenue
for the nine months ended September 30, 1999.
COST OF SERVICE. For the nine months ended September 30, 1999, the total
cost of service decreased $.4 million to $6.6 million from $7.0 million for the
comparable period in 1998. In addition, as a percentage of service and roaming
revenue, cost of cellular service decreased to 7.4% for the nine months ended
September 30, 1999 from 10.1% 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 nine months ended September 30, 1999, cost of
equipment increased $.6 million, or 7.8% to $8.4 million during 1999 from $7.8
million in the same period of 1998, primarily from increases in the volume of
equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased $6.3
million, or 70.6%, to $15.4 million for the nine month period ended September
30, 1999 from $9.1 million in the comparable period of 1998. This increase
resulted mainly from 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. The number of gross subscribers added in
the nine month period ended September 30, 1999 was approximately 54,800. The
number of gross subscribers added in the nine month period ended September 30,
1998 was approximately 43,900.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $.9 million, or 6.1%, to $15.6 million for the nine month period ended
September 30, 1999 from $14.7 million for the same period in 1998. This increase
year over year is a result of increased infrastructure costs such as customer
service, billing, collections and administrative costs as a result of our
overall growth. As a percentage of total operating revenue, general and
administrative costs decreased to 17.5% from 20.0% for the nine month
15
<PAGE>
period ended September 30, 1999 compared to the same period of 1998. In
addition, the Company's average monthly general and administrative costs per
subscriber decreased to $9 from $11 for the nine months ended September 30, 1999
and 1998. The decrease in general and administrative costs as a percentage of
revenue and per subscriber was a result of efficiencies gained from the
integration with our parent, Dobson Communications.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended September
30, 1999, depreciation and amortization expense increased $30.2 million, or
141.1% to $51.5 million in the nine months ended September 30, 1999 from $21.3
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 nine months ended September 30, 1999 compared to the same period
in 1998.
INTEREST EXPENSE. For the nine months ended September 30, 1999, interest
expense increased $27.0 million, or 124.8%, to $48.6 million in the nine months
ended September 30, 1999 from $21.6 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
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.
We completed an inventory of our automated systems and services and
identified significant risk areas by line of business, specific compliance
requirements and costs and estimated completion dates for affected systems. We
have had 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, whenever available.
We do not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, we have
historically relied on outsourcing relationships for most of our business and
operational support applications. 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 were to be included as a part of existing maintenance and/or service
agreements at no additional cost to us and were in place and tested by the end
of the second quarter of 1999. All critical systems relating to call delivery,
billing, accounting, payroll and
16
<PAGE>
customer care were fully 2000 compliant by the end of October 1999. There are
some non-critical systems that have yet to be replaced or upgraded for business
reasons. While these non-critical systems do not represent a threat to the
business, we will retire, upgrade or replace them by the end of 1999. The cost
of upgrading or replacing those systems that were not covered by existing
service or maintenance agreements was approximately $0.25 million. Our estimated
upgrade costs does not include the cost of upgrading and/ or replacing those
non-year 2000 compliant systems that were replaced or upgraded based on non-year
2000 related business reasons.
We will continue to analyze systems and services that utilize date-embedded
codes that may experience operational problems when year 2000 is reached. We
will continue communicating with third party vendors of systems software and
equipment, suppliers of telecommunications capacity and equipment, roaming
partners, customers and other with which we do business to coordinate year 2000
compliance. Our year 2000 contingency and business continuity plans are in
development and will be completed during the fourth quarter of 1999. If we are
unable to provide systems and services to our customers, because either our own
systems or those of our vendors are not year 2000 compliant, our reasonably
likely worst case scenario is that we would experience a reduction in our
operating revenues, which could adversely affect our ability to meet our
operating and financial obligations.
LIQUIDITY AND CAPITAL RESOURCES
We are a holding company with no direct operations and no significant assets
other than the stock of our subsidiaries. We depend on the cash flows of our
subsidiaries to meet our obligations, including our obligations to pay interest
and principal on our indebtedness. 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 September 30, 1999, we had working capital of $25.9 million (a ratio of
current assets to current liabilities of 2.2:1) and an unrestricted cash balance
of $1.8 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 $6.4 million for the nine
month period ended September 30, 1999, while the net cash provided by operating
activities totaled $13.5 million for the same period of 1998. The decrease of
$19.9 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 $11.1
million for the nine months ended September 30, 1999, and 1998, respectively
primarily increased as a result of capital expenditures for equipment related to
our acquisition of Sygnet Wireless, Inc.
Net cash provided by financing activities was $7.7 million the nine month
period ended September 30, 1999, while the net cash used in financing activities
was $2.9 million for the same period of 1998. Financing activity for the nine
months ended September 30, 1999 consisted primarily of $10.0 million of
maturities of restricted investments and proceeds from long-term debt of
$16.0 million offset by repayments of long-term debt totaling $17.0 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 September 30, 1999). The term of the interest rate swap
is 24 months.
17
<PAGE>
Our capital expenditures were $15.2 million for the nine months ended
September 30, 1999 and we expect our capital expenditures (excluding cost of
acquisitions) to be approximately $16 million for all of 1999. 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 September 30, 1999 we had $406.0 million outstanding under the facilities at
a weighted average interest rate of 8.7%. 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 interest at a 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
began 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, our financial condition at the time, the
restrictions in the instruments governing our 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.
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 instruments
and to raise additional capital; our ability to manage our rapid growth
successfully and to compete effectively in our cellular business against
competitors with greater financial, technical, marketing and other resources;
changes in end-user requirements and preferences; the development of other
technologies and products that may gain more commercial acceptance than 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
18
<PAGE>
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 nine months ended September 30, 1999 were
reflected in income and were immaterial.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. Based
on our market risk sensitive instruments outstanding at September 30, 1999, we
have determined that there was no material market risk exposure to our
consolidated financial position, results of operations or cash flows as of such
date.
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--Nine Months Ended September 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 15, 1999 DOBSON/SYGNET COMMUNICATIONS COMPANY
/s/ EVERETT R. DOBSON
--------------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 15, 1999
/s/ BRUCE R. KNOOIHUIZEN
--------------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,774,300
<SECURITIES> 0
<RECEIVABLES> 18,861,783
<ALLOWANCES> (640,958)
<INVENTORY> 3,672,980
<CURRENT-ASSETS> 46,960,779
<PP&E> 62,109,627
<DEPRECIATION> (7,862,137)
<TOTAL-ASSETS> 904,714,638
<CURRENT-LIABILITIES> 21,078,748
<BONDS> 604,250,000
0
0
<COMMON> 100
<OTHER-SE> 110,712,610
<TOTAL-LIABILITY-AND-EQUITY> 904,714,638
<SALES> 4,469,843
<TOTAL-REVENUES> 89,001,188
<CGS> 8,395,736
<TOTAL-COSTS> 97,443,438
<OTHER-EXPENSES> 8,442,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,576,054
<INCOME-PRETAX> (53,586,502)
<INCOME-TAX> (20,362,874)
<INCOME-CONTINUING> (33,223,628)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,223,628)
<EPS-BASIC> (332,236)
<EPS-DILUTED> (332,236)
</TABLE>
