<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
</TABLE>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<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. 000-29225
------------------------
DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 73-1513309
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
13439 NORTH BROADWAY EXTENSION 73114
SUITE 200 (Zip Code)
OKLAHOMA CITY, OKLAHOMA
(Address of principal executive offices)
</TABLE>
(405) 529-8500
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 2000, there were 93,137,353 shares of the registrant's $.001
par value common stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999..................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999......... 4
Condensed Consolidated Statements of Stockholders' Equity
for the Six Months Ended June 30, 2000.................... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999....................... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 2. Changes in Securities and Use of Proceeds................... 27
Item 3. Defaults Upon Senior Securities............................. 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 5. Other Information........................................... 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 170,298,120 $ 4,251,104
Restricted cash and investments........................... 22,735,000 22,919,339
Accounts receivable, net.................................. 76,304,343 52,355,414
Other current assets...................................... 14,588,652 12,636,268
-------------- --------------
Total current assets...................................... 283,926,115 92,162,125
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 268,071,213 208,567,577
-------------- --------------
OTHER ASSETS:
Receivables--affiliates................................... 9,398,205 8,257,403
Restricted investments.................................... 15,343,298 26,426,470
Cellular license acquisition costs, net................... 1,413,642,685 1,199,810,779
Deferred costs, net....................................... 81,060,761 67,492,378
Other intangibles, net.................................... 48,784,739 45,421,402
Investment in joint venture............................... 364,540,394 --
Other..................................................... 8,493,934 6,945,915
-------------- --------------
Total other assets...................................... 1,941,264,016 1,354,354,347
-------------- --------------
Total assets.......................................... $2,493,261,344 $1,655,084,049
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 61,490,059 $ 51,769,089
Accrued expenses.......................................... 19,573,660 14,419,170
Deferred revenue and customer deposits.................... 11,195,583 7,442,585
Current portion of long-term debt......................... 25,929,854 13,041,731
Accrued dividends payable................................. 12,051,086 24,672,246
-------------- --------------
Total current liabilities............................... 130,240,242 111,344,821
-------------- --------------
NET LIABILITIES OF DISCONTINUED OPERATIONS.................. -- 73,523,680
LONG-TERM DEBT, net of current portion...................... 1,468,934,845 1,055,815,604
DEFERRED CREDITS............................................ 176,559,973 207,991,241
MINORITY INTERESTS.......................................... 20,851,801 19,516,881
SENIOR EXCHANGEABLE PREFERRED STOCK, net.................... 486,746,129 455,721,875
CLASS D CONVERTIBLE PREFERRED STOCK......................... -- 85,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Preferred Stock................................... -- 314,286
Class A Common Stock, $.001 par value 175,000,000 and
160,250,720 shares authorized and 27,821,700 and
63,872,059 shares issued at June 30, 2000 and December
31, 1999, respectively.................................. 27,822 63,872
Class B Common Stock, $.001 par value 70,000,000 shares
authorized and 65,311,716 shares issued at June 30,
2000.................................................... 65,312 --
Class D Common Stock, $.001 par value 33,000 shares
authorized and 3,937 shares issued at June 30, 2000..... 4 --
Paid-in capital........................................... 613,851,316 18,234,773
Retained deficit.......................................... (404,016,100) (316,317,323)
-------------- --------------
209,928,354 (297,704,392)
Less--
Class A Common Stock held in treasury (9,048,705 shares), at
cost...................................................... -- (56,125,661)
-------------- --------------
Total stockholders' equity (deficit)...................... 209,928,354 (353,830,053)
-------------- --------------
Total liabilities and stockholders' equity (deficit).... $2,493,261,344 $1,655,084,049
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Service revenue........................................... $ 66,845,616 $ 51,097,106 $ 123,172,188 $ 96,966,188
Roaming revenue........................................... 55,527,372 35,207,947 99,324,652 63,305,157
Equipment revenue and other............................... 6,296,599 2,737,904 11,525,376 6,018,097
------------ ------------ ------------- ------------
Total operating revenues................................ 128,669,587 89,042,957 234,022,216 166,289,442
------------ ------------ ------------- ------------
OPERATING EXPENSES:
Cost of service........................................... 29,205,927 21,670,387 52,229,099 42,027,192
Cost of equipment......................................... 11,231,786 6,041,854 22,554,964 11,858,855
Marketing and selling..................................... 16,988,248 11,499,572 33,621,818 21,709,854
General and administrative................................ 17,884,736 13,253,896 33,911,821 26,067,555
Depreciation and amortization............................. 42,881,137 34,173,230 78,095,563 69,900,018
------------ ------------ ------------- ------------
Total operating expenses................................ 118,191,834 86,638,939 220,413,265 171,563,474
------------ ------------ ------------- ------------
OPERATING INCOME (LOSS):.................................... 10,477,753 2,404,018 13,608,951 (5,274,032)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (34,948,776) (27,168,431) (66,139,573) (55,528,311)
Other income, net......................................... 2,114,028 295,132 4,981,561 1,903,695
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES,
INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEMS..................................................... (22,356,995) (24,469,281) (47,549,061) (58,898,648)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES................ (1,236,398) (924,473) (2,297,051) (1,480,189)
LOSS FROM INVESTMENT IN JOINT VENTURE, net of income tax
benefit of $2,948,985 and $4,744,615 for the three and six
months ended June 30, 2000, respectively.................. (12,118,677) -- (17,959,607) --
------------ ------------ ------------- ------------
LOSS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEMS....................................... (35,712,070) (25,393,754) (67,805,719) (60,378,837)
INCOME TAX BENEFIT.......................................... 8,965,491 9,645,936 18,941,525 22,939,901
------------ ------------ ------------- ------------
LOSS FROM CONTINUING OPERATIONS............................. (26,746,579) (15,747,818) (48,864,194) (37,438,936)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax benefit
of $8,412,000 and $15,800,000 for the three and six months
ended June 30, 1999, respectively......................... -- (13,725,324) -- (25,778,997)
------------ ------------ ------------- ------------
LOSS BEFORE EXTRAORDINARY ITEMS............................. (26,746,579) (29,473,142) (48,864,194) (63,217,933)
EXTRAORDINARY EXPENSE, net of income tax benefit of
$12,495,341 for the six months ended June 30, 2000........ -- -- (20,387,134) --
------------ ------------ ------------- ------------
NET LOSS.................................................... (26,746,579) (29,473,142) (69,251,328) (63,217,933)
DIVIDENDS ON PREFERRED STOCK................................ (16,563,607) (17,756,107) (91,971,129) (31,871,955)
------------ ------------ ------------- ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................. $(43,310,186) $(47,229,249) $(161,222,457) $(95,089,888)
============ ============ ============= ============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
Before discontinued operations and extraordinary
expense................................................. $ (0.46) $ (0.61) $ (1.66) $ (1.26)
Discontinued operations................................... -- (0.25) -- (0.47)
Extraordinary expense..................................... -- -- (0.24) --
------------ ------------ ------------- ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE..................................................... $ (0.46) $ (0.86) $ (1.90) $ (1.73)
============ ============ ============= ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............ 93,532,473 54,823,354 84,985,029 54,823,354
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B CLASS D
PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
-------------------- ---------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- ----------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999............. 314,286 $ 314,286 63,872,059 $ 63,872 -- -- -- --
Net loss.................... -- -- -- -- -- -- -- --
Distribution of Logix....... -- -- -- -- -- -- -- --
Recapitalization............ (314,286) (314,286) (63,872,059) (63,872) 65,311,716 65,312
Issuance of common stock.... -- -- 27,821,700 27,822 -- -- 3,937 4
Preferred stock dividends... -- -- -- -- -- -- -- --
-------- --------- ----------- -------- ---------- ------- ----- --
June 30, 2000................. -- $ -- 27,821,700 $ 27,822 65,311,716 $65,312 3,937 $4
======== ========= =========== ======== ========== ======= ===== ==
<CAPTION>
TREASURY
PAID-IN STOCK RETAINED
CAPITAL AT COST DEFICIT
------------ ------------ -------------
<S> <C> <C> <C>
December 31, 1999............. $ 18,234,773 $(56,125,661) $(316,317,323)
Net loss.................... -- -- (69,251,328)
Distribution of Logix....... -- -- 73,523,680
Recapitalization............ 49,169,282 56,125,661 --
Issuance of common stock.... 546,447,261 -- --
Preferred stock dividends... -- -- (91,971,129)
------------ ------------ -------------
June 30, 2000................. $613,851,316 $ -- $(404,016,100)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations....................... $ (48,864,195) $ (37,438,936)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization........................... 78,095,563 69,900,018
Amortization of bond premium and financing cost......... 5,068,494 2,648,822
Deferred income taxes and investment tax credits, net... (18,935,927) (20,249,229)
Minority interests in income of subsidiaries............ 2,297,051 655,143
Loss from investment in joint venture................... 17,959,607 --
Other................................................... (13,054) 346,101
Changes in current assets and liabilities--
Accounts receivable..................................... (23,948,929) (11,058,146)
Other current assets.................................... (3,962,758) 1,503,129
Accounts payable........................................ 9,720,970 (5,321,012)
Accrued expenses........................................ 5,154,490 718,980
Deferred revenue and customer deposits.................. 3,752,998 882,219
------------- -------------
Net cash provided by operating activities............. 26,324,310 2,587,089
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (61,918,498) (31,180,901)
Acquisitions.............................................. (293,040,150) (27,278,079)
Investment in joint venture............................... (382,500,000) --
Decrease in payable--affiliate............................ -- (5,011,438)
Increase in receivables--affiliate........................ (1,140,802) (2,031,312)
Proceeds from sale of assets.............................. 2,268,042 1,103,509
Other investing activities................................ (2,191,574) (2,241,147)
------------- -------------
Net cash used in investing activities................. (738,522,982) (66,639,368)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,177,735,000 31,000,000
Repayments of long-term debt.............................. (751,727,636) (111,000,000)
Cash dividends............................................ -- (3,470,801)
Issuance of preferred stock............................... -- 170,000,000
Proceeds from equity offering............................. 545,365,158 --
Redemption of preferred stock............................. (53,295,725) (55,000,000)
Deferred financing costs.................................. (26,921,258) (7,375,582)
Premium on redemption of Senior Notes..................... (23,869,310) --
Maturities of restricted investments, net of interest..... 10,870,000 20,425,221
Other financing activities................................ 89,459 --
------------- -------------
Net cash provided by financing activities............. 878,245,688 44,578,838
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 166,047,016 (19,473,441)
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,251,104 22,323,734
------------- -------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 170,298,120 $ 2,850,293
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest, net of amounts capitalized.................. $ 58,216,133 $ 46,434,022
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES:
Conversion of Class D Preferred Stock to old Class A
Common Stock............................................ $ 58,200,000 $ --
Conversion of Class D Preferred Stock to Class E Preferred
Stock and old Class A Common Stock...................... $ 46,610,325 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated balance sheets of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of June 30, 2000, the condensed consolidated statements of operations for the
three and six months ended June 30, 2000 and 1999, the condensed consolidated
statement of stockholders' equity for the six months ended June 30, 2000 and the
condensed consolidated statements of cash flows for the six months ended
June 30, 2000 and 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, 1999 were derived from
audited financial statements, but do 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, 1999
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
1. ORGANIZATION
The Company, through its predecessors, was organized in 1936 as Dobson
Telephone Company and adopted its current organizational structure in 2000. The
Company is a provider of rural and suburban cellular telephone services.
Management of the Company completed a recapitalization of the Company
immediately prior to and in conjunction with its initial public offering of its
common stock on February 9, 2000. This recapitalization included:
- the conversion and redemption of its outstanding Class D preferred stock
and Class E preferred stock for cash and the issuance of old Class A
common stock;
- the conversion of old Class A common stock into Class B common stock;
- the creation of Class A common stock issued in the Company's initial
public offering;
- a 111.44 for 1 stock split of new Class B common stock;
- the retirement of the Company's Class A preferred stock; and
- the creation of a new Class D common stock to be issued upon the exercise
of options under the Company's amended 1996 option plan.
Subsequent to this recapitalization, the Company has outstanding only
Class A common stock, Class B common stock, Class D common stock, 12.25% senior
preferred stock and 13% senior preferred stock.
On February 9, 2000, the Company completed its initial public offering of
25 million shares of Class A common stock, and the sale of an additional
1.5 million shares of Class A common stock to AT&T Wireless, for net proceeds
(after commissions and expenses) of $545.4 million. The Company used
$53.3 million of the net proceeds to pay accrued dividends on its Class D
preferred stock and to redeem its Class E preferred stock. An additional
$382.5 million was used as a capital contribution to its joint venture with AT&T
Wireless which acquired American Cellular Corporation. The Company used the
balance of the net proceeds for working capital and other general corporate
purposes.
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS
RECENT ACQUISITIONS
On May 1, 2000, the Company completed the purchase of Texas 9 RSA for
approximately $125.0 million. Texas 9 RSA is located between Dallas/Fort Worth
and Abilene and adjoins the Company's Texas 10 property. It has population base
of approximately 190,000 and encompasses the towns of Brownwood, Stephenville,
Hamilton and Hillsboro.
On March 3, 2000, the Company completed the purchase of Michigan 10 RSA for
approximately $34.0 million. Michigan 10 RSA is located in the eastern portion
of the lower-peninsula of Michigan. The Michigan 10 market area, which is mostly
surrounded by Saginaw Bay and Lake Huron, has an estimated total population of
approximately 138,000.
On February 25, 2000, the Company and AT&T Wireless, through our
equally-owned joint venture, acquired American Cellular Corporation, ("American
Cellular"), for approximately $2.5 billion, including fees and expenses.
American Cellular's systems cover a total population of approximately
4.8 million. American Cellular serves markets in portions of Illinois, Kentucky,
Michigan, Minnesota, New York, Ohio, Pennsylvania, Tennessee, West Virginia and
Wisconsin.
On February 17, 2000, the Company completed the purchase of Alaska 1 RSA for
approximately $16.0 million. Alaska 1 is located in east central Alaska,
covering the Fairbanks area, with a population of approximately 113,000.
On February 11, 2000, the Company completed the purchase of Michigan 3 RSA
for approximately $97.0 million. This market is located in northwest Michigan
and has a total population of approximately 166,000.
On January 31, 2000, the Company completed the purchase of Alaska 3 RSA for
approximately $12.0 million. Alaska 3 is located in the southeast portion of
Alaska and has a total population of approximately 74,000.
On December 14, 1999, the Company purchased Pennsylvania 2 RSA for
$6.0 million. Pennsylvania 2 is located in Northwest Pennsylvania and covers an
estimated population base of 90,000.
On September 15, 1999, the Company purchased Arizona 1 RSA for
$24.0 million. Arizona 1 is located in the Northwest corner of the state and
covers an estimated population base of approximately 135,000 as of June 30,
2000.
On June 24, 1999, the Company's wholly-owned subsidiary, Dobson Cellular of
Maryland, purchased the Maryland 1 RSA for $9.1 million. Maryland 1 is located
in the westernmost county of the state and a small section of West Virginia and
covers an estimated population base of approximately 56,400.
On June 1, 1999, the Company completed the purchase of certain assets and
customers relating to the Texas 10 RSA. This completed the acquisition of the
Texas 10 market, which began on December 2, 1998, when the Company acquired the
FCC license of Texas 10 RSA for $55.0 million. Texas 10 is located in central
Texas and covers an estimated population of 317,900.
On March 16, 1999, the Company purchased certain assets and customers
relating to the Ohio 2 RSA for $3.9 million. This completes the acquisition of
the Ohio 2 market, which began on September 2, 1998,
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
when the Company acquired the FCC license of Ohio 2 RSA for $39.3 million. Ohio
2 is located in north central Ohio and covers an estimated population of 262,300
people.
The acquisition transactions were accounted for as purchases, and
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes all
acquisitions, which occurred during 1999 and 2000, as if the purchases occurred
at the beginning of each period presented. The unaudited pro forma information
is presented for informational purposes only and is not necessarily indicative
of the results of operations that actually would have been achieved had the
acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue.................. $129,921 $105,111 $ 242,993 $ 199,180
Net loss........................... (27,290) (37,666) (75,710) (86,006)
Net loss applicable to common
stockholders..................... (43,854) (55,422) (167,681) (117,878)
Basic net loss applicable to common
stockholders per common share.... $ (0.47) $ (0.59) $ (1.79) $ (1.26)
</TABLE>
PENDING ACQUISITIONS
On June 14, 2000, the Company entered into a definitive agreement to acquire
the FCC license for and certain assets related to the Oklahoma 6 RSA for
approximately $72.0 million, subject to adjustment. This acquisition is subject
to FCC approval, compliance with requirements of the Hart-Scott-Rodino Act and
customary closing conditions. The total population base for the Oklahoma 6 RSA
is approximately 221,000. The Oklahoma 6 RSA covers seven counties in central
and eastern Oklahoma, including the cities of Henryetta, McAlester, Muskogee,
Okmulgee and Seminole. The Company's acquisition of Oklahoma 6 is expected to
close in the third quarter of 2000.
3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
The Company owns a 50% interest in American Cellular Corporation. This
investment is accounted for on the equity method. The following is a summary of
the significant financial information for American
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP (CONTINUED)
Cellular as of and for the three months ended June 30, 2000 and the period from
inception, February 25, 2000 to June 30, 2000:
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY
THREE MONTHS ENDED 25, 2000, TO JUNE 30,
JUNE 30, 2000 2000
------------------ ---------------------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C>
Revenue................................ $ 98,746 $ 127,624
Operating income....................... 8,452 7,233
Net loss............................... (24,237) (35,886)
<CAPTION>
JUNE 30, 2000
---------------------
($ IN THOUSANDS)
<S> <C> <C>
Current assets............................................. $ 59,795
Intangible assets.......................................... 2,488,646
Other assets............................................... 174,896
Current liabilities........................................ 83,319
Long-term debt............................................. 1,644,375
Other liabilities.......................................... 266,528
Shareholders' equity....................................... 729,114
</TABLE>
4. DISCONTINUED OPERATIONS
On January 24, 2000, the Company distributed the stock of its former
subsidiary, Logix Communications Enterprises, Inc ("Logix"), to certain of the
Company's shareholders. Logix' operating results through the date of the
spin-off on January 24, 2000, was reported as a loss from discontinued
operations in the Company's consolidated financial statements at December 31,
1999. Therefore, beginning in January 2000, the Company no longer included the
operating results of Logix in its financial results.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," the consolidated financial statements have been restated for all
periods presented to reflect the Logix operations, assets and liabilities as
discontinued operations. The assets and liabilities of such operations have been
classified as "Net liabilities of
10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. DISCONTINUED OPERATIONS (CONTINUED)
discontinued operations" on the December 31, 1999 consolidated balance sheet and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
($ IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 672
Restricted investments--current............................. 40,079
Other current assets........................................ 28,152
Property, plant and equipment, net.......................... 121,136
Restricted investments--non-current......................... 21,062
Goodwill.................................................... 121,280
Other assets................................................ 75,557
--------
Total assets............................................ 407,938
Current liabilities......................................... 36,540
Long-term debt, net of current portion...................... 438,330
Other liabilities........................................... 6,592
--------
Total liabilities....................................... 481,462
--------
Net liabilities of discontinued operations.................. $(73,524)
========
</TABLE>
The net loss from operations of the wireline segment was classified on the
condensed consolidated statement of operations as "Loss from discontinued
operations." Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Net revenues............................. $ 28,187 $ 54,979
Loss before income taxes................. (22,137) (41,579)
Income tax benefit....................... 8,412 15,800
Loss from discontinued operations........ $(13,725) $(25,779)
</TABLE>
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Revolving credit facilities.................. $ 993,137,500 $ 705,000,000
Dobson/Sygnet Senior Notes................... 200,000,000 200,000,000
DCC 10 7/8% Senior Notes, net of discount.... 297,735,000 --
DCC 11 3/4% Senior Notes..................... 340,000 160,000,000
Other notes payable.......................... 3,652,199 3,857,335
-------------- --------------
Total debt................................. 1,494,864,699 1,068,857,335
Less--Current maturities..................... 25,929,854 13,041,731
-------------- --------------
Total long term debt....................... $1,468,934,845 $1,055,815,604
============== ==============
</TABLE>
REVOLVING CREDIT FACILITIES
The Company's revolving credit facilities consist of the following:
<TABLE>
<CAPTION>
AMOUNT INTEREST RATE
MAXIMUM OUTSTANDING AT WEIGHTED AVERAGE RATE
CREDIT FACILITY AVAILABILITY JUNE 30, 2000 AT JUNE 30, 2000(1)
--------------- ------------ -------------- ---------------------
<S> <C> <C> <C>
Dobson/Sygnet Credit Facilities.... $388,200,000 $364,200,000 9.7%
DOC LLC Credit Facility............ 923,937,500 628,937,500 9.0%
</TABLE>
------------------------
(1) Weighted average computation is based on actual interest rates without
giving effect to the interest rate hedge discussed below.
On January 14, 2000, the Company obtained an $800.0 million credit facility
and increased it by $125.0 million to $925.0 million on May 1, 2000. The
original proceeds from the $800.0 million credit facility were used primarily
to:
- consolidate the indebtedness of Dobson Cellular Operations Company, a
subsidiary, under a $160.0 million credit facility and Dobson Operating
Company, a subsidiary, under a $250.0 million senior secured credit
facility;
- repurchase $159.7 million outstanding principal amount of the Company's
11.75% senior notes due 2007; and
- pay the cash portion of the costs of certain of the Company's pending
acquisitions.
The increase of $125.0 million was used to fund the acquisition of
Texas 9 RSA on May 1, 2000.
At June 30, 2000, this credit facility included a $300.0 million revolving
credit facility and $623.9 million of term loan facilities consisting of a Term
A Facility of $350.0 million, a Term B Facility of $149.2 million and an
additional Term B Facility of $124.7 million (collectively the "DOC LLC Credit
Facility"). All of these loans will mature by 2008.
This credit facility is structured as a loan to the Company's subsidiary,
Dobson Operating Co., L.L.C., the successor by merger to Dobson Cellular
Operating Company and Dobson Operating Company, with
12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
guarantees from certain of its subsidiaries and the Company. Advances bear
interest, at the Company's option, on a prime rate or LIBOR formula. The
Company's obligations under the credit facility are secured by:
- a pledge of the membership interests in the borrower;
- stock and partnership interests of certain of the borrower's subsidiaries;
and
- liens on substantially all of the assets of the borrower and the
borrower's restricted subsidiaries including FCC licenses, but only to the
extent such licenses can be pledged under applicable law.
The Company is required to amortize the Term A Facility with quarterly
principal payments of $5.0 million commencing June 30, 2001, increasing over the
term of the loan to quarterly principal payments of $25.0 million. The Company
is required to amortize the Term B Facility with quarterly principal payments of
$375,000 from March 31, 2000 through December 31, 2006 and with quarterly
principal payments of $34.9 million during 2007. The Company is required to
amortize the additional $125.0 million portion of the Term B Facility with
quarterly principal payments of $312,500 from June 30, 2000, through March 31,
2007 and with quarterly principal payments of $29.1 million from June 30, 2007
through March 31, 2008. In addition, under certain circumstances, the Company is
required to make prepayments of proceeds received from significant asset sales,
new borrowings and sales of equity, other than this offering, and a portion of
excess cash flow. The Company has the right to prepay the credit facility in
whole or in part at any time.
The Company's new credit facility imposes a number of restrictive covenants
that, among other things, limit the Company's ability to incur additional
indebtedness, create liens, make capital expenditures and pay dividends.
The Company's subsidiary, Sygnet Wireless, Inc., is a party to a credit
agreement for an aggregate of $388.2 million, consisting of a $46.0 million
revolving credit facility and $342.2 million of term loan facilities
(collectively the "Sygnet credit facilities"). Interest on the revolving credit
facility and the term loan facilities is based on a prime rate or a LIBOR
formula, and has ranged between 8.3% and 9.7% since inception. As of June 30,
2000, the Company had $364.2 million outstanding under the Sygnet credit
facilities and the Company had $24.0 million of availability under the Sygnet
credit facilities.
The obligations under the Sygnet credit facilities are secured by a pledge
of the capital stock of Dobson/Sygnet's operating subsidiary as well as a lien
on substantially all of the assets of Dobson/Sygnet and its operating
subsidiary. The Sygnet credit facilities require that Dobson/Sygnet and the
Company maintain certain financial ratios. The failure to maintain these ratios
would constitute an event of default, notwithstanding Dobson/Sygnet's ability to
meet its debt service obligations. The Sygnet credit facilities amortize
quarterly beginning on December 31, 2000. The $46.0 million revolving credit
facility terminates on September 23, 2006. The $342.2 million term loans
terminate on December 23, 2007.
DOBSON/SYGNET SENIOR NOTES
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, issued
$200 million of 12.25% Senior Notes maturing in 2008 ("Dobson/Sygnet Senior
Notes"). The net proceeds were used to finance the Sygnet Acquisition in
December 1998 and to purchase $67.7 million of securities pledged to secure
payment of the first six semi-annual interest payments on the Dobson/Sygnet
Senior Notes, which began on
13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
June 15, 1999. The pledged securities are reflected as restricted cash and
investments in the Company's consolidated balance sheets. The Dobson/Sygnet
Senior Notes are redeemable at the option of the Company in whole or in part, on
or after December 15, 2003, initially at 106.125%. Prior to December 15, 2001,
the Company may redeem up to 35% of the principal amount of the Dobson/Sygnet
Senior Notes at 112.25% with proceeds from equity offerings, provided that at
least $130 million remains outstanding.
SENIOR NOTES
On June 15, 2000, the Company issued $300 million principal amount of
10 7/8% Senior Notes maturing on July 1, 2010. The Company used $204.0 million
of the net proceeds to pay down the DOC LLC credit facility. The company intends
to use the balance of the net proceeds for working capital and other general
corporate purposes. The Notes are redeemable, at any time. In addition, the
Company may redeem up to 35% of the Notes before July 1, 2003 with the net cash
proceeds from certain equity offerings.
OTHER NOTES PAYABLE
Other notes payable represents the amount financed with the United States
Government for nine PCS licenses. The Company has entered into a definitive
agreement to sell the Company's nine PCS licenses for $1.1 million plus the
assumption of these notes payable.
INTEREST RATE HEDGES
The Company pays interest on its Bank Credit Facilities based on a variable
factor, such as LIBOR or prime rate. The Company will from time to time enter
into derivative contracts to reduce exposure against rising interest rates.
The Company has entered into a $135 million derivative contract on the DOC
LLC Credit Facility whereby the interest rate on $135 million of the facility
ranges from a cap of 8.5% to a floor of 7.0% plus a factor based on DOC LLC's
leverage (total rate of approximately 9.7% at June 30, 2000). The agreement
expires March, 2002. Additionally, the Company has entered into a $165 million
derivative contract on the DOC LLC Credit Facility whereby the interest rate on
$165 million of the facility has a cap of 8.5% plus a factor based on DOC LLC's
leverage (total rate of approximately 9.0% at June 30, 2000). The agreement
expires March 2002. DOC LLC also has an interest rate cap agreement of
$160 million that expires in June 2001. Under this agreement the maximum rate
the Company will pay on the $160 million of its DOC LLC facility is 7.5% plus a
factor based on the Company's leverage (total rate of approximately 9.0% at
June 30, 2000).
The Company has entered into a $110 million interest rate swap agreement
under the Sygnet credit facility which caps the interest rate on $110 million of
the facility at 5.48% plus a factor based on Dobson/ Sygnet's leverage (total
rate of approximately 8.8% at June 30, 2000). The agreement expires in
March 2001.
14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. STOCKHOLDERS' EQUITY:
The Company issued preferred stock dividends of $92.0 million for the six
months ended June 30, 2000 consisting of approximately $31.6 million of
dividends on its 12.25% and 13% Senior Exchangeable Preferred Stock through the
issuance of additional shares of such Preferred Stock and $60.4 million of
dividends on their previous Class D and Class E shares of Preferred Stock.
As of June 30, 2000, the Company's authorized and outstanding capital stock
is as follows:
<TABLE>
<CAPTION>
PAR VALUE LIQUIDATION
# OF SHARES # OF SHARES PER PREFERENCE REDEMPTION
CLASS TYPE AUTHORIZED ISSUED SHARE DIVIDENDS PER SHARE DATE
----- --------------- ----------- ----------- --------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A.............. Common Stock 175,000,000 27,821,700 $.001 As declared -- --
Class B.............. Common Stock 70,000,000 65,311,716 $.001 As declared -- --
Class C.............. Common Stock 4,226 -- $.001 As declared -- --
Class D.............. Common Stock 33,000 3,937 $.001 As declared -- --
----------- ----------
245,037,226 93,137,353
----------- ----------
Senior Exchangeable.. Preferred Stock 734,000 305,789 $1.00 12.25% Cumulative $1,000 Jan. 15, 2008
Senior Exchangeable.. Preferred Stock 500,000 193,336 $1.00 13% Cumulative $1,000 May 1, 2009
Class E.............. Preferred Stock 40,000 -- $1.00 15% Cumulative $1,131.92 After Dec. 23,
2010
Other................ Preferred Stock 4,726,000 -- $1.00 -- -- --
----------- ----------
6,000,000 499,125
----------- ----------
<CAPTION>
OTHER
FEATURES,
RIGHTS,
PREFERENCES
AND
CLASS POWERS
----- -----------
<S> <C>
Class A.............. Voting
Class B.............. Voting
Class C.............. Voting
Class D.............. Voting
Senior Exchangeable.. Non-voting
Senior Exchangeable.. Non-voting
Class E.............. Non-voting
Other................ --
</TABLE>
Each share of the Company's Class D common stock is convertible into 111.44
shares of Class A common stock at the option of the holder. Due to this
conversion feature, the Company's calculation of its weighted average common
shares outstanding is performed on an as converted basis, as discussed in
Note 8 below.
The Company adopted the 2000 stock incentive plan on January 10, 2000. The
maximum number of shares for which the Company may grant options under the plan
is 4,000,000 shares of post recapitalization Class A common stock, subject to
adjustment in the event of any stock dividend, stock split, recapitalization,
reorganization or certain defined change of control events. On May 10, 2000, the
Company granted options to purchase approximately 2,260,000 shares of common
stock under this 2000 stock incentive plan. Shares subject to previously
expired, cancelled, forfeited or terminated options become available again for
grants of options. The shares that the Company will issue under the plan will be
newly issued shares.
7. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of interest pledge deposits for the
Dobson/Sygnet Senior Notes. The Dobson/Sygnet Senior Notes interest pledge
deposit of approximately $35.4 million includes the initial deposit of
$67.7 million, net of interest earned and payments issued to bondholders.
Amortization expense of $288,310 and $431,358 was recorded for the six months
ended June 30, 2000 and 1999, respectively, for bond premiums recorded with the
purchase of the restricted investments.
15
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. EARNINGS PER COMMON SHARE
The Company's Class D common stock is convertible into 111.44 shares of
Class A common stock at the option of the holder. Due to this conversion
feature, basic loss per common share is computed by the weighted average number
of shares of common stock outstanding on an as converted basis for the period
described. Diluted net loss per common share has been omitted because the impact
of stock options and convertible preferred stock on the Company's net loss per
common share is anti-dilutive.
9. RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133, as amended by SFAS 137,
Derivatives and Hedging-Deferral of the Effective Date of FASB Statement
No. 133, will be effective for fiscal years beginning after June 15, 2000. In
addition, SFAS 138, was issued in June 2000 as an amendment to SFAS 133 and
addresses issues causing implementation difficulties. Under SFAS 133, the
Company would record an asset of $1.4 million relating to its interest rate
hedge valuation at June 30, 2000. The Company has not determined the timing or
method of adoption of SFAS 133.
10. COMMITMENTS
Effective December 6, 1995 (as amended through June 30, 2000), the Company
entered into an equipment supply agreement in which the Company agreed to
purchase approximately $215.0 million of cell site and switching equipment
between June 24, 1997 and December 31, 2002 to update the cellular systems for
newly acquired and existing MSAs and RSAs. Of this commitment, approximately
$112.7 million remained at June 30, 2000.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1998 (as amended through April 13, 2000). The
Company agreed to purchase approximately $131.0 million of cell site and
switching equipment between January 13, 1998 and January 12, 2002 to update the
cellular systems for newly acquired and existing MSAs and RSAs. Of this
commitment, $60.7 million remained at June 30, 2000.
11. RECLASSIFICATIONS
Certain items have been reclassified in the 1999 consolidated financial
statements to conform to the current presentation.
12. SUBSEQUENT EVENT
On July 27, 2000, the Company entered into a definitive agreement to acquire
the FCC cellular license and certain assets related to the Georgia 1 RSA for
approximately $65.0 million, subject to adjustment. Approximately 30 percent of
the purchase price will be paid in Dobson common stock, with the remainder paid
in cash. Completion of the transaction is subject to customary closing
conditions and approvals by regulatory agencies. The Company expects to complete
the acquisition by the end of the year. Georgia 1 covers eight counties in north
and central Georgia, and covers an estimated population base of approximately
237,000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We provide rural and suburban cellular telephone services. We began
providing cellular telephone service in 1990 in Oklahoma and the Texas
Panhandle. We have expanded our cellular operations rapidly since then,
primarily through acquisitions. As of June 30, 2000, our cellular systems
covered a total population of approximately 6.6 million and we had 556,700
subscribers.
On February 25, 2000, our equally-owned joint venture with AT&T Wireless
acquired American Cellular for approximately $2.5 billion, including fees and
expenses. As of June 30, 2000, American Cellular's systems covered a total
population of approximately 4.9 million and had 488,500 subscribers, primarily
in rural areas of the midwestern and eastern United States. We account for our
interest in the American Cellular joint venture using the equity method of
accounting. On May 30, 2000, we entered into an agreement with AT&T Wireless,
Inc. to expand the operations of the joint venture into northeastern Oklahoma
and several adjacent counties in Kansas. Under this agreement AT&T will
contribute PCS licenses to the joint venture, and we will contribute
$16.4 million in cash.
Since 1996 we have completed 20 acquisitions of cellular licenses and
systems and related assets for an aggregate purchase price of $2.4 billion,
including 50% of the purchase price of American Cellular, increasing the total
proportionate population served by our systems to approximately 9.0 million. Our
recent acquisitions affect the comparability of our historical results of
operations for the periods discussed.
REVENUE
Our cellular revenues consist of service, roaming and equipment sales and
other revenues. There has been an industry trend of declining average revenue
per minute, as competition among service providers has led to reductions in
rates for airtime and subscriptions and other charges. We believe that the
impact of this trend will be mitigated by increases in the number of cellular
telecommunications subscribers and the number of minutes of usage per
subscriber. There has also been a broad trend in the cellular telecommunications
industry of declining average revenue per subscriber. We believe that the
downward trend is primarily the result of the addition of new lower usage
customers who utilize cellular services for personal convenience, security or as
a backup for their traditional landline telephone as well as declining average
revenues per minutes of use.
Roaming revenues are revenues we derive from providing service to
subscribers of other wireless providers when those subscribers "roam" into our
markets and use our systems to carry their calls. Roaming accounted for 43.2%,
39.5%, 42.4%, and 38.1% of our operating revenue for the three months ended
June 30, 2000 and 1999 and the six months ended June 30, 2000 and 1999,
respectively. Roaming revenues typically yield higher average per minute rates
and higher margins than revenues from our subscribers. We achieve these higher
margins because we incur immaterial incremental costs related to equipment,
customer service or collections to earn roaming revenues.
Our overall cellular penetration rates increased for the six-month period
ended June 30, 2000 compared to the same period in 1999 due to the incremental
penetration gains in existing markets. We believe that as our cellular
penetration rates increase, the increase in new subscriber revenue will exceed
the loss of revenue attributable to the customer churn rate.
We include any toll, or long-distance, revenues related to our cellular and
roaming services in service revenues and roaming revenues. Our roaming yield
(roaming service revenues, which include airtime, toll charges and surcharges,
divided by roaming minutes of use) was $.43, $.49, $.43, and $.53 per minute for
the three months ended June 30, 2000 and 1999 and the six months ended June 30,
2000 and 1999, respectively. Despite the decline in our roaming yield, we have
seen overall roaming revenues grow due to growth in roaming minutes of use.
17
<PAGE>
We derive revenues from charges to our subscribers when those subscribers
roam into other wireless providers' markets. Through 1999, our accounting
practice was to net those revenues against the associated expenses charged to us
by third-party wireless providers (that is, the fees we pay the other wireless
providers for carrying our subscribers' calls on their network) and to record
the net expense as cost of service. Historically, we have been able to pass
through to our subscribers the majority of the costs charged to us by
third-party wireless providers. Recently, the industry has been increasing the
use of pricing plans that include flat rate pricing and larger home areas. Under
these types of plans, amounts charged to us by other wireless providers may not
necessarily be passed through to our subscribers. Therefore, we have changed our
accounting procedures to report these revenues and expenses separately in our
statements of operations and have reclassified prior year amounts to reflect
this change in accounting.
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 when our
subscribers roam into their markets.
Our cost of equipment represents the cost associated with telephone
equipment and accessories sold to customers. In recent years, we and other
cellular providers, have increased the use of discounts on phone equipment and
free phone promotions, as competition between service providers has intensified.
As a result, we have incurred, and expect to continue to incur, losses on
equipment sales, which have resulted in increased marketing and selling costs
per gross additional subscriber. While we expect to continue these discounts and
promotions, we believe that the use of such promotions will result in increased
revenue from increases in the number of cellular subscribers.
Our marketing and selling costs include advertising, compensation paid to
sales personnel and independent agents and all other costs to market and sell
cellular products and services and costs related to customer retention. We pay
commissions to direct sales personnel for new business generated. Independent
sales agents receive commissions for generating new sales and ongoing sales to
existing customers.
Our general and administrative costs include all infrastructure costs such
as customer support, billing, collections, and corporate administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
DISCONTINUED OPERATIONS
On January 24, 2000, we distributed the stock of our former subsidiary,
Logix Communications Enterprises, Inc. to certain of our shareholders. Logix is
accounted for as a discontinued operation in our consolidated financial
statements.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statement numbers.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999
OPERATING REVENUE. For the three months ended June 30, 2000, total
operating revenue increased $39.7 million, or 44.5%, to $128.7 million from
$89.0 million for the comparable period in 1999. Total
18
<PAGE>
service, roaming and equipment sales and other revenue represented 51.9%, 43.2%
and 4.9%, respectively, of total operating revenue during the three months ended
June 30, 2000 and 57.4%, 39.5% and 3.1%, respectively, of total operating
revenue during the three months ended June 30, 1999.
The following table sets forth the components of our operating revenue for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue.......................................... $ 66,846 $51,097
Roaming revenue.......................................... 55,527 35,208
Equipment sales and other................................ 6,297 2,738
-------- -------
Total.................................................. $128,670 $89,043
======== =======
</TABLE>
Service revenue increased $15.7 million, or 30.8%, to $66.8 million in the
three months ended June 30, 2000 from $51.1 million in the same period of 1999.
In the second quarter of 2000, service revenue of $9.3 million was attributable
to markets acquired since June 30, 1999. The remaining increase of $6.4 million
was primarily attributable to increased penetration and usage in the existing
company markets. Our subscriber base increased 38.6% to 556,700 at June 30, 2000
from 401,700 at June 30, 1999. At June 30, 2000, the subscriber base for markets
we acquired since June 30, 1999 totaled approximately 70,100. Our average
monthly service revenue per subscriber decreased 6.8% to $41 for the three
months ended June 30, 2000 from $44 for the comparable period in 1999 due to the
addition of new lower rate subscribers and competitive market pressures.
Roaming revenue increased $20.3 million, or 57.7%, to $55.5 million in the
three months ended June 30, 2000 from $35.2 million for the comparable period of
1999. In the second quarter of 2000, roaming revenue of $10.8 million was
attributable to markets acquired since June 30, 1999. The remaining increase of
$9.5 million was primarily attributable to increased roaming minutes in our
existing markets due to expanded coverage areas and increased usage in these
markets.
Equipment sales and other revenue of $6.3 million in the three months ended
June 30, 2000 represented an increase of $3.6 million, or 130.0%, from
$2.7 million in the same period of 1999, as we sold more equipment during the
three months ended June 30, 2000 as a result of growth in subscribers.
COST OF SERVICE. For the three months ended June 30, 2000, the total cost
of service increased $7.5 million, or 34.8% to $29.2 million from $21.7 million
for the comparable period in 1999. This increase was primarily attributable to
the increased number of subscribers. As a percentage of service and roaming
revenue, cost of cellular service decreased to 23.9% for the three months ended
June 30, 2000 from 25.1% for the same period in 1999. This decrease was
primarily a result of a reduction in rates charged by third-party cellular
providers for providing service to the our subscribers.
COST OF EQUIPMENT. For the three months ended June 30, 2000, cost of
equipment increased $5.2 million, or 85.9% to $11.2 million during 2000 from
$6.0 million in the same period of 1999, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$5.5 million, or 47.7%, to $17.0 million for the three month period ended
June 30, 2000 from $11.5 million in the comparable period of 1999. This was
primarily a result of an increase in gross subscriber adds. The number of gross
subscribers added in the second quarter of 2000 was approximately 51,500. The
number of gross subscribers added in the second quarter 1999 was approximately
40,600.
19
<PAGE>
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $4.6 million, or 34.9%, to $17.9 million for the three month period
ended June 30, 2000 from $13.3 million for the same period in 1999. 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. However, our average monthly general and administrative
costs per subscriber remained constant at $11 for the three months ended
June 30, 2000 and 1999.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended June 30,
2000, depreciation and amortization expense increased $8.7 million, or 25.5% to
$42.9 million from $34.2 million in the same period of 1999. The increase is a
result of depreciation and amortization on assets that were acquired during the
second half of 1999 and the first six months of 2000.
INTEREST EXPENSE. For the three months ended June 30, 2000, interest
expense increased $7.7 million, or 28.6%, to $34.9 million from $27.2 million in
the same period of 1999. The increase was primarily a result of increased
borrowings to finance our acquisitions.
OTHER INCOME (EXPENSE), NET. For the three months ended June 30, 2000, our
other income increased $1.8 million, or 616.3%, to $2.1 million from
$0.3 million for the comparable 1999 period. The increase was primarily the
result of an increase in interest income that we earned on excess proceeds from
our initial public offering.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the three months ended
June 30, 2000, our minority interests in income of subsidiaries increased
$0.3 million or 33.7% to $1.2 million from $0.9 million in the same period of
1999. This was a result of the increased income earned from subsidiaries in
established markets in which we do not own a 100% interest.
LOSS FROM INVESTMENT IN JOINT VENTURE. For the three months ended June 30,
2000, we incurred a loss, net of income tax benefits, from our American Cellular
joint venture totaling $12.1 million. This loss represents our fifty-percent
ownership in American Cellular for the quarter ended June 30, 2000.
LOSS FROM DISCONTINUED OPERATIONS. For the three months ended June 30,
1999, our loss, net of income tax benefits, from discontinued operations totaled
$13.7 million. As previously discussed, we distributed the capital stock of
Logix to our current stockholders on January 24, 2000, and will no longer
include Logix' financial results in our consolidated operations.
NET LOSS. For the three months ended June 30, 2000, our net loss was
$26.7 million. Our net loss decreased $2.8 million, or 9.3%, from $29.5 million
in the three months ended June 30, 1999. The decrease in our net loss is
primarily attributable to our increase in operating income and the spin off of
our discontinued operations offset by the loss from investment in our joint
venture and our increase in interest expense resulting from our 1999 and 2000
business acquisitions and financings.
DIVIDENDS ON PREFERRED STOCK. For the three months ended June 30, 2000, our
dividends on preferred stock decreased $1.2 million, or 6.7%, to $16.6 million
from $17.8 million for the comparable 1999 period.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
OPERATING REVENUE. For the six months ended June 30, 2000, total operating
revenue increased $67.7 million, or 40.7%, to $234.0 million from
$166.3 million for the comparable period in 1999. Total service, roaming and
equipment sales and other revenue represented 52.6%, 42.5% and 4.9%,
respectively, of total operating revenue during the six months ended June 30,
2000 and 58.3%, 38.1% and 3.6%, respectively, of total operating revenue during
the six months ended June 30, 1999.
20
<PAGE>
The following table sets forth the components of our operating revenue for
the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue......................................... $123,172 $ 96,966
Roaming revenue......................................... 99,325 63,305
Equipment sales and other............................... 11,525 6,018
-------- --------
Total............................................... $234,022 $166,289
======== ========
</TABLE>
Service revenue increased $26.2 million, or 27.0%, to $123.2 million in the
six months ended June 30, 2000 from $97.0 million in the same period of 1999. In
the six months ended June 30, 2000, service revenue of $14.2 million was
attributable to markets acquired since June 30, 1999. The remaining increase of
$12.0 million was primarily attributable to increased penetration and usage in
the existing company markets. Our subscriber base increased 38.6% to
approximately 556,700 at June 30, 2000 from approximately 401,700 at June 30,
1999. At June 30, 2000, the subscriber base for markets we acquired since
June 30, 1999 totaled approximately 70,100. Our average monthly service revenue
per subscriber decreased 7.0% to $40 for the six months ended June 30, 2000 from
$43 for the comparable period in 1999 due to the addition of new lower rate
subscribers and competitive market pressures.
Roaming revenue increased $36.0 million, or 56.9%, to $99.3 million in the
six months ended June 30, 2000 from $63.3 million for the comparable period of
1999. In the six months ended June 30 2000, roaming revenue of $18.2 million was
attributable to markets acquired since June 30, 1999. The remaining
$17.8 million was primarily attributable to increased roaming minutes in our
existing markets due to expanded coverage areas and increased usage in these
markets.
Equipment sales and other revenue of $11.5 million in the six months ended
June 30, 2000 represented an increase of $5.5 million, or 91.5%, from
$6.0 million in the same period of 1999, as we sold more equipment during the
six months ended June 30, 2000 as a result of growth in subscribers.
COST OF SERVICE. For the six months ended June 30, 2000, the total cost of
service increased $10.2 million, or 24.3% to $52.2 million from $42.0 million
for the comparable period in 1999. This increase was primarily attributable to
the increased number of subscribers. As a percentage of service and roaming
revenue, cost of cellular service decreased to 23.5% for the six months ended
June 30, 2000 from 26.2% for the same period in 1999. This decrease was
primarily a 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, 2000, cost of
equipment increased $10.7 million, or 90.2% to $22.6 million during 2000 from
$11.9 million in the same period of 1999, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$11.9 million, or 54.9%, to $33.6 million for the six month period ended
June 30, 2000 from $21.7 million in the comparable period of 1999. This was
primarily a result of an increase in gross subscriber additions. The number of
gross subscribers added in the six months ended June 30, 2000 was 109,500. The
number of gross subscribers added in the six months ended June 30, 1999 was
75,700.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $7.8 million, or 30.1%, to $33.9 million for the six month period
ended June 30, 2000 from $26.1 million for the same period in 1999. 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. However, our average monthly
21
<PAGE>
general and administrative costs per subscriber remained constant at $11 for the
six months ended June 30, 2000 and 1999. The decrease in general and
administrative costs per subscriber is a result of efficiencies gained from the
integration of acquired companies.
DEPRECIATION AND AMORTIZATION EXPENSE. For the six months ended June 30,
2000, depreciation and amortization expense increased $8.2 million, or 11.7% to
$78.1 million from $69.9 million in the same period of 1999. This increase is a
result of depreciation and amortization on assets that were acquired during
2000.
INTEREST EXPENSE. For the six months ended June 30, 2000, interest expense
increased $10.6 million, or 19.1%, to $66.1 million from $55.5 million in the
same period of 1999. The increase was primarily a result of increased borrowings
to finance our acquisitions.
OTHER INCOME (EXPENSE), NET. For the six months ended June 30, 2000, our
other income increased $3.1 million, or 161.7%, to $5.0 million from
$1.9 million for the comparable 1999 period. The increase was primarily the
result of an increase in interest income that we earned on excess proceeds from
our initial public offering.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the six months ended
June 30, 2000, our minority interests in income of subsidiaries increased
$0.8 million or 55.2% to $2.3 million from $1.5 million in the same period of
1999. This was a result of the increased income earned from subsidiaries in
which we do not own a 100% interest.
LOSS FROM INVESTMENT IN JOINT VENTURE. For the six months ended June 30,
2000, we incurred a loss, net of income tax benefits, from our American Cellular
joint venture totaling $18.0 million. This loss represents our fifty- percent
ownership in American Cellular for the period from acquisition (February 25,
2000) to June 30, 2000.
LOSS FROM DISCONTINUED OPERATIONS. For the six months ended June 30, 1999,
our loss, net of income tax benefits, from discontinued operations totaled
$25.8 million. As previously discussed, we distributed the capital stock of
Logix to our current stockholders on January 24, 2000, and will no longer
include Logix' financial results in our consolidated operations.
EXTRAORDINARY ITEM. For the six months ended June 30, 2000, we incurred an
extraordinary loss of $20.4 million, net of income tax benefits. This loss was a
result of a tender premium paid on the early redemption of the Company's 11.75%
Senior Notes and the writing off of previously capitalized financing costs
associated with the 11.75% Senior Notes and the previous DOC and DCOC credit
facilities which were refinanced in January 2000.
NET LOSS. For the six months ended June 30, 2000, our net loss was
$69.3 million. Our net loss increased $6.1 million, or 9.5%, from $63.2 million
in the three months ended June 30, 1999. The increase in our net loss is
primarily attributable to our loss from investment in our joint venture, our
extraordinary item and our increase in interest expense resulting from our 1999
and 2000 business acquisitions and financings.
DIVIDENDS ON PREFERRED STOCK. For the six months ended June 30, 2000, our
dividends on preferred stock increased $60.1 million, or 188.6%, to
$92.0 million from $31.9 million for the comparable 1999 period. This increase
was primarily the result of a $60.4 million dividend recognized upon the
conversion of our Class D Preferred Stock into Class E Preferred Stock and old
Class A Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
We have required, and will likely continue to require, substantial capital
to further develop, expand and upgrade our cellular systems and those we may
acquire. We have financed our operations through cash flows from operating
activities, bank debt and the sale of debt and equity securities.
22
<PAGE>
NET CASH FLOW
At June 30, 2000, we had working capital of $153.7 million (a ratio of
current assets to current liabilities of 2.2:1) and an unrestricted cash balance
of $170.3 million, which compares to a working capital deficit of $(19.2)
million (a ratio of current assets to current liabilities of .8:1) and an
unrestricted cash balance of $4.3 million at December 31, 1999.
Our net cash provided by operating activities totaled $26.3 million for the
six month period ended June 30, 2000, while the net cash provided by operating
activities totaled $2.6 million for the same period of 1999. The increase of
$23.7 million was primarily due to the loss from our investment in joint venture
and the change in current assets and liabilities.
Our net cash used in investing activities totaled $(738.5) million and
$(66.6) million for the six months ended June 30, 2000 and 1999, respectively.
The increase of $671.9 million was primarily due to additional acquisitions
during 2000, including our investment in American Cellular. Acquisitions,
including our investment in American Cellular, and their related costs accounted
for $675.5 million and $27.3 million and capital expenditures were
$61.9 million and $31.2 million for the six month periods ended June 30, 2000
and 1999, respectively.
Net cash provided by financing activities was $878.2 million the six month
period ended June 30, 2000 compared to $44.6 million for the same period of
1999. Financing activity sources for the six months ended June 30, 2000
consisted primarily of net proceeds from the initial public offering of our
common stock and bank facilities.
The minority partners in our partnerships that own certain of our cellular
operations receive distributions equal to their share of the profit multiplied
by estimated income tax rates. Under our bank credit agreements, our minority
partners are not entitled to receive any cash distributions in excess of amounts
required to meet income tax obligations until all indebtedness of their
respective partnerships to us is paid or extinguished.
CAPITAL RESOURCES
On January 14, 2000, we obtained an $800.0 million credit facility and
increased it by $125.0 million to $925.0 million on May 1, 2000. The original
proceeds from the $800.0 million credit facility were used primarily to:
- consolidate the indebtedness of our Dobson Cellular Operations Company
subsidiary under a $160.0 million credit facility and our Dobson Operating
Company subsidiary under a $250.0 million senior secured credit facility;
- repurchase $159.7 million outstanding principal amount of our 11.75%
senior notes due 2007; and
- pay the cash portion of the costs of certain of our pending acquisitions.
The increase of $125.0 million was used to fund the acquisition of Texas 9
RSA on May 1, 2000.
At June 30, 2000, this credit facility included a $300.0 million revolving
credit facility and $623.9 million of term loan facilities consisting of a Term
A Facility of $350.0 million, a Term B Facility of $149.2 million and an
additional Term B Facility of $124.7 million. All of these loans will mature by
2008.
This credit facility is structured as a loan to our subsidiary, Dobson
Operating Co., L.L.C., the successor by merger to Dobson Cellular Operating
Company and Dobson Operating Company, with guarantees from certain of its
subsidiaries and us. Advances bear interest, at our option, on a prime rate or
LIBOR formula. The weighted average interest rate was 9.02% as of June 30, 2000.
Our obligations under the credit facility are secured by:
- a pledge of the membership interests in the borrower;
23
<PAGE>
- stock and partnership interests of certain of the borrower's subsidiaries;
and
- liens on substantially all of the assets of the borrower and the
borrower's restricted subsidiaries including FCC licenses, but only to the
extent such licenses can be pledged under applicable law.
We are required to amortize the Term A Facility with quarterly principal
payments of $5.0 million commencing June 30, 2001, increasing over the term of
the loan to quarterly principal payments of $25.0 million. We are required to
amortize the Term B Facility with quarterly principal payments of $375,000 from
March 31, 2000 through December 31, 2006 and with quarterly principal payments
of $34.9 million during 2007. The company is required to amortize the additional
$125.0 million portion of the Term B Facility with quarterly principal payments
of $312,500 from June 30, 2000, through March 31, 2007 and with quarterly
principal amounts of $29.1 million from June 30, 2007 through March 31, 2008. In
addition, under certain circumstances, we are required to make prepayments of
proceeds received from significant asset sales, new borrowings and sales of
equity, other than this offering, and a portion of excess cash flow. We have the
right to prepay the credit facility in whole or in part at any time. As of
June 30, 2000, we had $628.9 million outstanding under the credit facility.
Our new credit facility imposes a number of restrictive covenants that,
among other things, limit our ability to incur additional indebtedness, create
liens, make capital expenditures and pay dividends.
Our subsidiary, Sygnet Wireless, Inc., is a party to a credit agreement for
an aggregate of $388.2 million, consisting of a $46.0 million revolving credit
facility and $342.2 million of term loan facilities. Interest on the revolving
credit facility and the term loan facilities is based on a prime rate or a LIBOR
formula, and has ranged between 8.3% and 9.7% since inception. As of June 30,
2000, we had $364.2 million outstanding under the Sygnet credit facilities and
we had $24.0 million of availability under the Sygnet credit facilities.
The obligations under the Sygnet credit facilities are secured by a pledge
of the capital stock of Dobson/Sygnet's operating subsidiary as well as a lien
on substantially all of the assets of Dobson/Sygnet and its operating
subsidiary. The Sygnet credit facilities require that Dobson/Sygnet and we
maintain certain financial ratios. The failure to maintain these ratios would
constitute an event of default, notwithstanding Dobson/Sygnet's ability to meet
its debt service obligations. The Sygnet credit facilities amortize quarterly
beginning on December 31, 2000. The $46.0 million revolving credit facility
terminates on September 23, 2006. The $342.2 million term loans terminate on
December 23, 2007. The weighted average interest rate on the Dobson/Sygnet
credit facilities was 9.7% as of June 30, 2000.
Dobson/Sygnet has outstanding $200.0 million aggregate principal amount of
senior notes that mature in 2008. The Dobson/Sygnet notes bear interest at an
annual rate of 12.25%, payable semi-annually on each June 15 and December 15,
beginning June 15, 1999. The Dobson/Sygnet note indenture contains restrictive
covenants that, among other things, limit our ability and that of
Dobson/Sygnet's subsidiaries to incur additional indebtedness, create liens, pay
dividends or make distributions in respect of their capital stock, make
investments or certain other restricted payments, sell assets, redeem capital
stock, issue or sell stock of restricted subsidiaries, enter into transactions
with stockholders or affiliates or effect a consolidation or merger. Of the net
proceeds from the sale of these notes, we used $67.7 million, to purchase
securities we have pledged to secure the first six semi-annual interest payments
on the notes. The restricted cash and investments balance at June 30, 2000,
relating to these purchased securities was $35.4 million.
On January 14, 2000, we repurchased $159.7 million of our outstanding
$160.0 million aggregate principal amount of senior notes which mature in April
2007 and accrued interest at an annual rate of 11.75%, payable semi-annually on
each April 15 and October 15. We repurchased our outstanding senior notes with
funds available under our new credit facility described above.
On June 22, 2000, we completed the private placement for the $300.0 million
principle amount of 10 7/8% Senior Notes due 2010. The offering resulted in net
proceeds totaling $290.2 million. We used $207.0 million of the proceeds to
repay indebtedness under the revolving credit facility of our subsidiary,
24
<PAGE>
Dobson Operating Co. LLC, and will use the remaining balance for working capital
and other general corporate purposes.
As of June 30, 2000, we have issued and outstanding 12.25% senior preferred
stock and 13% senior preferred stock with aggregate liquidation values of
$313.8 million and $197.6 million, respectively, including accrued stock
dividends. Each of the certificates of designation for our senior preferred
stock contains several restrictive covenants, which may limit our ability to
issue indebtedness in the future.
CAPITAL COMMITMENTS
Our capital expenditures (excluding cost of acquisitions and discontinued
operations) were $61.9 million for the six months ended June 30, 2000 and we
expect our capital expenditures to be approximately $100.0 million for all of
2000. We have not budgeted any amounts to be expended in 2000 with respect to
the systems, which may be acquired in acquisitions, or our PCS system. The
amount and timing of capital expenditures may vary depending on the rate at
which we expand and develop our cellular systems and whether we consummate
additional acquisitions.
We have agreed to purchase approximately $215.0 million of cell site and
switching equipment from Nortel Networks Corp. prior to November 2001. Of this
commitment, approximately $112.7 million remained outstanding at June 30, 2000.
Under another equipment supply agreement, we agreed to purchase approximately
$131.0 million of cell site and switching equipment from Lucent
Technologies Inc. by January 13, 2002. Of this commitment, $60.7 million
remained outstanding at June 30, 2000. Purchases made under these commitments
will be financed using funds available under our credit facilities. We expect to
fulfill our purchase commitments under both of these agreements with purchases
budgeted for 2000 and 2001.
The American Cellular joint venture has a bank credit facility of
$1.75 billion with Bank of America N.A., as Administrative Agent and a group of
participating lenders. After initial funding and borrowings under this credit
facility to complete the American Cellular acquisition, there is approximately
$75.0 million of credit availability. American Cellular has required, and will
likely continue to require, substantial capital to further develop, expand and
upgrade its cellular systems. The American Cellular joint venture has budgeted
approximately $70.0 million for American Cellular capital expenditures in 2000.
If American Cellular does not generate sufficient cash flows from operations or
otherwise have sufficient access to capital to meet all of its debt service,
capital expenditure, working capital or other operating needs, we may be
required to fund our 50% share of any capital needs of the American Cellular
joint venture in order to protect our substantial investment in it.
Although we cannot provide any assurance, assuming successful implementation
of our strategy, including the further development of our cellular systems and
significant and sustained growth in our cash flows, we believe that borrowings
under our new credit facility, the net proceeds from our February 2000 initial
public offering and cash flows from operations should be sufficient to allow us
to consummate our pending acquisitions and are expected to be sufficient to
satisfy our currently expected capital expenditures, working capital and debt
service obligations. The actual amount and timing of our future capital
requirements may differ materially from our estimates as a result of, among
other things, the demand for our services and regulatory, technological and
competitive developments. We currently expect that we may have to refinance our
indebtedness at their respective maturities commencing in 2006. We will also
need to refinance our mandatory redemption obligations under our senior
preferred stock. Sources of additional financing may include commercial bank
borrowings, vendor financing and the sale of equity or debt securities. We
cannot assure you that any such financing will be available on acceptable terms
or at all.
25
<PAGE>
EFFECT OF NEW ACCOUNTING STANDARDS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized in current earnings.
SFAS 133, as amended by SFAS 137, Derivatives and Hedging--Deferral of the
Effective Date of FASB Statement No. 133, will be effective for fiscal years
beginning after June 15, 2000. In addition, SFAS 138, was issued in June 2000 as
an amendment to SFAS 133 and addresses issues causing implementation
difficulties. Under SFAS 133, we would record an asset of $1.4 million relating
to its interest rate hedge valuation at June 30, 2000. We have not determined
the timing or method of adoption of SFAS 133.
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including planned capital
expenditures and acquisitions, are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These plans involve a number of risks and uncertainties. Important factors
that could cause actual capital expenditures, acquisition activity or our
performance to differ materially from the plans include, without limitation, our
ability to satisfy the financial covenants of our outstanding debt and preferred
stock instruments and to raise additional capital; our ability to manage our
rapid growth successfully and to compete effectively in our cellular business
against competitors with greater financial, technical, marketing and other
resources; changes in end-user requirements and preferences; the development of
other technologies and products that may gain more commercial acceptance than
ours; and adverse regulatory changes. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to update or revise these forward-looking
statements to reflect events or circumstances after the date hereof including,
without limitation, changes in our business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in interest rates. Market risk is
the potential loss arising from adverse changes in market prices and rates,
including interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes. The objective of our financial
risk management is to minimize the negative impact of interest rate fluctuations
on our earnings and equity. The counterparty is a major financial institution.
As of June 30, 2000, we had interest rate protection under various derivative
contracts totaling $460.0 million on our $925.0 million DOC LLC credit facility.
The terms of these agreements expire from June 2001 to March 2002. In addition,
we had an interest rate hedge on $110.0 million of our outstanding indebtedness
under the Sygnet credit facilities. Increases in interest expense related to the
interest rate hedge for the six months ended June 30, 2000 and 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 June 30, 2000, we have
determined that there was no material market risk exposure to our consolidated
financial position, results of operations or cash flows as of such date.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
27
<PAGE>
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 Financial Data Schedule--Six months Ended June 30, 2000
99.1 Press Release issued July 31, 2000 regarding the acquisition
of a cellular property in northern Georgia.
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on From 8-K on April 4, 2000, which
reported the declaration on an in-kind dividend on its outstanding 12 1/4%
Preferred Stock under "Item 5. Other Events." In addition, it announced that
Craig T. Sheets Executive Vice President and Chief Operating Officer left the
company to become the Chief Financial Officer for Logix Communications
Enterprises, Inc., a former subsidiary of Dobson.
The Company filed a Current Report on Form 8-K on April 14, 2000, which
reported the declaration of an in-kind dividend on its outstanding 13% Senior
Exchangeable Preferred Stock under "Item 5. Other Events."
The Company filed a Current Report on Form 8-K on May 3, 2000, which
reported the acquisition of Texas 9 Rural Service Area (RSA) under "Item 5.
Other Events."
The Company filed a Current Report on Form 8-K on June 14, 2000, which
reported the intent to raise $250.0 million through the issuance and sale of
senior notes. In addition, it reported the intent to purchase cellular licenses
and related assets for Oklahoma 6 Rural Service Area under "Item 5. Other
Events."
28
<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: August 2, 2000 DOBSON COMMUNICATIONS CORPORATION
(registrant)
/s/ Everett R. Dobson
---------------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: August 2, 2000 /s/ Bruce R. Knooihuizen
---------------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
29
