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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 000-29225
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DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
OKLAHOMA 75-1513309
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13439 NORTH BROADWAY EXTENSION
SUITE 200
OKLAHOMA CITY, OKLAHOMA 73114
(Address of principal executive offices) (Zip Code)
</TABLE>
(405) 529-8500
(Registrant's telephone number, including area code)
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Securities registered pursuant to 12(b) of the Act: NONE
Securities registered pursuant to 12(g) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS
-------------------
<S> <C>
CLASS A COMMON STOCK, $.001
PAR VALUE
</TABLE>
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
As of March 3, 2000, there were outstanding 93,133,416 shares of common
stock, par value $.001. Based upon the closing price for the common stock on the
Nasdaq National Market on March 3, 2000, the aggregate market value of common
stock held by non-affiliates of the registrant as of March 3, 2000 was
approximately $545,250,000.
Documents incorporated by reference: THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS WHICH WILL BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION NOT LATER THAN 120 DAYS AFTER DECEMBER 31, 1999.
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DOBSON COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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ITEM
NUMBER PAGE
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PART I
1 Business.................................................... 2
2 Properties.................................................. 23
3 Legal Proceedings........................................... 24
4 Submission of Matters to a Vote of Security Holders......... 24
PART II
5 Market for Registrant's Common Equity and Related 24
Stockholder Matters.......................................
6 Selected Financial Data..................................... 25
7 Management's Discussion and Analysis of Financial Condition 26
and Results of
Operations................................................
7A Quantitative and Qualitative Disclosure About Market Risk... 38
8 Financial Statements and Supplementary Data................. 39
9 Changes in and Disagreements with Accountants on Accounting 66
and Financial
Disclosure................................................
PART III
10 Directors and Executive Officers of the Registrant.......... 67
11 Executive Compensation...................................... 67
12 Security Ownership of Certain Beneficial Owners and 67
Management................................................
13 Certain Relationships and Related Transactions.............. 67
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on 68
Form 8-K..................................................
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
At December 31, 1999 our cellular telephone systems covered a total
population of approximately 5.9 million and we had approximately 444,700
subscribers with an aggregate market penetration of approximately 7.5%. 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 the acquisition of rural and suburban cellular systems. Since
1996, and as of March 3, 2000, we have completed 19 acquisitions of cellular
licenses and systems, thus, expanding the geographic scope of our operations. We
have upgraded substantially all of our systems to digital technology and we now
offer voice and digital feature service, to approximately 90% of our covered
population. For the year ended December 31, 1999, we had total revenues of
$319.9 million, a net loss applicable to common stockholders of $197.0 million
and a net loss applicable to common stockholders per common share of $3.59. At
December 31, 1999, we had approximately $1.1 billion of consolidated
indebtedness and a consolidated stockholders' deficit of approximately
$353.8 million. We expect to incur significant additional indebtedness to fund
our capital needs in the future as we continue to acquire, develop and construct
our cellular systems and grow our subscriber base.
We believe that owning and operating a mix of rural and suburban cellular
systems provides strong growth opportunities because we believe these systems
currently have lower penetration rates, higher subscriber growth rates, a higher
proportion of roaming revenues and less competition for subscribers than
cellular systems located in larger metropolitan areas. We focus on acquiring
underdeveloped cellular systems that are adjacent to major metropolitan areas,
which include a high concentration of expressway corridors and roaming activity.
We have a strategic relationship with AT&T Wireless Services, Inc. ("AT&T
Wireless") which is one of our stockholders. Through this relationship, we have
a coast-to-coast roaming agreement that allows our customers to utilize wireless
systems owned by AT&T Wireless, and customers of AT&T Wireless to utilize our
cellular systems. We also have roaming agreements with AirTouch, Southwestern
Bell Mobile Systems and other wireless providers.
On February 25, 2000, we 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 is
one of the largest independent rural cellular telephone operators in the United
States. American Cellular's systems cover a total population of approximately
4.8 million, and as of December 31, 1999 it had approximately 431,200
subscribers with an aggregate market penetration of approximately 8.9%. American
Cellular serves markets in portions of Illinois, Kentucky, Michigan, Minnesota,
New York, Ohio, Pennsylvania, Tennessee, West Virginia and Wisconsin. Following
completion of this acquisition, we will operate American Cellular's systems.
American Cellular's management organization, billing system, network
infrastructure and marketing programs are substantially similar to ours.
OTHER RECENT ACQUISITIONS
Subsequent to December 31, 1999, we have completed five acquisitions. In
addition to our American Cellular joint venture with AT&T Wireless as described
above, we completed the purchase of the FCC license for, and certain assets
related to, Alaska 3 RSA, Michigan 3 RSA, Alaska 1 RSA and Michigan 10 RSA. The
following is a summary of each acquisition:
ALASKA 3 RSA. On January 31, 2000, we completed the purchase of Alaska 3
for $12.0 million. Alaska 3 is located in the southeastern corner of the state.
The Alaska 3 market area, which includes Juneau and Ketchikan, had a population
of approximately 74,000 as of December 31, 1999.
2
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MICHIGAN 3 RSA. On February 11, 2000, we completed the purchase of
Michigan 3 RSA for $97.0 million. Michigan 3 RSA is located in northwestern
Michigan. The Michigan 3 RSA market area, which includes Traverse City and
Petoskey, has an estimated total population of approximately 166,000.
ALASKA 1 RSA. On February 17, 2000, we completed the purchase of Alaska 1
RSA for $16.0 million. Alaska 1 RSA is located in central Alaska. The Alaska 1
market area, which includes Fairbanks, has an estimated total population of
approximately 113,000.
MICHIGAN 10 RSA. On March 3, 2000, we completed the purchase of
Michigan 10 RSA for $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.
PENDING ACQUISITION
On January 4, 2000, we entered into a definitive agreement to acquire the
FCC license for, and certain assets related to, Texas 9 RSA that, if completed,
will increase the total population served by our cellular systems by
approximately 191,000. This acquisition is subject to FCC approval, compliance
with requirements of the Hart-Scott-Rodino Act and customary closing conditions.
The purchase price for Texas 9 RSA is approximately $125.0 million, subject to
adjustment. Texas 9 RSA, which is located in central Texas, includes the towns
of Brownwood and Stephenville. Our acquisition of Texas 9 is expected to close
in the second quarter of 2000.
STRATEGY
We have developed organizational, marketing and operational programs
designed to increase the number and retention of our subscribers, promote
superior customer service, control subscriber acquisition costs and enhance
operating cash flow in our markets. We intend to apply these programs to the
properties we acquire, including American Cellular.
Our strategy is to capitalize on our competitive strengths and acquire,
develop and operate rural and suburban cellular systems. The principal elements
of our strategy include:
- CONTINUE TO GROW THROUGH DISCIPLINED ACQUISITIONS. We intend to acquire
additional cellular operations in RSAs and smaller MSAs that:
- have attractive demographics and growth trends;
- have a favorable competitive environment;
- are located adjacent to major metropolitan areas;
- include a high concentration of expressway corridors that have a
significant amount of roaming activity; and
- have the potential to further develop strategic relationships with
operators of neighboring wireless systems and the ability to offer
service under a leading brand name.
- INTEGRATE ACQUIRED OPERATIONS. We intend to integrate the operations of
cellular systems we acquire, including American Cellular, with our
existing operations to achieve economies of scale. We believe that these
increased efficiencies will come from the consolidation and centralized
control of pricing, customer service and marketing, system design,
engineering, purchasing, financial and administrative functions and
billing functions. We expect to consolidate American Cellular's call
service centers and one or more of our call centers. We intend to use our
increased leverage in negotiating prices and services from third party
service providers and equipment vendors.
3
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- CONTINUE TO INCREASE SYSTEM CAPACITY AND COVERAGE AND FURTHER UPGRADE OUR
SYSTEMS THROUGH THE IMPLEMENTATION OF ADVANCED TECHNOLOGY. We believe that
increasing capacity and upgrading our systems will attract additional
subscribers, increase the use of our systems by existing subscribers,
increase roaming activity and further enhance the overall efficiency of
our network. We have upgraded substantially all of our systems to digital
technology and we now offer digital voice and digital feature services to
approximately 90% of our covered population. We intend to upgrade our
remaining cellular systems with digital technology to enable us to
increase roaming, serve the increasing number of digital cellular
subscribers and personal communications service subscribers with multimode
phones, and provide value-added, high margin, enhanced capabilities,
including caller ID, longer battery life and zone billing.
- EXPAND STRATEGIC RELATIONSHIPS. We intend to maintain and expand strategic
relationships with operators of wireless systems in major MSAs near our
cellular systems. These relationships include roaming agreements that
allow our subscribers to use the wireless systems of operators in
neighboring MSAs and RSAs at favorable rates. Under these agreements,
similar benefits are available to the MSA operators' subscribers roaming
in our areas. In addition, we deploy digital technology in our system area
that is the same as that selected by our roaming partners in the
neighboring MSA. We also market our cellular products and services under
the predominant brand name used in neighboring MSAs. These brand names
include CELLULAR ONE-Registered Trademark- and AIRTOUCH-TM-
CELLULAR-Registered Trademark-. We believe these strategic relationships
and agreements enable us to increase our roaming revenues, offer our
subscribers larger "home rate" areas and leverage the recognized brand
names of our roaming partners and their extensive marketing efforts.
- AGGRESSIVELY MARKET AND PROMOTE OUR CELLULAR SERVICES IN OUR LOCAL
MARKETS. Our marketing objective is to continue our service quality, local
sales presence and commitment to the community. Our sales efforts are
conducted primarily through our retail outlets and our direct sales force
and, to a lesser extent, through independent agents. Our local management
teams have day-to-day operating authority with the flexibility to respond
to individual market requirements. Their presence fosters a sense of
customer service and community spirit. In addition, we believe that our
marketing and customer service functions are more effective when tailored
to the local market population.
- USE HIGHLY TARGETED SALES EFFORTS. We seek to attract subscribers who we
believe are likely to generate high monthly revenues and low churn rates.
Local management conducts market research to identify and design marketing
programs to attract these subscribers and tailor distinctive rate plans
and roaming rates to emphasize the quality, value and advantage of our
cellular services.
- PROVIDE SUPERIOR CUSTOMER SERVICE. We intend to maintain a high level of
customer satisfaction through a variety of techniques, including the
maintenance of 24-hour customer service. We support local customer service
through our direct sales force, our retail stores and regional customer
service centers. The regional presence of our call centers enhances our
knowledge of local markets, which improves our ability to provide customer
service, credit and collection and order activation.
4
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RECENT DEVELOPMENTS--
FINANCING ACTIVITIES:
- On January 14, 2000, we obtained a new $800.0 million credit facility
which was used primarily to:
- consolidate the indebtedness of two of our previous credit facilities:
- repurchase $159.7 million principal amount of our 11.75% senior notes
due 2007; and
- pay the cash portion of the costs of certain of our new acquisitions.
- On January 14, 2000, we completed a tender offer for $159.7 million
principal amount of our $160 million principal amount of our 11.75% senior
notes for approximately $188.4 million.
DISCONTINUED OPERATIONS:
On January 24, 2000, we distributed the stock of Logix Communications
Enterprises, Inc. to certain of our stockholders.
RECAPITALIZATION:
On February 9, 2000, immediately prior to and in conjunction with the
initial public offering of our common stock, we completed a recapitalization
which included:
- the conversion and redemption of our 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 new Class B common stock;
- the creation of Class A common stock issued in our initial public
offering;
- a 111.44 for 1 stock split of new Class B common stock;
- the retirement of our Class A preferred stock;
- the creation of a new Class D common stock to be issued upon the exercise
of options under our 1996 stock option plan;
As of March 3, 2000, the following table reflects the outstanding shares of
our equity securities:
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<CAPTION>
SHARES
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<S> <C>
COMMON STOCK
New Class A common........................................ 27,640,923
New Class B common........................................ 65,492,493
New Class D common........................................ 2,730
PREFERRED STOCK
12 1/4% Senior Exchangeable............................... 296,605
13% Senior Exchangeable................................... 187,250
</TABLE>
EQUITY OFFERING:
On February 9, 2000, we completed the initial public offering of 25 million
shares of our 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 of
$549.5 million. We used $53.3 million of the net proceeds to pay accrued
dividends on, and redeem, our Class D preferred stock and Class E preferred
stock. We used an additional $402.5 million as a capital contribution to our
joint venture with AT&T Wireless to acquire American Cellular. We intend to use
the balance of the net proceeds for working capital and other general corporate
purposes.
5
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CELLULAR OPERATIONS--DOBSON COMMUNICATIONS
MARKETS AND SYSTEMS
The following table sets forth information with respect to our existing
cellular markets. Information with respect to populations in our licensed areas
are as of December 31, 1999 and are management's estimates based upon Kagan's
1999 Cellular/PCS Pop Book Disk, Paul Kagan Associates, Inc., Carmel,
California, adjusted to exclude those portions of our RSAs and MSAs not covered
by our licenses. Net population represents total population less minority
ownership interests in our licenses. Information with respect to subscribers are
management estimates as of December 31, 1999. We determine market penetration by
dividing total subscribers in each of our FCC cellular licensed areas at the end
of the period by the estimated total population covered by the applicable
cellular license or authorization.
<TABLE>
<CAPTION>
TOTAL NET TOTAL MARKET DATE
POPULATION POPULATION SUBSCRIBERS PENETRATION ACQUIRED
---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
MARKETS:
NORTHERN REGION
Youngstown (Youngstown, OH MSA, Sharon, PA MSA,
PA 1 RSA and OH 11 RSA)........................... 911,000 911,000 1998
OH 2 RSA............................................ 262,000 262,000 1999
Erie (Erie, PA MSA)................................. 280,000 280,000 1998
PA (PA 2, 6 and 7 RSAs )............................ 690,000 690,000 1998
NY 3 RSA............................................ 481,000 481,000 1998
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Total............................................. 2,624,000 2,624,000 238,300 9.1%
---------- ---------- -------
CENTRAL REGION
Northwest OK (Enid, OK MSA and OK
2 RSA)............................................ 106,000 106,000 1991
OK 5 and 7 RSAs..................................... 157,000 101,000 1989
TX 2 RSA............................................ 89,000 55,000 1989
KS/MO (KS 5 RSA, MO 1, 4 and 5 RSAs)................ 246,000 246,000 1996
TX 16 RSA........................................... 336,000 336,000 1998
TX 10 RSA........................................... 320,000 320,000 1998
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Total............................................. 1,254,000 1,164,000 68,800 5.5%
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WESTERN REGION
AZ 5 RSA............................................ 183,000 137,000 1997
AZ 1 RSA............................................ 135,000 135,000 1999
CA 7 RSA............................................ 144,000 144,000 1998
CA 4 RSA............................................ 368,000 368,000 1998
Santa Cruz, CA MSA.................................. 251,000 219,000 1998
---------- ----------
Total............................................. 1,081,000 1,003,000 64,700 6.0%
---------- ---------- -------
EASTERN REGION
West MD (Cumberland, MD MSA, Hagerstown, MD MSA,
MD 1 and 3 RSAs, and PA 10 West RSA).............. 494,000 494,000 1997
East MD (MD 2 RSA).................................. 455,000 455,000 1997
---------- ----------
Total............................................. 949,000 949,000 72,900 7.7%
---------- ---------- -------
Total--Dobson regions combined................ 5,908,000 5,740,000 444,700 7.5%
========== ========== =======
</TABLE>
6
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PRODUCTS AND SERVICES
We provide a variety of cellular services and products designed to address a
range of business and personal needs. In addition to mobile voice and data
transmission, we offer ancillary services such as call forwarding, call waiting,
three-party conference calling, voice message storage and retrieval and
no-answer transfer. The nature of the services we offer varies depending upon
market area. We also sell cellular equipment at discount prices and use free
phone promotions as a way to encourage use of our mobile services. We offer
cellular service for a fixed monthly access fee accompanied by varying
allotments of unbilled or free minutes, plus additional variable charges per
minute of use and for custom calling features. We offer longer-term pricing
programs under single year and, to a lesser extent, multi-year service
contracts. Unlike some of our competitors, we design rate plans on a
market-by-market basis. Our local general managers generally have the authority
to initiate and modify rate plans, depending upon the market and competitive
conditions. Generally, these rate plans include a high-volume user plan, a
medium-volume user plan, a basic plan and an economy plan.
CUSTOMER SERVICE
Customer service is an essential element of our marketing and operating
philosophies. We are committed to attracting new subscribers and retaining
existing subscribers by providing consistently high-quality customer service. In
each of our cellular service areas, we maintain installation and repair
facilities and a local staff, including a market manager and customer service,
technical and sales representatives. In each of our cellular service areas, we
handle our own customer-related functions, such as customer activations, account
adjustments and rate plan changes. We believe our local offices and installation
and repair facilities enhance our knowledge of local markets and enable us to
better serve customers, schedule installations and make repairs. Through the use
of centralized monitoring equipment, we are able to centrally monitor the
technical performance of our cellular service areas.
In addition, our customers generally are able to report cellular telephone
service or account problems 24 hours a day to our regional customer service
centers located in Oklahoma City, Oklahoma and Frederick, Maryland on a
toll-free access number with no airtime charge. We believe that our emphasis on
customer service affords us a competitive advantage over our larger competitors.
We contact our subscribers frequently in order to evaluate and measure, on an
ongoing basis, the quality and competitiveness of our services.
SALES, MARKETING AND DISTRIBUTION
We focus our marketing program on attracting subscribers who we believe are
likely to generate high monthly revenues and low churn rates. We undertake
extensive market research to identify and design marketing programs to attract
these subscribers and tailor distinctive rate plans and roaming rates to
emphasize the quality, value and advantage of our cellular service. We have
established marketing alliances with neighboring cellular systems to create
larger home rate areas in order to increase our roaming revenues and to attract
new subscribers. We market our service offerings primarily through our direct
sales force and company-owned retail stores. We also use a network of dealers
and other agents, such as electronics stores, car dealerships and department
stores. In addition to these traditional channels, our marketing team
continuously evaluates other, less traditional, methods of distributing our
services and products, such as targeted telemarketing and direct mail programs.
We market our cellular products and services under national brand names and,
in selected markets, our own brand name. The service mark we select for use in
each of our markets depends, to a large extent, upon the service mark used by
the principal cellular operator in the neighboring metropolitan areas.
We train and compensate our sales force in a manner designed to stress the
importance of customer service, high penetration levels and minimum acquisition
costs per subscriber. We believe that our direct sales force is better able to
select and screen new subscribers and select pricing plans that realistically
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match subscriber means and needs than are independent agents. In addition, we
motivate our direct sales force to sell appropriate rate plans to subscribers,
thereby reducing churn, by linking payment of commissions to subscriber
retention. As a result, we believe that our use of a direct sales force keeps
marketing costs low both directly, because commissions are lower, and
indirectly, because subscriber retention is higher than when we use independent
agents. We had approximately 84 direct sales representatives as of December 31,
1999.
We believe that our after-sale telemarketing program, which includes
courtesy calls to our new customers and is conducted by our sales force and
customer service personnel, helps to reduce our churn rates. This program
enhances customer loyalty and allows our sales staff to check customer
satisfaction as well as to offer additional calling features, such as voicemail,
call waiting and call forwarding.
We operated approximately 130 retail outlets as of December 31, 1999. Our
retail stores range in size from 420 square feet to 6,400 square feet. Each of
our retail stores is fully equipped to handle customer service and telephone
maintenance and installation. Some of these stores are also authorized warranty
repair centers. Our stores provide subscriber-friendly retail environments,
including extended hours, a large selection of products and services, a
well-trained sales staff and convenient locations, which are designed to make
the sales process quick and easy for the subscriber.
ROAMING
We believe that regional roaming is an important service component for many
subscribers. Accordingly, where possible, we attempt to arrange roaming
agreements that allow customers to roam at competitive prices. We believe this
increases usage on all cellular systems, including our own. We focus on systems
that are adjacent to major metropolitan areas and include a high concentration
of expressway corridors, which tend to have a significant amount of roaming
activity. The following table lists our principal roaming partners in each of
our cellular markets:
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CELLULAR MARKETS PRINCIPAL CELLULAR ROAMING PARTNERS
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<S> <C>
Northern Region...................... AirTouch
AT&T Wireless
Southwestern Bell Mobile
Central Region....................... AirTouch
AT&T Wireless
Houston Cellular
Southwestern Bell Mobile
U.S. Cellular
Western Region....................... AirTouch
AT&T Wireless
Bay Area Cellular
Eastern Region....................... AT&T Wireless
Southwestern Bell Mobile
</TABLE>
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Our largest roaming partner is AT&T Wireless. For the year ended
December 31, 1999, AT&T Wireless' customers accounted for approximately 43% of
our roaming revenues, or approximately 20% of our total operating revenues.
Under our roaming agreement with AT&T Wireless, we and AT&T Wireless charge each
other favorable roaming rates for each of our respective markets. This rate will
decrease over time. The agreement provides for the maintenance by us of certain
call features and related services to roaming customers, such as call waiting,
call forwarding, three-way calling, caller ID and voice mail. The roaming
agreement may be terminated or suspended by either party if the FCC revokes a
license covering a material portion of our or AT&T Wireless's markets, either
party fails to control subscriber fraud, either party fails to adhere to system
technical requirements and upgrades or either party breaches any of the material
terms of the roaming agreement. The agreement expires in January 2003.
We also have agreements with the North American Cellular Network, which is
the largest wireless telephone network system in the world linking cellular
operators throughout the United States and Canada and enabling customers to use
their cellular phones to place and receive calls in these areas as easily as
they do in their home areas. Through this network, customers are able to receive
calls automatically without the use of complicated roaming codes as they roam in
more than 5,000 cities and towns in the United States and Canada. In addition,
the North American Cellular Network enables special services such as call
forwarding and call waiting to automatically follow subscribers as they travel.
SYSTEM DEVELOPMENT AND TECHNOLOGY
SYSTEM DEVELOPMENT. We develop or build out our cellular service areas in
response to projected subscriber demand and competitive factors by adding
channels to existing cell sites and by building new cell sites to increase
capacity with an emphasis on improving coverage for hand-held phones in
high-traffic areas. We develop projected subscriber service demand for each
cellular market area on a cell-by-cell basis. In January 1998, we entered into
an agreement with Lucent Technologies Inc. to purchase 300 cell sites, three
switches and related hardware and software for approximately $81.0 million over
a four year period. We estimate our aggregate remaining commitment under this
agreement as of December 31, 1999 was approximately $26.8 million. We are also a
party to another equipment supply agreement with Nortel to purchase
approximately $120.0 million of cell site and switching equipment through the
period ending in November 2001. We estimate our aggregate remaining commitment
under this agreement as of December 31, 1999 was approximately $56.4 million.
We expect our cell site expansion to enable us to continue to add and retain
subscribers, enhance subscriber use of our systems, increase roaming traffic due
to the larger geographic area covered by our cellular network and further
enhance the overall efficiency of our cellular systems. We believe that the
increased cellular coverage will have a positive impact on market penetration
and subscriber usage.
DIGITAL TECHNOLOGY. We use two basic protocols in our digital networks. Our
primary digital technology or protocol is Time Division Multiple Access, known
as TDMA, which divides each channel into three voice circuits providing service
to three simultaneous users instead of using the same spectrum for one analog
voice circuit. Our other digital technology or protocol is Code Division
Multiple Access, known as CDMA, which converts analog voice signals into a
wideband coded digital sequence that is transmitted over our cellular network.
Our digital services include digital voice channels, short messaging services,
message waiting indicator, increased battery life and caller ID services.
We have upgraded substantially all of our systems to digital technology and
we now offer digital voice and digital feature services to approximately 90% of
our covered population. We match the digital protocols of our markets to those
used by our roaming partners in adjoining markets in order to increase revenue
opportunities.
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The following table reflects the digital technology currently used by us in
each of our cellular markets.
<TABLE>
<CAPTION>
STATUS/EXPECTED
CELLULAR MARKET DIGITAL TECHNOLOGY COMPLETION DATE
- --------------- -------------------------- -------------------
<S> <C> <C>
Northern Region:
Youngstown............................... analog/TDMA IS-136 Completed
Erie..................................... analog/TDMA IS-136 Completed
New York................................. analog/TDMA IS-136 Completed
Pennsylvania............................. analog/TDMA IS-136 Completed
Ohio 2................................... analog/TDMA IS-136 Completed
and analog/CDMA First quarter 2000
Michigan 3............................... analog/TDMA IS-136 Second quarter 2000
Michigan 10.............................. analog/TDMA IS-136 Second quarter 2000
Central Region:
Oklahoma 5 and 7......................... analog/TDMA IS-136 Completed
Texas Panhandle.......................... analog/TDMA IS-136 Completed
Northwest Oklahoma....................... analog/TDMA IS-136 Completed
Texas 10................................. analog/TDMA IS-136 Completed
Texas 16................................. analog/TDMA IS-136 Completed
Kansas/Missouri.......................... analog/TDMA IS-136 Completed
Western Region:
Alaska 3................................. analog/TDMA IS-136 Second quarter 2000
Alaska 1................................. analog/TDMA IS-136 Second quarter 2000
Arizona 5................................ analog/CDMA Second quarter 2000
Arizona 1................................ analog/TDMA IS-136 Completed
California 7............................. analog/CDMA Second quarter 2000
California 4............................. analog/TDMA IS-136 Completed
Santa Cruz............................... analog/TDMA IS-136 Completed
Eastern Region:
East Maryland............................ analog/TDMA IS-136 Completed
West Maryland............................ analog/TDMA IS-136 Completed
</TABLE>
BILLING SYSTEM. H.O. Systems, Inc. recently began providing the billing
function for all of our cellular operations. Proprietary software furnished by
H.O. Systems serves all functions of billing for corporate and retail locations.
All administrative and customer maintenance functions are handled in-house.
H.O. Systems prints and processes all of our customer invoices. H.O. Systems'
software was in place and functioning throughout all of our regions by the end
of 1999. We use software that compliments this billing system, allowing the use
of credit, collection and switch interfaces.
SERVICE MARKS
We own the service mark Dobson Cellular-TM-, which we use in our cellular
telephone systems in western Oklahoma and the Texas Panhandle. While we have not
attempted to federally register the brand name "Dobson Cellular," we believe
that our prior use of this brand name in the limited areas where it is used will
enable us to effectively police against any infringing uses of our brand name.
10
<PAGE>
The following table sets forth the brand names used by us for products and
services in each of our cellular markets:
<TABLE>
<CAPTION>
CELLULAR MARKET SERVICE MARK
- --------------- -----------------------------------
<S> <C>
Northern Region................................ CELLULAR ONE-Registered Trademark-
AIRTOUCH-TM-
CELLULAR-Registered Trademark-
Central Region................................. Dobson Cellular-TM-
CELLULAR ONE-Registered Trademark-
Western Region................................. CELLULAR ONE-Registered Trademark-
AIRTOUCH-TM-
CELLULAR-Registered Trademark-
Eastern Region................................. CELLULAR ONE-Registered Trademark-
</TABLE>
CELLULAR ONE-Registered Trademark- is a registered service mark with the
U.S. Patent and Trademark Office. The service mark is owned by Cellular One
Group, a Delaware general partnership of Cellular One Marketing, Inc., a
subsidiary of Southwestern Bell Mobile Systems and Cellular One
Development, Inc., a subsidiary of AT&T Wireless. We use the CELLULAR
ONE-Registered Trademark- service mark to identify and promote our cellular
telephone service pursuant to licensing agreements with Cellular One Group. We
believe we obtain substantial marketing benefits from the name recognition
associated with this widely used service mark, both with existing subscribers
traveling outside of our service areas and with potential new subscribers moving
into our service areas. Licensing and advertising fees are determined based upon
the population of the licensed areas. The licensing agreements require us to
provide high-quality cellular telephone service to our customers and to maintain
a certain minimum overall customer satisfaction rating in surveys commissioned
by the licensor. The licensing agreements have original five-year terms that
begin expiring in 2000 and may be renewed at our option, subject to the
satisfaction of certain operating standards, for two additional five-year terms.
AIRTOUCH-TM- CELLULAR-Registered Trademark- is a registered service mark
licensed by Vodafone AirTouch. Our right to use the service mark is
non-exclusive and non-transferrable. The licensing agreement for the
AIRTOUCH-TM- CELLULAR-Registered Trademark- service mark requires us to provide
high-quality cellular telephone service to our customers and to otherwise
maintain reasonable standards set by Vodafone AirTouch. The licensing agreement
is for an initial term of 20 years with automatic extensions for additional
five-year periods.
DISCONTINUED OPERATIONS
Our former wholly owned subsidiary, Logix, provides integrated local, long
distance, data and other telecommunications services to small and medium-sized
business customers throughout the Southwestern United States. Logix operates
long-haul fiber optic facilities in Oklahoma, Texas and Colorado and incumbent
local exchange services in Oklahoma. Logix also offers switch-based integrated
carrier provider services in Oklahoma City, Tulsa, Amarillo, Houston, Austin,
Dallas, Forth Worth and San Antonio.
We distributed the stock of Logix to certain of our stockholders, on
January 24, 2000. Logix is accounted for as a discontinued operation in our
consolidated financial statements.
COMPETITIVE STRENGTHS/COMPETITION
We believe that our competitive strengths are:
- ESTABLISHED OPERATING HISTORY IN RURAL AND SUBURBAN MARKETS. We began
providing cellular telephone service in 1990 in Oklahoma and the Texas
Panhandle and since then have rapidly expanded our cellular operations to
include systems in rural and suburban markets covering a total
proportionate population of approximately 8.8 million (5.9 million as of
December 31, 1999). We believe that during this time we have gained
substantial experience as an operator of cellular systems in rural and
suburban markets.
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<PAGE>
- PROVEN ACQUISITION AND INTEGRATION CAPABILITIES. Since 1996 we have
successfully completed 19 acquisitions of cellular licenses and systems,
significantly expanding the geographic scope of our operations. As a
result, our total subscribers have increased from approximately 26,600 as
of December 31, 1995 to approximately 444,700 as of December 31, 1999. On
December 23, 1998 we acquired Sygnet, which increased the total population
covered by our cellular systems by approximately 2.4 million. We
substantially completed the integration of Sygnet's systems and operations
by the end of June 1999, and since closing the Sygnet acquisition have
increased the number of our subscribers in the Sygnet markets from
approximately 178,800 to approximately 223,800 as of December 31, 1999, a
25.2% increase.
- STRATEGIC RELATIONSHIP WITH AT&T WIRELESS. We have a strategic
relationship with AT&T Wireless, which recently became one of our
stockholders. Through this relationship, we have a coast-to-coast roaming
agreement that enables our customers to use AT&T Wireless' systems, and
AT&T Wireless' customers to use our systems, each at favorable rates. AT&T
Wireless customers accounted for approximately 43% of our roaming
revenues, or approximately 20% of our total revenues, for the year ended
December 31, 1999. In addition, our joint venture with AT&T Wireless
acquired American Cellular on February 25, 2000 for approximately
$2.5 billion, including fees and expenses, which has further expanded the
scope of our relationship with AT&T Wireless.
- EXPERIENCED MANAGEMENT TEAM. We have an experienced management team. Both
Everett R. Dobson, our Chairman of the Board and Chief Executive Officer,
and G. Edward Evans, our President, have substantial experience in the
wireless communications industry and both are actively involved in the
Cellular Telecommunications Industry Association, the leading cellular
industry association.
- ABILITY TO OFFER A VARIETY OF DIGITAL SERVICES, INCLUDING DIGITAL VOICE
AND DIGITAL FEATURE SERVICES TO APPROXIMATELY 90% OF OUR COVERED
POPULATION. We have upgraded our cellular network to offer digital voice
and digital feature services to approximately 90% of our covered
population, which both enhances our attractiveness as a roaming partner to
personal communications service and other cellular providers and provides
increased services to our current subscribers, including digital voice
services.
12
<PAGE>
We compete with various companies in each of our markets. The following
table lists the principal competitors in each of our cellular markets:
<TABLE>
<CAPTION>
CELLULAR MARKET PRINCIPAL COMPETITORS
- --------------------------------------------------- ------------------------
<S> <C>
Northern Region.................................... ALLTEL
Bell Atlantic Mobile
Frontier Cellular
GTE Wireless
Central Region..................................... ALLTEL
AT&T Wireless
Chariton Cellular
GTE Wireless
Kansas Cellular
Pioneer Cellular
Southwestern Bell Mobile
Western Wireless
Western Region..................................... Bell Atlantic Mobile
Centennial Cellular
Citizens Mojave Cellular
GTE Wireless
Nextel
Sprint PCS
Eastern Region..................................... Bell Atlantic Mobile
Nextel
Sprint PCS
U.S. Cellular
</TABLE>
The telecommunications industry is experiencing significant technological
changes, as evidenced by the increasing pace of improvements in the capacity and
quality of digital technology, shorter cycles for new products and enhancements
and changes in consumer preferences and expectations. Accordingly, we expect
competition in the wireless telecommunications industry to be dynamic and
intense as a result of the entrance of new competitors and the development of
new technologies, products and services. Many of our competitors have been
operating for a number of years, operate nationwide systems, currently serve a
substantial subscriber base and have significantly greater financial, personnel,
technical, marketing, sales and distribution resources than we do. Some
competitors are expected to market other services, such as long distance,
landline local exchange and internet access service, with their cellular
telecommunication service offerings.
We compete primarily against one other facilities-based cellular carrier in
each of our cellular markets. We also compete with personal communications
service and enhanced specialized mobile radio providers. We compete for
customers based principally upon price, the services and enhancements offered,
the quality of our cellular system, customer service, system coverage and
capacity. This competition may increase to the extent that licenses are
transferred from smaller, stand-alone operators to larger, better capitalized
and more experienced cellular operators that may be able to offer consumers
certain network advantages.
AT&T Wireless, Nextel Communications and Sprint PCS operate substantially
nationwide networks, and Bell Atlantic Mobile Systems, VoiceStream Wireless
Corporation and Vodafone AirTouch, among others, through joint ventures and
affiliation arrangements, could operate a substantially nationwide wireless
system. If any of our roaming partners, including AT&T Wireless, were to acquire
a personal communications service license for any of our markets, they could
build out personal communications service networks in our markets to provide
their customers with wireless service which would reduce our roaming revenues.
Any increased competition from personal communications service providers in
rural markets covered by our systems could also have the effect of further
reducing the roaming rates we could charge. Although AT&T Wireless has agreed
not to build out personal communications service networks in
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<PAGE>
any of the markets currently served by American Cellular for five years after
the consummation of the American Cellular acquisition, AT&T Wireless is not
contractually restricted from building out a competing personal communications
service network in our markets.
We also face, to a lesser extent, competition from mobile satellite service
providers, as well as from resellers of these services and cellular service. In
the future, we may also compete more directly with traditional landline
telephone service providers. Recently, the FCC created potential sources of new
competition by auctioning additional personal communications service licenses,
as well as licenses for wireless communications services, local multipoint
distribution service and 220 to 222 MHz service. Further, the FCC has announced
plans to auction licenses in the general wireless communications services, the
24 GHz and 39 GHz Services, has allocated spectrum in the 700 MHz band for
auction in May 2000 that may be licensed for mobile use, and has stated its
intent to reauction in July 2000 personal communication service licenses that
have been the subject of bankruptcy proceedings and/or otherwise returned to the
FCC. The FCC has also recently announced its intent to allocate approximately
200 MHz of additional spectrum to wireless use, much of which can be licensed
for commercial wireless purposes. Continuing technological advances in
telecommunications make it impossible to predict the extent of future
competition. However, due to the depth and breadth of these competitive services
offered by operators using these other technologies, future competition from
these operators could be intense.
CELLULAR OPERATIONS--AMERICAN CELLULAR
American Cellular is one of the largest independent rural cellular telephone
operators in the United States. American Cellular's systems cover a total
population of approximately 4.8 million and, as of December 31, 1999 it had
approximately 431,200 subscribers. American Cellular has concentrated its recent
efforts on creating an integrated network of cellular systems in its operating
regions. American Cellular operated four regions of cellular systems in New
York, Kentucky and the Upper Midwest and Mid-Atlantic regions as well as certain
other markets and has a number of other minority interests. American Cellular
markets all of its cellular products and services under the CELLULAR
ONE-Registered Trademark- brand name for its cellular systems. American Cellular
offers digital technology, which is comprised of digital feature services, such
as call waiting, caller ID and voice mail, in all its cellular systems, and
digital voice services through approximately 60% of its cell sites. The joint
venture expects to convert the remaining 40% of American Cellular's cell sites
to offer digital voice services by the end of the second quarter of 2000.
American Cellular's management, organization, billing system, network
infrastructure and working programs are substantially similar to ours.
The majority of American Cellular's systems are in the early stages of their
growth cycle and, we believe, afford significant opportunities for improvements
in performance, particularly with respect to rates of penetration and churn.
There can be no assurances, however, that we, as the operator of these systems
under our joint venture with AT&T Wireless, will be able to achieve or maintain
such improvements.
14
<PAGE>
MARKETS AND SYSTEMS
The following table sets forth information with respect to American
Cellular's existing cellular markets.
<TABLE>
<CAPTION>
TOTAL NET TOTAL MARKET DATE
POPULATION POPULATION SUBSCRIBERS PENETRATION ACQUIRED
---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
MARKETS:
UPPER MIDWEST REGION
Duluth MSA/MN 4 RSA/WI 2 RSA........... 290,000 290,000 1994
Eau Claire MSA/WI 2 RSA................ 174,000 168,000 1994
Wausau MSA/WI 6A RSA................... 158,000 153,000 1995
MN 2A RSA.............................. 31,000 31,000 1995
MN 3 RSA............................... 58,000 58,000 1994
MN 5 RSA............................... 257,000 257,000 1995
MS 6 RSA............................... 145,000 145,000 1994
WI 1 RSA............................... 109,000 109,000 1994
WI 3 RSA/WI 2 RSA...................... 166,000 166,000 1994
WI 4 RSA............................... 119,000 119,000 1997
WI 5 RSA............................... 80,000 80,000 1997
MI 1 RSA............................... 198,000 198,000 1995
Alton, IL RSA.......................... 23,000 20,000
--------- ---------
Total................................ 1,808,000 1,794,000 177,600 9.8%
--------- --------- -------
NY REGION
Orange County NY MSA................... 330,000 330,000 1996
Poughkeepsie NY MSA.................... 264,000 253,000 1996
NY 5 RSA............................... 378,000 378,000 1995
NY 6 RSA............................... 112,000 112,000 1996
--------- ---------
Total................................ 1,084,000 1,073,000 109,700 10.1%
--------- --------- -------
KY REGION
KY 4 RSA............................... 252,000 252,000 1997
KY 5 RSA............................... 161,000 161,000 1997
KY 6 RSA............................... 268,000 268,000 1997
KY 8 RSA............................... 120,000 120,000 1997
TN 4 RSA............................... 273,000 273,000 1998
--------- ---------
Total................................ 1,074,000 1,074,000 78,500 7.3%
--------- --------- -------
MID-ATLANTIC REGION
OH 7 RSA/OH 10A RSA.................... 323,000 323,000 1995
PA 9 RSA............................... 187,000 187,000 1996
WV 2 RSA............................... 78,000 78,000 1995
WV 3 RSA............................... 266,000 266,000 1996
--------- ---------
Total................................ 854,000 854,000 65,400 7.7%
--------- --------- -------
Total--American Cellular regions
combined......................... 4,820,000 4,795,000 431,200 8.9%
========= ========= =======
</TABLE>
MARKETING
American Cellular markets all of its cellular products and services under
the CELLULAR ONE-Registered Trademark-brand names. We believe the national
advertising campaign conducted by the Cellular One Group has
15
<PAGE>
enhanced American Cellular's advertising exposure at a lower cost than could be
achieved alone. We also believe that American Cellular has obtained substantial
marketing benefits from the name recognition associated with this widely used
service mark, both with existing subscribers traveling outside of American
Cellular's service areas and with potential new subscribers moving into American
Cellular's service areas.
Through its membership in North American Cellular Network and other special
networking arrangements, American Cellular has provided extended regional and
national service to its subscribers in other markets, thereby allowing them to
make and receive calls while in other cellular service areas without dialing
special access codes.
American Cellular's sales force works principally out of its retail stores
in which American Cellular offers a full line of cellular products and services.
As of December 31, 1999, American Cellular maintained approximately 90 retail
locations. Ranging from 250 square feet to 4,000 square feet, each store is
fully equipped to handle customer service and telephone maintenance and
installation. Some of these stores are also authorized warranty repair centers.
PRODUCTS AND SERVICES
In addition to providing cellular telephone service in each of its markets,
American Cellular also offers various custom-calling features, including voice
mail, call forwarding, call waiting, three-way conference calling and no answer
transfer. American Cellular has upgraded its systems to provide digital feature
services in its markets such as caller ID, message waiting indicator, short
messaging services and sleep mode for longer battery life.
American Cellular offers several rate plans so that customers may choose the
plan that best fits their expected calling needs. American Cellular has designed
rate plans on a market-by-market basis. These rate plans include a high-volume
user plan, a medium-volume user plan, a basic plan and an economy plan. Most
rate plans combine a fixed monthly access fee, a designated amount of free
minutes, per-minute usage charges and additional charges for custom-calling
features in a package which offers value to the customer while enhancing airtime
use and revenues. In general, rate plans which include a higher monthly access
fee typically include a lower usage rate per minute.
Agreements between American Cellular and other cellular operators allow
their respective subscribers to place calls, or roam, in most cellular service
areas throughout the country. American Cellular's markets, strategically
surrounding or between major metropolitan areas, encompass significant portions
of heavily traveled corridors, which results in significant roaming revenues.
CUSTOMER SERVICE
Customer service is an essential element of American Cellular's marketing
and operating philosophy. American Cellular has endeavored to attract new
subscribers and retain existing subscribers by providing consistently
high-quality customer service. In each of its cellular service regions, American
Cellular has maintained a local staff, including a market manager, customer
service representatives, technical and engineering staff, sales representatives
and installation and repair facilities. Each cellular service region handles its
own customer-related functions such as credit evaluation, customer activations,
account adjustments and rate plan changes. Local offices and installation and
repair facilities have enabled American Cellular to better service customers,
schedule installations and make repairs.
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<PAGE>
COMPETITORS AND ADJOINING SYSTEMS
The following chart lists American Cellular's cellular competitors in each
of its regions.
<TABLE>
<CAPTION>
AMERICAN CELLULAR REGIONS COMPETITORS
- ------------------------- -------------------------------------
<S> <C>
Upper Midwest AirTouch Communications, Inc.
U.S. Cellular
CelluLink
Cellular 2000
CellCom
Century Telephone Enterprises
Rural Cellular Corp.
Mid-Atlantic U.S. Cellular
ALLTEL
Ameritech
Bell Atlantic Mobile
New York Bell Atlantic Mobile
Kentucky BellSouth Mobility
Ramcell, Inc.
Bluegrass Cellular
U.S. Cellular
ALLTEL
</TABLE>
SERVICE MARKS
American Cellular uses the CELLULAR ONE-Registered Trademark- service mark
to identify and promote its cellular telephone service pursuant to licensing
agreements with Cellular One Group. Licensing and advertising fees are
determined based upon the population of the licensed areas. The licensing
agreements require American Cellular to provide high-quality cellular telephone
service to its customers and to maintain a certain minimum overall customer
satisfaction rating in surveys commissioned by Cellular One Group. The licensing
agreements which American Cellular has entered into are for original five-year
terms expiring on various dates. These agreements may be renewed at American
Cellular's option for three additional five-year terms.
EMPLOYEES AND DEALERS
As of December 31, 1999, American Cellular had approximately 815 employees.
In addition, American Cellular has agreements with independent dealers,
including car dealerships, electronics stores, paging services companies and
independent contractors. None of American Cellular's employees are represented
by a labor organization, and American Cellular's management considers its
employee relations to be good.
REGULATION
OVERVIEW
The wireless telecommunications industry is subject to extensive
governmental regulation on the federal level and to varying degrees on the state
level. The enactment of the Telecommunications Act of 1996 has had an impact on
many aspects of this regulation. In addition, this regulation is currently the
subject of administrative rulemakings and judicial proceedings that are
significant to us. The following is a summary of the federal laws and
regulations that materially affect the wireless telecommunications industry, in
general, and us, in particular, and a description of applicable certain state
laws. This section does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the wireless
telecommunications industry.
17
<PAGE>
FEDERAL REGULATION
The licensing, construction, modification, operation, ownership and
acquisition of cellular telephone systems are subject to regulations and
policies of the FCC under the Communications Act of 1934, as amended. The FCC
has promulgated rules and regulations governing, among other things,
applications to construct and operate cellular communications systems,
applications to transfer control of or assign cellular licenses and technical
and operational standards for the operation of cellular systems (such as maximum
power and antenna height).
The FCC licenses cellular systems in accordance with 734 geographically
defined market areas comprised of 306 MSAs and 428 RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal 25
MHz blocks and designated as wireline and non-wireline. Apart from the different
frequency blocks, there is no technical difference between wireline and
non-wireline cellular systems and the operational requirements imposed on each
by the FCC are the same. Under FCC rules, the authorized service area of a
cellular provider in each of its markets is referred to as the cellular
geographic service area. The cellular geographic service area may conform
exactly with the boundaries of the FCC designated MSA or RSA, or it may be
smaller if a licensee has chosen not to provide services to certain areas. A
cellular licensee has the exclusive right to expand its cellular geographic
service area boundaries within the licensee's MSA or RSA for a period of five
years after grant of the licensee's initial construction permit. At the end of
this five-year build-out period, however, other entities may apply to serve
portions of the MSA or RSA, of at least 50 square miles, in areas outside the
licensee's then designated cellular geographic service area. The five year
build-out period has expired for most licensees and the FCC has granted several
"unserved area" applications filed by parties other than the original MSA or RSA
licensee. No entity may, directly or indirectly, own a controlling interest in,
or otherwise have the ability to control, both systems. The FCC may prohibit or
impose conditions on transfers of licenses. In addition, under FCC rules, no
person or entity may have an attributable interest, as defined in FCC rules, in
a total of more than 45 MHz of licensed broadband personal communications
service, cellular and enhanced specialized mobile radio spectrum, regulated as
commercial mobile radio services with significant overlap in any geographic area
except in RSAs, where a total of 55MHz is lawful. This so-called "spectrum cap"
rule could have an impact on our ability to acquire other cellular systems, and
it also could limit the universe of potential buyers of any of our systems
should we wish to sell.
The FCC recently amended the spectrum cap ownership attribution rules to
allow for somewhat more ownership overlap. Significant overlap will occur when
at least 10% of the 1990 census population of the licensed service area is
within the cellular geographic service area, as defined below, and/or the
personal communications service area or enhanced specialized mobile radio
service area. Ownership limits on overlapping cellular licensees were recently
amended so that a party with a controlling interest or otherwise attributable
interest in a cellular licensee may have a direct or indirect ownership interest
of up to 5% in another cellular licensee in overlapping cellular geographic
service areas, and a party may have a direct or indirect ownership interest of
up to 20% in both cellular licensees in overlapping cellular geographic service
areas so long as neither interest is a controlling interest. This change in the
ownership attribution rules affords greater opportunities for non-controlling
investment in cellular systems and could facilitate our ability to attract
capital or to make investments in other cellular operators.
Cellular service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One requirement is the coordination
of proposed frequency usage with adjacent cellular users, permittees and
licensees in order to avoid interference between adjacent systems. In addition,
the height and power of base station transmitting facilities and the type of
signals they emit must fall within specified parameters. We are obligated to pay
annual regulatory fees and assessments to support the FCC's regulation of its
cellular operations, as well as fees necessary to support federal universal
service programs, number portability regional database costs, centralized
administration of telephone numbering, telecommunications relay service for the
hearing-impaired and application filing fees. These regulatory payment
obligations will increase our costs of doing business.
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<PAGE>
The Communications Act requires prior FCC approval for substantive, non
proforma transfers or assignments to or from us of a controlling interest in any
license or construction permit, or any rights thereunder. Although we cannot
assure you that the FCC will approve or timely act upon any future requests for
approval of applications that we file, we have no reason to believe that the FCC
would not approve or grant such requests or applications in due course. Because
an FCC license is necessary to lawfully provide cellular service, if the FCC
were to disapprove any such filing our business plans would be adversely
affected.
The FCC also regulates a number of other aspects of the cellular business.
For example, the FCC regulates cellular resale practices and currently also
applies such cellular resale requirements to A and B Block (and A/B Block
controlled) broadband personal communications service and enhanced specialized
mobile radio licensees. These cellular, personal communications service and
enhanced specialized mobile radio providers may not restrict any customer's
resale of their services or unreasonably discriminate against resellers of their
services. All resale obligations for cellular, broadband personal communications
service and enhanced specialized mobile radio operators are currently scheduled
to terminate on November 24, 2002. Moreover, federal legislation enacted in 1993
requires the FCC to reduce the disparities in the regulatory treatment of
similar mobile services, such as cellular services, personal communications
services and enhanced specialized mobile radio services. Under this regulatory
structure, all of our cellular licenses are classified as commercial mobile
radio services. As a commercial mobile radio services provider, the FCC
regulates us as a common carrier. The FCC, however, has exempted cellular
services from some typical common carrier regulations, such as tariff filings,
thereby allowing us to respond more quickly to our competition in the
marketplace.
The FCC has also adopted requirements for cellular and other commercial
mobile radio services providers to implement basic and enhanced 911 services.
These services provide emergency service providers with the ability to better
identify and locate callers using wireless services, including callers using
special devices for the hearing impaired. Our obligations to implement these
services are scheduled to occur in several stages, with the final stage
beginning as early as March 2001 and the FCC recently amended its rules to
eliminate a requirement that carriers be compensated for enhanced 911 costs and
expand the circumstances under which wireless carriers may be required to offer
enhanced 911 services. Federal legislation recently signed into law may limit
our liability relative to incompleted 911 calls to a degree commensurate with
wireline carriers in our markets. Federal law also requires cellular and
personal communications service carriers to provide law enforcement agencies
with capacity to support lawful wiretaps by March 12, 2001 and technical
capabilities for wiretaps beginning June 30, 2000 and to comply with
wiretap-related record-keeping and personnel-related obligations. Some of the
FCC's and FBI's rules implementing the wiretap requirements are currently being
reviewed by federal courts. These wireless 911 and law enforcement wiretap
requirements may create additional capital obligations for us to make necessary
system changes.
In addition, the FCC regulates the ancillary service offerings that cellular
and personal communications service licensees can provide and permits cellular,
broadband personal communications service, paging and enhanced specialized
mobile radio licensees to offer fixed services on a co-primary basis along with
mobile services. This rule change may facilitate the provision of wireless local
loop service, which involves the use of wireless links to provide local
telephone service by cellular licensees, as well as broadband personal
communications service and enhanced specialized mobile radio licensees, although
the extent of lawful state regulation of such "wireless local loop" service is
undetermined. In this regard, the FCC has also adopted telephone number
portability rules for local exchange carriers, as well as cellular, personal
communications service and enhanced specialized mobile radio licensees, that
could facilitate the development of local exchange competition, including
wireless local loop service. The new number portability rules generally require
cellular, personal communications service and enhanced specialized mobile radio
licensees to have the capability to deliver calls from their systems to ported
numbers effective December 31, 1998 and offer number portability and roaming to
ported numbers by November 24, 2002 but this schedule may be expedited if deemed
necessary by the FCC to promote number
19
<PAGE>
conservation. These requirements may result in added capital expenditures for us
to make necessary system changes, although we currently have no plans for any
such expenditures.
The FCC has also adopted rules to govern customer billing by commercial
mobile radio service providers and is considering whether to extend billing
rules currently applicable to landline carriers to commercial mobile radio
services carriers. Adoption of some of the FCC's proposals could increase the
complexity and costs of our billing processes and limit the manner in which we
bill for services. Finally, the FCC has initiated a rulemaking proceeding to
help facilitate the offering of so-called "calling party pays" services whereby
the party placing the call to a wireless customer pays the wireless airtime
charges. Adoption of a calling party pays system may result in increased usage
of wireless systems, thereby generating increased revenues and creating more
competition between commercial mobile radio services and traditional landline
carriers.
The FCC generally grants cellular and personal communications service
licenses for terms of ten years that are renewable upon application to the FCC.
Near the conclusion of the license term, we must file applications for renewal
of licenses to obtain authority to operate for an additional 10-year term. The
FCC may revoke our licenses and may deny our license renewal applications for
cause after appropriate notice and hearing. The FCC will award a renewal
expectancy to us if we meet certain standards of past performance. If we receive
a renewal expectancy, it is very likely that the FCC will renew our existing
cellular license without entertaining competing applications. To receive a
renewal expectancy, we must show that we have provided "substantial" service
during our past license term, and have substantially complied with applicable
FCC rules and policies and the Communications Act. The FCC defines "substantial"
service as service which is sound, favorable and substantially above a level of
mediocre service that might only minimally warrant renewal. If a licensee does
not receive a renewal expectancy, then the FCC will accept competing
applications for the license, subject to a comparative hearing, and the FCC may
award the license to another entity. To date, the FCC has renewed each of our
licenses for which a renewal application was required for a new ten year term.
The balance of our existing licenses begin to expire in October 2000.
A personal communications service system operates under a protected
geographic service area license granted by the FCC for either a major trading
area or a basic trading area on one of six frequency blocks allocated for
broadband service. The FCC has divided the United States and its possessions and
territories into personal communications service markets based upon Rand
McNally's 493 basic trading areas, all of which are included in the 51 major
trading areas. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band
for licensed broadband PCS services. The FCC divided the 120 MHz of spectrum
into six individual blocks, two 30 MHz blocks (A and B Blocks) licensed for each
of the 51 major trading areas, one 30 MHz block (C Block) licensed for each of
the 493 basic trading areas, and three 10 MHz blocks (D, E and F Blocks)
licensed for each of the 493 basic trading areas, a total of more than 2,000
licenses.
The FCC may deny applications for FCC authority, and in extreme cases revoke
licenses, if it finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making the determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or administrative proceeding involving felonies, the possession or sale
of unlawful drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. To our
knowledge, there are no activities, and no judicial or administrative
proceedings, involving either us or the licensees in which we hold a controlling
interest, that would warrant such a finding by the FCC.
If foreign nationals or their representatives, a foreign government or its
representative or any corporation organized under the laws of a foreign country
own of record or vote greater than 25 percent of our equity and the FCC
determines that the public interest would be so served, it may revoke our
cellular licenses or require an ownership restructuring. The FCC will generally
permit additional indirect ownership in excess of the statutory 25 percent
benchmark where that interest is to be held by an entity or entities from member
countries of the World Trade Organization. For investors from countries that are
not
20
<PAGE>
members of the World Trade Organization, the FCC will determine whether the home
country of the foreign investor extends reciprocal treatment called "equivalent
competitive opportunities" to U.S. entities. If these opportunities do not
exist, it is unlikely that the FCC will permit investment beyond the 25 percent
benchmark. These restrictions could adversely affect our ability to attract
additional equity financing. We have no knowledge that any foreign national owns
any of our capital stock.
The Telecommunications Act, which made significant changes to the
Communications Act and terminated the antitrust consent decree applicable to the
regional Bell operating companies, affects the telecommunications industry. This
legislation, among other things, affects competition for local
telecommunications services, interconnection arrangements for carriers,
universal service funding and the provision of interexchange services.
The Telecommunications Act requires state public utilities commissions
and/or the FCC to implement policies that mandate reciprocal compensation
between local exchange carriers, a category that will, for these purposes,
include cellular carriers, for interconnection services at rates more closely
related to cost. In a rulemaking proceeding pertaining to interconnection
between local exchange carriers and commercial mobile radio service providers
such as us, the FCC concluded that local exchange carriers are required to
compensate commercial mobile radio service providers for the reasonable costs
incurred by these providers in terminating traffic that originates on local
exchange carrier facilities, and vice versa. Consistent with this ruling, the
FCC has determined that local exchange carriers may not charge a commercial
mobile radio service provider or other carrier for terminating local exchange
carrier-originated traffic and that local exchange carriers may not charge
commercial mobile radio service providers for number activation and use fees.
Depending on further FCC disposition of these issues, we may or may not be
successful in securing refunds, future relief or both, with respect to charges
for termination of local exchange carrier-originated local traffic. If the FCC
ultimately resolves these issues in favor of commercial mobile radio service
providers, then we will pursue relief through settlement negotiations,
administrative complaint procedures or both. If these issues are ultimately
decided in favor of the local exchange carriers, we likely would be required to
pay all past due contested charges and may also be assessed interest and late
charges for the withhold amounts. These requirements could in the future have a
material effect on us.
The Telecommunications Act requires, and the FCC has adopted, rules that
require interstate communications carriers, including cellular carriers, to
"make an equitable and non-discriminatory contribution" to a universal service
fund that reimburses communications carriers that provide basic communications
services to users who receive services at subsidized rates. We have made such
payments as the FCC has required. The United States Court of Appeals for the
Fifth Circuit recently reversed many of the FCC's rules regarding carriers'
contribution obligations, and the FCC has recently adopted rules implementing
the court's decision. While it generally appears that our contributions to
federal universal service programs may decrease, our contributions to state
universal service programs may be subject to increases and, moreover, the FCC's
decision implementing the court's decision is subject to further administrative
and possibly judicial proceedings. Thus, the impact of the court's decision is
uncertain. We may also seek to qualify for payments from these programs in high
cost areas where we provide wireless services, although we are not certain that
such payments will be available to cellular carriers. If such payments are made
available to us, they would be an additional source of revenue to us that could
be used to subsidize service we provide in these high cost areas.
The Telecommunications Act also eases the restrictions on the provision of
interexchange telephone services by wireless carriers affiliated with regional
Bell operating companies. Regional Bell operating company-affiliated wireless
carriers have interpreted the legislation to permit immediate provision of in
region long distance call delivery for their cellular customers, thus presenting
an additional source of competition to us.
Additionally, the Telecommunications Act specifically exempts all cellular
carriers from the obligation to provide equal access to interstate long distance
carriers. However, the Telecommunications Act gives the FCC the authority to
impose rules to require unblocked access through carrier identification codes or
21
<PAGE>
800/888 numbers, so that cellular subscribers are not denied access to the long
distance carrier of their choosing, if the FCC determines that the public
interest so requires. We currently provide "dial around" equal access to all of
our customers.
The Telecommunications Act also imposes restrictions on a telecommunications
carrier's use of customer proprietary network information without prior customer
approval. FCC rules implementing these restrictions are being revised but have
the potential to impose upon us new costly obligations and impose burdens on our
current marketing activities. The FCC's rules implementing the
Telecommunications Act's customer proprietary network information provisions
were recently vacated by the United States Court of Appeals for the Tenth
Circuit on First Amendment grounds. The extent to which the FCC will need to
modify its rules to address the court's concerns is uncertain, but imposition of
rules similar to those vacated by the court would impose additional costs on us
and inhibit our marketing efforts.
The Telecommunications Act also requires telecommunications carriers to make
their services accessible to persons with disabilities and the FCC's rules
implementing these requirements are effective. These rules generally require
service providers to offer equipment and services that are accessible to and
usable by persons with disabilities, if readily available, and to comply with
complaint/grievance procedures for violations of these provisions. These rules
are still new and are subject to interpretation through the complaint process.
While much of the focus of these rules is on the manufacture of equipment,
carriers such as us could, if found to have violated the rules, be subject to
fines and/or the imposition of costly new requirements.
In addition, the FCC is currently considering rules to promote the
conservation of numbering resources. These efforts may affect wireless service
providers by imposing additional costs or limiting access to numbering
resources. The FCC has also authorized a number of states, including California,
Ohio and Texas to initiate limited numbering administration measures while the
FCC's consideration of federal rules remains pending, and other states have
requested similar authority. The impact of the federal rules on wireless
carriers, and whether states will continue to have numbering administration
authority, is uncertain. If more states are given authority over numbering
administration, differing number conservation regimes may be adopted in
different states. In such a case, we likely would incur additional costs in
order to keep abreast of each such regime.
The FCC has determined that interexchange (long distance) service offerings
of commercial mobile radio service providers are subject to rate averaging and
rate integration requirements of the Telecommunications Act. Rate averaging
requires us to average our intrastate long distance commercial mobile radio
service rates between high cost and urban costs. The FCC has delayed
implementation of the rate integration requirements with respect to wide area
rate plans pending further reconsideration of its rules, and has delayed the
requirement that commercial mobile radio service carriers integrate their rates
among commercial mobile radio service affiliates. Other aspects of the FCC's
rules are currently under review before the United States Court of Appeals for
the District of Columbia. There is a pending proceeding in which the FCC will
determine how integration requirements apply to commercial mobile radio service
offerings, including single rate plans. While this proceeding is pending,
commercial mobile radio service providers are subject to long distance rate
integration only where they separately state a long distance toll charge and
bill to customers, and the FCC is not enforcing the requirement for wide-area
plans. To the extent that we offer services subject to these requirements our
pricing flexibility is reduced, and there is no assurance that the FCC will
decline to impose these requirements on us and/or across our various commercial
mobile radio service affiliates.
The overall impact of the Telecommunications Act on our business is unclear
and will likely remain so for the foreseeable future. For example, limitations
on local zoning requirements imposed by the Telecommunications Act may
facilitate the construction of new cell sites and related facilities. However,
these restrictions on zoning authority may provide only limited assistance to
cellular carriers. On the other hand, other provisions of the new statute
relating to interconnection, telephone number portability,
22
<PAGE>
universal service, equal access, use of customer proprietary network information
and resale could subject us to additional costs and increased competition.
STATE, LOCAL AND OTHER REGULATION
The Communications Act preempts state or local regulation of the market
entry of, or the rates charged by, any commercial mobile radio services or any
private mobile service provider, which includes cellular telephone service
providers. The FCC has denied the petitions of eight states to continue their
rate regulation authority, including authority over cellular operators. As a
practical matter, we are free to establish rates and offer new products and
service with a minimum of regulatory requirements. The states in which we
operate maintain nominal oversight jurisdiction, primarily focusing upon prior
approval of acquisitions and transfers of licenses and resolution of customer
complaints.
The location and construction of our cellular transmitter towers and
antennas are subject to FCC and Federal Aviation Administration regulations and
are subject to federal, state and local environmental regulation, as well as
state or local zoning, land use and other regulation. Before we can put a system
into commercial operation, we must obtain all necessary zoning and building
permit approvals for the cell site microwave tower locations. The time needed to
obtain zoning approvals and requisite state permits varies from market to market
and state to state. Likewise, variations exist in local zoning processes.
Additionally, any proposed site must comply with the FCC's environmental rules.
If zoning approval or requisite state permits cannot be obtained, or if
environmental rules make construction impossible or infeasible on a particular
site, our network design might be adversely affected, network design costs could
increase the service provided to our customers might be reduced.
We cannot assure you that any state or local regulatory requirements
currently applicable to our systems will not be changed in the future or that
regulatory requirements will not be adopted in those states and localities which
currently have none. Such changes could impose new obligations on us that would
adversely affect our operating results.
FUTURE REGULATION
From time to time, federal or state legislators propose legislation that
could affect us, either beneficially or adversely. We cannot assure you that
federal or state legislation will not be enacted, or that regulations will not
be adopted or actions taken by the FCC or state regulatory authorities, that
might adversely affect our business. Changes such as the allocation by the FCC
of radio spectrum for services that compete with our business could adversely
affect our operating results.
EMPLOYEES AND AGENTS
As of December 31, 1999, we had approximately 1,065 employees. In addition,
as of that date, we had agreements with approximately 365 independent sales
agents, including car dealerships, electronics stores, paging service companies
and independent contractors. None of our employees is represented by a labor
organization, and we consider our employee relations to be good.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Oklahoma City, Oklahoma where we
lease approximately 24,600 square feet at a monthly rental of approximately
$19,000. As of December 31, 1999, our cellular operations leased approximately
130 retail offices and approximately 10 administrative offices at aggregate
annual rentals of approximately $3.3 million. We review these leases from time
to time and, in the future, may lease or acquire new facilities as needed. We
expect to lease or purchase additional sales and administrative office spaces in
connection with our pending acquisitions. We do not anticipate encountering any
material difficulties in meeting our future needs for leased space. We also
owned or leased approximately 488 cell sites as of December 31, 1999.
23
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
We are not currently aware of any pending or threatened litigation against
us or our subsidiaries that could have a material adverse effect on our
financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 10, 1999, the holders of our common stock unanimously consented
to the adoption of resolutions affirming and ratifying:
<TABLE>
<S> <C>
(i) the formation of an IPO Committee,
(ii) the distribution of Logix Communications Enterprises, Inc.
and its subsidiaries to holders of common stock and Class D
preferred stock prior to the IPO,
(iii) our recapitalization and reorganization,
(iv) the appointment and designation of our corporate officers,
(v) the authorization of the initial public offering of our
common stock and related matters,
(viii) the registration of our common stock with the Nasdaq
National Market,
(ix) the adherence to NASD requirements,
(x) the appointment of a transfer agent,
(xi) our tender offer for our 11.75% senior notes due 2007, and
(xii) our new credit facility.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1999, there was no established trading market for our
common stock. On February 9, 2000, we closed the initial public offering of
25,000,000 shares of our Class A common stock at a price to the public of
$22.00 per share. Since this date, our Class A common stock has been traded
over-the-counter and is quoted on the Nasdaq National Market System under the
ticker symbol "DCEL". There currently is no established public trading market
for our Class B common stock or Class D common stock. Each share of our Class B
common stock and Class D common stock is convertible into one share of our
Class A common stock and each share of Class B common stock is entitled to ten
votes per share.
As of March 3, 2000, there were 49 and four shareholders of record for our
Class A and Class B common stock, respectively. The closing price of our
Class A common stock on March 3, 2000 was $21.81.
We paid cash dividends of approximately $7.6 million to our common
stockholders in 1997. Since then, we have not paid any cash dividends to our
common stockholders. We currently intend to retain all of our earnings to
finance our operations, repay indebtedness and fund future growth. We do not
expect to pay any dividends on our common stock for the foreseeable future. In
addition, covenants contained in the instruments governing our bank credit
facilities and our outstanding preferred stock limit our ability to pay cash
dividends on our common stock.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data with respect to each of the five years ended December 31, 1999. The
consolidated financial data has been derived from our consolidated financial
statements. The historical consolidated financial data should be read in
conjunction with Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and our audited consolidated financial
statements and the related notes thereto included in Item 8, Financial
Statements and Supplementary Data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
($ IN THOUSANDS EXCEPT PER SHARE
AND PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Service revenue.......................... $ 160,075 $ 69,402 $ 38,410 $ 17,593 $ 13,949
Roaming revenue.......................... 145,473 66,479 26,262 7,852 4,370
Equipment sales.......................... 14,011 4,130 1,455 662 671
Other revenue............................ 380 24 587 832 693
----------- ----------- ----------- ----------- -----------
Total revenue............................ 319,939 140,035 66,714 26,939 19,683
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of service.......................... 47,408 33,267 16,431 6,119 4,654
Cost of equipment........................ 28,512 8,360 4,046 2,571 2,013
Marketing and selling.................... 50,649 22,393 10,669 4,462 3,103
General and administrative............... 55,482 26,051 11,555 3,902 3,035
Depreciation and amortization............ 127,440 47,110 16,798 5,241 2,529
----------- ----------- ----------- ----------- -----------
Total operating expenses................. 309,491 137,181 59,499 22,295 15,334
----------- ----------- ----------- ----------- -----------
Operating income........................... 10,448 2,854 7,215 4,644 4,349
Interest expense........................... (109,509) (38,979) (27,640) (4,284) (1,854)
Other income (expense), net................ 3,853 3,858 2,777 (1,503) (210)
Minority interests in income of
subsidiaries(1).......................... (3,308) (2,487) (1,693) (675) (1,334)
Income tax benefit (provision)............. 37,436 11,469 3,625 593 (347)
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations
before extraordinary items............... (61,080) (23,285) (15,716) (1,225) 604
----------- ----------- ----------- ----------- -----------
Discontinued operations:
(Loss) income from discontinued operations,
net of income taxes...................... (48,243) (27,110) 332 331 500
Loss on disposal of discontinued
operations, net of income taxes.......... (18,248) -- -- -- --
Extraordinary items, net of income
taxes(2)................................. -- (2,166) (1,350) (527) --
----------- ----------- ----------- ----------- -----------
Net (loss) income.......................... $ (127,571) $ (52,561) $ (16,734) $ (1,421) $ 1,104
Dividends on preferred stock............... (69,477) (23,955) (2,603) (849) (591)
----------- ----------- ----------- ----------- -----------
Net (loss) income applicable to common
stockholders............................. $ (197,048) $ (76,516) $ (19,337) $ (2,270) $ 513
=========== =========== =========== =========== ===========
Net (loss) income applicable to common
stockholders per common share:
Before discontinued operations and
extraordinary expense.................. $ (2.38) $ (0.90) $ (0.35) $ (0.04) $ --
Discontinued operations.................. (1.21) (0.51) 0.01 0.01 0.01
Extraordinary expense.................... -- (0.04) (0.03) (0.01) --
----------- ----------- ----------- ----------- -----------
Net (loss) income applicable to common
stockholders per common share............ $ (3.59) $ (1.45) $ (0.37) $ (0.04) $ 0.01
=========== =========== =========== =========== ===========
Cash dividends declared per common share... $ -- $ -- $ 0.14 $ 0.01 $ 0.01
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding.............................. 54,823,354 52,773,972 52,728,059 52,728,059 52,728,059
=========== =========== =========== =========== ===========
OTHER FINANCIAL DATA:
Capital expenditures, excluding cost of
acquisitions............................. $ 91,537 $ 55,289 $ 23,216 $ 17,438 $ 3,925
OTHER DATA:
Cellular subscribers (at period end)....... 444,700 352,000 100,100 34,000 26,600
Cellular penetration (at period end)(3).... 7.5% 6.8% 6.1% 5.8% 8.0%
Cellular churn(4).......................... 2.0% 2.0% 1.9% 1.8% 1.5%
Average monthly revenue per cellular
subscriber(5)............................ $ 33 $ 40 $ 41 $ 48 $ 50
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 4,251 $ 22,324 $ 2,752 $ 981 $ 732
Restricted cash and investments........ 49,346 75,580 26,777 -- --
Net fixed assets....................... 208,568 173,054 52,374 26,794 11,414
Total assets........................... 1,655,084 1,703,427 359,645 95,376 37,711
Long-term debt, net of current
portion.............................. 1,041,816 1,103,857 335,570 75,750 24,319
Mandatorily redeemable preferred
stock................................ 540,722 381,320 11,623 10,000 5,913
Stockholders' deficit.................. (353,830) (156,783) (36,673) (9,802) (6,971)
</TABLE>
- ------------------------
(1) Reflects minority interests in partnerships in which we own the majority
interests.
(2) Extraordinary items reflect losses related to early extinguishment of debt.
(3) Determined by dividing our total ending cellular subscribers for the period
by the estimated total Pops covered by applicable FCC cellular licenses.
(4) Churn means the number of cellular subscriber cancellations per period as a
percentage of the weighted average total cellular subscribers during such
period. Churn is stated as the average monthly churn rate for the period.
(5) Excludes roaming and equipment revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents factors which we believe are
relevant to an assessment and understanding of our consolidated financial
position and results of operations. This financial and business analysis should
be read in conjunction with our consolidated financial statements and the notes
thereto included in Item 8.
OVERVIEW
We provide rural suburban cellular telephone services. We began providing
cellular telephone services in 1990 in Oklahoma and the Texas Panhandle. We have
rapidly expanded our cellular operations with an acquisition strategy targeting
underdeveloped rural and suburban areas which have a significant number of
potential customers with substantial needs for cellular communications. At
December 31, 1999, our cellular systems covered a population of 5.9 million and
we had approximately 444,700 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. American Cellular is one of the largest independent rural cellular
telephone operations in the United States. As of December 31, 1999, American
Cellular's systems covered a total population of approximately 4.9 million and
it had approximately 431,200 subscribers, primarily in rural areas of the
midwestern and eastern United States.
We will account for our interest in the American Cellular joint venture
using the equity method of accounting. As a result, beginning with the first
quarter of 2000, we will reflect our proportionate share of the joint venture's
equity in a single line item entitled "Investment in unconsolidated subsidiary"
in our balance sheet and we will reflect our proportionate share of the joint
venture's net income or losses in a single line item entitled "Equity in income
(loss) of unconsolidated subsidiary" in our statement of operations. To the
extent that the joint venture incurs losses in the future, our "Investment in
unconsolidated subsidiary" will be reduced.
26
<PAGE>
Since 1996 and as of March 3, 2000, we have completed 19 acquisitions of
cellular licenses and systems and related assets for an aggregate purchase price
of $3.5 billion, increasing the total proportionate population served by our
systems to approximately 8.5 million and expanding the geographical scope of our
operations. Although our cash flows from operations has increased as a result of
our acquisitions, the increased amortization of our costs of FCC licenses and
related assets, and our acquisition costs, together with the increased interest
expense and dividend requirements associated with our outstanding indebtedness
and preferred stock, have resulted in increased losses applicable to common
stockholders for 1999, 1998 and 1997. We expect that our interest in the
American Cellular joint venture will result in an immediate increase in our net
losses. We expect our net losses to continue until we expand our acquired
systems and increase our subscriber base. Our recent acquisitions affect the
comparability of our historical results of operations for the periods discussed,
therefore these results may not be indicative of future performance.
REVENUE
Our cellular revenues consist of service revenue, roaming revenue, equipment
sales and other revenues. There has been an industry trend of declining average
revenue per minute as competition among wireless 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 wireless telecommunications
industry of declining average revenue per subscriber. We believe that this
downward trend results primarily from the addition of new lower usage customers
who utilize wireless services for personal convenience, security or as a backup
to their traditional landline telephone as well as declining average revenues
per minute.
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 45.5%,
47.5% and 39.4% of our cellular revenue for the years ended December 31, 1999,
1998 and 1997, 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 virtually no costs related to equipment,
customer service or collections to earn roaming revenues.
We include any toll, or long-distance, revenues related to our cellular and
roaming services in service revenues and roaming revenues. Our roaming yield,
which is our roaming service revenues, including airtime, toll charges and
surcharges, divided by roaming minutes of use, was $.48, $.61 and $.72 per
minute for the years ended December 31, 1999, 1998 and 1997. Despite the decline
in our roaming yield, we have seen overall roaming revenues grow due to growth
in roaming minutes of use.
We derive roaming revenues from charges to our subscribers when those
subscribers roam into other wireless providers' markets. Our current accounting
practice is 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 moving to
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 are currently
assessing the need to report these revenues and expenses separately in our
statements of operations. If we had reported these revenues and expenses
separately in our statement of operations for the years ended December 31, 1999,
1998 and 1997, revenues would have been $359.3 million, $150.8 million, and
$74.4 million, respectively, average monthly revenues per cellular subscriber,
excluding roaming revenues, would have been $42, $48 and $52, respectively.
27
<PAGE>
Our overall cellular penetration rates increased in 1999 and 1998 compared
to 1997 due to the incremental penetration gains in existing markets. We believe
that as our cellular penetration rates increase, the increase in new subscriber
revenues will continue to exceed the loss of revenues attributable to our
cellular churns.
COSTS AND EXPENSES
Our primary operating expense categories include cost of service, cost of
equipment, marketing and selling costs, general and administrative costs 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 these 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,
including costs for customer support, billing, collections, and corporate
administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
During the first quarter 2000, we expect to incur an extraordinary pretax
loss of approximately $37.1 million, which includes a $28.4 million premium paid
on the retirement of our 11.75% senior notes and an $8.7 million write-off of
previously capitalized financing costs associated with our existing Dobson
Operating Company and Dobson Cellular Operations Company credit facilities and
our senior notes.
DISCONTINUED OPERATIONS
Our former wholly-owned subsidiary, Logix, provides integrated local, long
distance, data and other telecommunications services to small and medium-sized
business customers throughout the Southwest United States. Logix operates
long-haul fiber optic facilities in Oklahoma, Texas and Colorado and incumbent
local exchange services in Oklahoma. Logix also offers switch-based integrated
communications provider services in Oklahoma City, Tulsa, Amarillo, Houston,
Austin, Dallas, Fort Worth and San Antonio.
We distributed the stock of Logix to certain of our stockholders on
January 24, 2000. Logix is accounted for as a discontinued operation in our
consolidated financial statements.
RESULTS OF OPERATIONS
The financial statement numbers have been rounded; however, the percentage
changes are based on the actual financial statement numbers.
28
<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
OPERATING REVENUES. For the year ended December 31, 1999, total operating
revenue increased $179.9 million, or 128.5%, to $319.9 million from
$140.0 million for the comparable period in 1998. Our total service revenues,
roaming revenues and equipment sales and other revenues represented 50.0%, 45.5%
and 4.5%, respectively, of total operating revenue during the year ended
December 31, 1999 and 49.5%, 47.5% and 3.0%, respectively, of total operating
revenue during the year ended December 31, 1998.
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue....................................... $160,075 $ 69,402
Roaming revenue....................................... 145,473 66,479
Equipment sales....................................... 14,391 4,154
-------- --------
Total................................................. $319,939 $140,035
======== ========
</TABLE>
For the year ended December 31, 1999, service revenue increased
$90.7 million, or 130.6%, to $160.1 million from $69.4 million for the year
ended December 31, 1998. Of the increase, $85.1 million was attributable to the
service revenue earned by markets acquired during 1998 and 1999 acquisitions. On
a pro forma basis, assuming these acquisitions had occured at the beginning of
1998, service revenues increased 13.3% from 1998, due to increased penetration
and usage in our markets. Our subscriber base increased 26.3% to 444,700 at
December 31, 1999 from 352,000 at December 31, 1998. Approximately 16,300
subscribers were added since December 31, 1998 as a result of acquisitions. Our
average monthly service revenue per subscriber decreased 17.5% to $33 for the
year ended December 31, 1999 from $40 for the comparable period in 1998 due to
the addition of new lower rate subscribers in our eastern region and competitive
market pressures in all our markets.
For the year ended December 31, 1999, roaming revenue increased
$79.0 million, or 118.8%, to $145.5 million from $66.5 million for the year
ended December 31, 1998. Of the increase, $53.7 million was attributable to the
roaming revenue earned by markets acquired during 1998 and 1999 acquisitions. On
a pro forma basis, assuming these acquisitions had occured at the beginning of
1998, roaming revenue increased 45.0% from 1998 due to increased roaming minutes
in our markets from expanded coverage areas and increased usage.
For the year ended December 31, 1999, equipment sales and other revenues
increased $10.2 million, or 246.4%, to $14.4 million from $4.2 million for the
year ended December 31, 1998 due to increased sales of equipment as a result of
growth in subscribers.
COST OF SERVICE. For the year ended December 31, 1999, the total cost of
service increased $14.1 million, or 42.5%, to $47.4 million from $33.3 million
for the comparable period in 1998. The increase was primarily attributable to
increased subscribers and minutes of use in our markets. As a percentage of
service and roaming revenue, our cost of cellular service decreased to 15.5% for
the year ended December 31, 1999 from 24.5% for the year ended December 31,
1998. 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 year ended December 31, 1999, our cost of
equipment increased $20.1 million, or 241.1%, to $28.5 million during 1999 from
$8.4 million in 1998, primarily as a result of increases in the volume of
equipment we sold due to the growth in subscribers.
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MARKETING AND SELLING COSTS. For the year ended December 31, 1999, our
marketing and selling costs increased $28.2 million, or 126.2%, to
$50.6 million from $22.4 million for the year ended December 31, 1998. As a
percentage of total operating revenue, marketing and selling costs decreased
slightly to 15.8% for the year ended December 31, 1999 from 16.0% for the year
ended December 31, 1998. We added 176,600 gross subscribers during the year
ended December 31, 1999 and 65,700 gross subscribers during the year ended
December 31, 1998. Gross subscriber additions do not include subscribers
acquired through business acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. For the year ended December 31, 1999, our
general and administrative costs increased $29.4 million, or 113.0%, to
$55.5 million from $26.1 million for the year ended December 31, 1998. This
increase was the result of increased infrastructure costs, including customer
service, billing, collections and administrative costs as a result of the
overall growth. Our average monthly general and administrative costs per average
subscriber decreased 25% to $12 for 1999 compared to $16 for 1998. This decrease
in general and administrative costs per subscribers was primarily from
efficiencies gained from the integration of acquired companies.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1999, our depreciation and amortization expense increased $80.3 million, or
170.5% to $127.4 million from $47.1 million for 1998. Depreciation and
amortization of assets acquired in acquisitions accounted for $61.4 million of
this increase. The remainder of this increase was from depreciation and
amortization attributable to our depreciable assets and intangibles.
INTEREST EXPENSE. For the year ended December 31, 1999, our interest
expense increased $70.5 million, or 180.9%, to $109.5 million from
$39.0 million for the year ended December 31, 1998. The increase resulted
primarily from our increased borrowings during December of 1998 to finance our
acquisitions.
OTHER INCOME (EXPENSE), NET. For the year ended December 31, 1999 and 1998,
our other income remained constant at $3.9 million.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the year ended
December 31, 1999, our minority interests in income of subsidiaries increased
$0.8 million, or 33.0%, to $3.3 million from $2.5 million in 1998. This increase
was attributable to the increased income earned from our subsidiaries in
established markets in which we do not own a 100% interest, which was offset by
losses from subsidiaries in newly acquired markets in which we do not own a 100%
interest.
EXTRAORDINARY EXPENSE. For the year ended December 31, 1998, we incurred an
extraordinary pretax loss of approximately $3.3 million as a result of writing
off previously capitalized financing costs associated with the revolving credit
facility that was refinanced in March 1998.
(LOSS) INCOME FROM DISCONTINUED OPERATIONS. For the year ended
December 31, 1999, we had a loss from discontinued operations of $48.2 million,
compared to $27.1 million for the year ended December 31, 1998. This increase
resulted from increased losses by Logix, our wholly-owned subsidiary. Subsequent
to year-end, we distributed the capital stock of Logix to certain of our
stockholders.
LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS. For the year ended
December 31, 1999, we incurred an extraordinary pretax loss of approximately
$29.4 million resulting from our loss on the disposition of Logix. This loss
represents Logix' loss from November 10, 1999 (the date we adopted a plan to
distribute the stock of Logix) through January 24, 2000 (the date of
disposition).
NET (LOSS) INCOME. For the year ended December 31, 1999, our net loss was
$127.6 million. Our net loss increased $75.0 million, or 142.7%, from
$52.6 million for the year ended December 31, 1998. The increase in our net loss
was primarily attributable to increased depreciation and amortization expense
and interest expense resulting from our recent business acquisitions, related
financings and increased losses from discontinued operations.
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DIVIDENDS ON PREFERRED STOCK. For the year ended December 31, 1999, our
dividends on preferred stock increased $45.5 million, or 190.0%, to
$69.5 million from $24.0 million for the year ended December 31, 1998. The
increase was primarily the result of additional dividends on our December 1998
and May 1999 issuance of senior preferred stock.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
OPERATING REVENUES. For the year ended December 31, 1998, total operating
revenue increased $73.3 million, or 109.9%, to $140.0 million from
$66.7 million for the comparable period in 1997. Our total service revenues,
roaming revenues and equipment sales and other revenues represented 49.5%, 47.5%
and 3.0%, respectively, of total operating revenue during the year ended
December 31, 1998 and 57.6%, 39.4% and 3.1%, respectively, of total operating
revenue during the year ended December 31, 1997.
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Service revenue........................................ $ 69,402 $38,410
Roaming revenue........................................ 66,479 26,263
Equipment sales........................................ 4,154 2,041
-------- -------
Total.................................................. $140,035 $66,714
======== =======
</TABLE>
For the year ended December 31, 1998, service revenue increased
$31.0 million, or 80.7%, to $69.4 million from $38.4 million for the year ended
December 31, 1997. Of the increase, $15.8 million was attributable to the
service revenue earned by markets acquired during 1997 and 1998 acquisitions. On
a pro forma basis, assuming these acquisitions had occured at the beginning of
1997, service revenue increased 19.5% from 1997 due to increased penetration and
usage in our central and eastern regions. Our subscriber base increased 251.7%
to 352,000 at December 31, 1998 from 100,100 at December 31, 1997. Approximately
220,600 subscribers were added since December 31, 1997 as a result of
acquisitions. Our average monthly service revenue per subscriber decreased 2.4%
to $40 for the year ended December 31, 1998 from $41 for the comparable period
in 1997 due to the addition of new lower rate subscribers in our eastern region
and competitive market pressures in all our markets.
For the year ended December 31, 1998, roaming revenue increased
$40.2 million, or 153.1%, to $66.5 million from $26.3 million for the year ended
December 31, 1997. Of the increase, $25.0 million was attributable to the
roaming revenue earned by markets acquired during 1997 and 1998 acquisitions. On
a pro forma basis, assuming these acquisitions had occured at the beginning of
1997, roaming revenue increased 21.4% from 1997 due to increased roaming minutes
in our central and eastern regions due to expanded coverage areas and increased
usage in these markets.
For the year ended December 31, 1998, equipment sales and other revenues
increased $2.2 million, or 103.5%, to $4.2 million from $2.0 million for the
year ended December 31, 1997 due to increased sales of equipment as a result of
growth in subscribers.
COST OF SERVICE. For the year ended December 31, 1998, the total cost of
service increased $16.8 million, or 102.5%, to $33.3 million from $16.4 million
for the comparable period in 1997. Of the increase, $9.0 million was
attributable to acquisitions. The remaining $7.8 million was primarily
attributable to increased subscribers and minutes of use in our central and
eastern regions and payments we made to other wireless service providers for the
use of their networks while our customers were roaming in their
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service areas. As a percentage of service and roaming revenue, our cost of
cellular service remained constant at 24.5% for the year ended December 31, 1998
and the year ended December 31, 1997.
COST OF EQUIPMENT. For the year ended December 31, 1998, our cost of
equipment increased $4.3 million, or 106.6%, to $8.4 million during 1999 from
$4.0 million in 1997, primarily as a result of increases in the volume of
equipment we sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. For the year ended December 31, 1998, our
marketing and selling costs increased $11.7 million, or 109.9%, to
$22.4 million from $10.7 million for the year ended December 31, 1997. As a
percentage of total operating revenue, marketing and selling costs remained
constant at 16.0% for the year ended December 31, 1998 and the year ended
December 31, 1997. We added 65,700 gross subscribers during the year ended
December 31, 1998 and 33,400 gross subscribers during the year ended
December 31, 1997. Gross subscriber additions do not include subscribers
acquired through business acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. For the year ended December 31, 1998, our
general and administrative costs increased $14.5 million, or 125.5%, to
$26.1 million from $11.6 million for the year ended December 31, 1997. This
increase was the result of increased infrastructure costs, including customer
service, billing, collections and administrative costs as a result of the
overall growth. As a percentage of total operating revenue, general and
administrative costs increased to 18.6% in the year ended December 31, 1998 from
17.3% in the year ended December 31, 1997. The increase as a percentage of total
operating revenues resulted from initial inefficiencies created in our
administrative areas as a result of the fourth quarter 1998 operational split of
our ongoing wireless and our wireline business segments. In addition, we
experienced higher than expected levels of bad debt expenses in certain markets
in the fourth quarter of 1998.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1998, our depreciation and amortization expense increased $30.3 million, or
180.5% to $47.1 million from $16.8 million for 1997. Depreciation and
amortization of assets acquired in acquisitions accounted for $21.1 million of
this increase. The remainder of this increase was from depreciation attributable
to our depreciable assets.
INTEREST EXPENSE. For the year ended December 31, 1998, our interest
expense increased $11.3 million, or 41.0%, to $39.0 million from $27.6 million
for the year ended December 31, 1997. The increase resulted primarily from our
increased borrowings in 1998 to finance our acquisitions.
OTHER INCOME (EXPENSE), NET. For the year ended December 31, 1998, our
other income increased $1.1 million, or 38.9%, to $3.9 million from
$2.8 million for the year ended December 31, 1997. Of this increase,
$0.9 million was attributable to increased interest income in 1998. In 1998, we
had higher investment balances than in 1997, primarily related to proceeds from
the sale of securities pending their use and escrow deposits relating to
acquisition completed in 1998.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the year ended
December 31, 1998, our minority interests in income of subsidiaries increased
$0.8 million, or 46.9%, to $2.5 million from $1.7 million in 1997. This increase
was attributable to the increased income earned from our subsidiaries in
established markets in which we do not own a 100% interest, which was offset by
losses from subsidiaries in newly acquired markets in which we do not own a 100%
interest.
EXTRAORDINARY EXPENSE. In 1998 and 1997, we incurred an extraordinary
pretax loss of approximately $3.3 million and $2.2 million, respectively, as a
result of writing off previously capitalized financing costs associated with
revolving credit facilities that were refinanced in March 1998 and
February 1997, respectively.
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(LOSS) INCOME FROM DISCONTINUED OPERATIONS. For the year ended
December 31, 1998, we had a loss from discontinued operations of $27.1 million,
compared to income from discontinued operations of $0.3 million for the year
ended December 31, 1997. The loss was the result of increased losses by Logix,
our local exchange carrier subsidiary, that substantially expanded its
operations in 1998. We distributed the capital stock of Logix to our current
stockholders subsequent to year end.
NET (LOSS) INCOME . For the year ended December 31, 1998, our net loss was
$52.6 million. Our net loss increased $35.9 million, or 214.1%, from
$16.7 million for the year ended December 31, 1997. The increase in our net loss
was primarily attributable to increased depreciation and amortization expense
and interest expense resulting from our 1998 business acquisitions and related
financings and increased losses from discontinued operations.
DIVIDENDS ON PREFERRED STOCK. For the year ended December 31, 1998, our
dividends on preferred stock increased $21.4 million, or 820.2%, to
$24.0 million from $2.6 million for the year ended December 31, 1997. The
increase was primarily the result of additional dividends on our January 1998
issuance of senior preferred 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 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.
NET CASH FLOW
At December 31, 1999, we had a working capital deficit of $19.2 million, a
ratio of current assets to current liabilities of 0.8:1 and an unrestricted cash
balance of $4.3 million, which compares to working capital of $13.5 million, a
ratio of current assets to current liabilities of 1.1:1 and an unrestricted cash
balance of $22.3 million at December 31, 1998.
Our net cash provided by operating activities totaled $26.7 million for 1999
compared to $28.0 million for 1998 and $6.9 million for 1997. The decrease of
$1.3 million was primarily due to an increase in our net loss and deferred
income taxes for the period offset by increased depreciation and amortization.
The increase of $21.1 million from 1997 to 1998 was primarily due to
depreciation and amortization and the change in current assets and liabilities
offset by our net loss for the period.
Our net cash used in investing activities, which totaled $123.5 million,
$999.1 million and $217.6 million for the years ended December 31, 1999, 1998
and 1997, respectively, related primarily to acquisitions and capital
expenditures in all periods. Acquisitions and their related costs accounted for
$40.0 million, $945.4 million and $190.7 million and capital expenditures were
$91.5 million, $55.3 million and $17.8 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Net cash provided by financing activities was $78.8 million for the year
ended December 31, 1999 compared to $990.6 million and $212.5 million for 1998
and 1997, respectively. Financing activity sources for the year ended
December 31, 1999 consisted primarily of the issuance of $170.0 million of 13%
senior preferred stock, maturities of restricted investments of $29.7 million
and proceeds from long-term debt of $126.0 million, which was partially offset
by the redemption of $55.0 million of our Class F and Class G preferred stock
and repayments of long-term debt totaling $161.2 million.
The minority partners in 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.
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<PAGE>
CAPITAL RESOURCES
On January 14, 2000, we obtained a new $800.0 million credit facility under
a credit agreement with Bank of America, N.A., as Administrative Agent and a
group of participating lenders, the proceeds of which 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;
- to repurchase $159.7 million outstanding principal amount of our 11.75%
senior notes due 2007; and
- to pay the cash portion of the costs of certain of our pending
acquisitions.
This new credit facility includes a $300.0 million revolving credit facility
and $500.0 million of term loan facilities consisting of a Term A Facility of
$350.0 million and a Term B Facility of $150.0 million. All of these loans will
mature in 2007.
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. Our 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.
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. 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.
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. In addition, we are required
to maintain certain financial ratios with respect to the borrower and certain of
its subsidiaries, including:
- a ratio of total indebtedness to operating cash flow of initially not more
than 7.75 to 1, decreasing over time to 5.00 to 1;
- a ratio of operating cash flow to debt service requirements of initially
not less than 1.15 to 1, increasing over time to 1.50 to 1;
- a ratio of operating cash flow to interest expense of initially not less
than 1.40 to 1, increasing over time to 2.25 to 1;
- beginning on December 31, 2001, a ratio of operating cash flow minus
capital expenditures to the sum of debt service requirements and cash
distributions of initially not less than 1.05 to 1, increasing over time
to 1.25 to 1; and
- a limitation of capital expenditures for 2000 and 2001.
34
<PAGE>
Our subsidiary, Dobson/Sygnet, is a party to a credit agreement for an
aggregate of $430.0 million, consisting of a $50.0 million revolving credit
facility and $380.0 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 8.9% since inception. As of
December 31, 1999, we had $398.0 million outstanding under the Dobson/Sygnet
credit facilities and we had $24.0 million of availability under the
Dobson/Sygnet credit facilities.
The obligations under the Dobson/Sygnet credit facilities are secured by a
pledge of the capital stock of Dobson/Sygnet's operating subsidiary as well as a
lien on substantially all of the assets of Dobson/Sygnet and its operating
subsidiary. The Dobson/Sygnet credit facilities require 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 Dobson/Sygnet credit facilities amortize
quarterly beginning on December 31, 2000. The revolving credit facility
terminates on September 23, 2006. The $50.0 million term loan facility
terminates on March 23, 2007 and the $380.0 million term loan facility
terminates on December 23, 2007. The weighted average interest rate on the
Dobson/Sygnet credit facilities was 9.8% as of December 31, 1999.
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 1/4%, 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 December 31, 1999,
relating to these purchased securities was $46.3 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 3/4%, 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.
As of December 31, 1999, we have issued and outstanding 12 1/4% senior
preferred stock and 13% senior preferred stock with aggregate liquidation values
of $295.2 million and $185.2 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
We had capital expenditures of $91.5 million during 1999. We have budgeted
approximately $100.0 million for capital expenditures in 2000. We may also
require additional financing for future acquisitions, to refinance our debt at
its final maturities and to meet our mandatory redemption provisions on our
senior preferred stock.
We have agreed to purchase approximately $120.0 million of cell site and
switching equipment from Nortel Networks Corp. prior to November 2001. Of this
commitment, approximately $56.4 million remained outstanding at December 31,
1999. Under another equipment supply agreement, we agreed to purchase
approximately $81.0 million of cell site and switching equipment from Lucent
Technologies Inc. by January 13, 2002. Of this commitment, $26.8 million
remained outstanding at December 31, 1999. 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.
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We recently entered into a definitive agreement to acquire the FCC license
for, and certain assets related to, Texas 9 RSA for an aggregate purchase price
of $125.0 million, subject to adjustment. This acquisition is expected to close
in the first half of 2000. On June 24, 1999 we concluded our purchase of the
FCC license for, and certain assets related to, Maryland 1 RSA and an unserved
portion of Cumberland, Maryland MSA for $9.1 million in cash using available
funds under our credit facilities. In the third quarter of 1999, we also
acquired the FCC license for, and certain assets related to, a portion of
Arizona 1 RSA for $24.0 million. Arizona 1 is located in northwestern Arizona.
Effective December 14, 1999, we concluded the purchase of the FCC license for,
and certain assets related to, Pennsylvania 2 RSA for $6.0 million. Effective
January 31, 2000, we concluded the purchase of the FCC license for, and certain
assets related to, Alaska 3 RSA for $12.0 million. On February 11, 2000, we
concluded our purchase of the FCC license for, and certain assets related to,
Michigan 3 RSA for $97.0 million. Effective February 17, 2000, we concluded the
purchase of the FCC license for, and certain assets related to, Alaska 1 RSA for
$16.0 million. 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. On March 3, 2000, we acquired the FCC license for
Michigan 10 RSA and certain related assets for approximately $34.0 million. We
have no definitive agreements with respect to any acquisitions other than our
acquisition of Texas 9 RSA.
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.
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. Under SFAS 133, the Company would record an asset
of $.5 million relating to its interest rate hedge
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<PAGE>
valuation at December 31, 1999. The Company has not determined the timing or
method of adoption of SFAS 133.
IMPACT OF YEAR 2000 ISSUE
Many computer systems and applications, including those embedded in
equipment and facilities, use two digit rather than four digit date fields to
designate an applicable year. As a result, these systems and applications may
not properly recognize the year 2000 or process data that includes it,
potentially causing data miscalculations, inaccuracies, operational malfunctions
or failures.
In April 1998, we established a multi-disciplined team to perform a year
2000 impact analysis. The team consisted of representatives from each of our
lines of business, as well as representatives from key corporate departments,
and was headed by a full-time year 2000 compliance manager. The team created a
year 2000 assessment methodology that brought a structured approach to the
assessment and management reporting process.
We completed an inventory of our automated systems and services and
identified significant risk areas by line of business, specific compliance
requirements and costs and estimated completion dates for affected systems. The
services we provide are based on the systems of regional Bell operating
companies and other systems outside our control. We have had contact with all of
the vendors of products and services that we believe are critical to our
operations. Our vendors' representations pertaining to year 2000 compliance have
come in writing directly to us, in contracts and by accessing year 2000
information available at their web sites. While all of our vendors have provided
some type of assurance that their products will be year 2000 compliant, not all
have provided us expressly with a "year 2000 compliance statement" and/or a
"year 2000 warranty." Our focus with our vendors has been directed toward
obtaining assurances of year 2000 compliance in the form of documented year 2000
planning and testing and third party audits, whenever available.
We do not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, we have
historically relied on outsourcing relationships for most of our business and
operational support applications. Those applications that have not been
outsourced to service providers have been deployed using packaged software from
outside vendors. As a result, the focus of our remediation efforts is not a
large scale in-house effort, but rather an identification of third party systems
and services that are not currently year 2000 compliant and oversight of third
party compliance efforts.
The results of the impact analysis revealed that for most of our information
systems, services and telecommunications infrastructure, year 2000 compliant
versions were to be included as a part of existing maintenance and/or service
agreements at no additional cost to us and were in place and tested by the end
of the second quarter of 1999. All critical systems relating to call delivery,
billing, accounting, payroll and customer care were running on software that was
designated by the vendor as being year 2000 compliant by the end of October
1999. We have replaced or upgraded all non-critical systems such as workstations
to ensure compliance with year 2000. The cost of upgrading or replacing those
systems that were not covered by existing service or maintenance agreements was
approximately $0.75 million. Our estimated upgrade costs does not include the
cost of upgrading and/or replacing those non-year 2000 compliant systems that
were replaced or upgraded based on non-year 2000 related business reasons.
Since January 1, 2000 we have tested our critical systems and those tests
revealed no year 2000 problems. In addition, our operations to date have not
experienced any year 2000-related problems. We will continue to analyze systems
and services that utilize date-embedded codes that may experience operational
problems as various functions are utilized in the coming months. We will
continue communicating with third party vendors of systems software and
equipment, suppliers of telecommunications capacity and equipment, roaming
partners, customers and others with which we do business to coordinate year 2000
compliance. We completed our year 2000 contingency and business continuity plans
during the fourth quarter of 1999.
37
<PAGE>
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including planned capital
expenditures and acquisitions, are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These plans involve a number of risks and uncertainties. Important factors
that could cause actual capital expenditures, acquisition activity or our
performance to differ materially from the plans include, without limitation, our
ability to satisfy the financial covenants of our outstanding debt and preferred
stock instruments and to raise additional capital; our ability to manage our
rapid growth successfully and to compete effectively in our cellular, fiber and
resale businesses against competitors with greater financial, technical,
marketing and other resources; changes in end-user requirements and preferences;
the development of other technologies and products that may gain more commercial
acceptance than those of ours; and adverse regulatory changes. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. We undertake no obligation to update or revise
these forward-looking statements to reflect events or circumstances after the
date hereof including, without limitation, changes in our business strategy or
planned capital expenditures, or to reflect the occurrence of unanticipated
events.
ITEM 7A. 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. 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 amount of
the Dobson/Sygnet credit facilities at approximately 5.48% plus a factor based
on our leverage, approximately 8.76% at December 31, 1999. The term of the
interest rate swap is 24 months. In June 1999, we entered into an interest rate
cap agreement terminating on June 14, 2001. The cap agreement minimizes our
interest rate exposure by setting a maximum rate of 7.50% plus a factor based on
our leverage, approximately 8.89% at December 31, 1999, for $160.0 million of
our indebtedness. The counterparty to each of the interest rate swap and cap are
major financial institutions. Increases in interest expense relating to the
interest rate hedge for the year ended December 31, 1998 and 1999 were reflected
in income and were immaterial. We did not recognize any gains or losses in 1997,
1998 or 1999 from such interest rate hedging. We do not enter into derivatives
or other financial instruments for trading or speculative purposes.
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. The
estimated fair market values of our total long-term fixed rate debt and our
variable-rate debt are shown in Note 16 to our December 31, 1999 consolidated
financial statements. Based on our market risk sensitive instruments outstanding
at December 31, 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.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Financial Statements:
Report of independent public accountants.................. 40
Consolidated balance sheets as of December 31, 1999 and
1998.................................................... 41
Consolidated statements of operations for the years ended
December 31, 1999, 1998 and 1997........................ 43
Consolidated statements of stockholders' deficit for the
years ended December 31, 1999, 1998 and 1997............ 44
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998 and 1997........................ 45
Notes to consolidated financial statements................ 47
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Dobson Communications Corporation:
We have audited the accompanying consolidated balance sheets of Dobson
Communications Corporation (an Oklahoma corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dobson Communications Corporation and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
February 25, 2000
40
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,251,104 $ 22,323,734
Accounts receivable--
Due from customers, net of allowance for doubtful accounts
of $1,834,041 and $2,043,200 in 1999 and 1998,
respectively............................................ 52,355,414 43,299,568
Restricted cash and investments........................... 22,919,339 30,074,946
Inventory................................................. 7,894,329 5,158,512
Prepaid expenses and other................................ 3,556,263 2,026,538
Deferred income taxes..................................... 1,185,676 1,404,000
-------------- --------------
Total current assets.................................. 92,162,125 104,287,298
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 208,567,577 173,054,329
-------------- --------------
OTHER ASSETS:
Receivables--affiliates................................... 1,168,886 227,990
Notes receivable--affiliates.............................. 7,088,517 7,047,272
Restricted investments.................................... 26,426,470 45,505,020
Cellular license acquisition costs, net of accumulated
amortization of $131,605,210 and $43,879,184 in 1999 and
1998, respectively...................................... 1,199,810,779 1,250,790,448
Deferred financing costs, net of accumulated amortization
of $10,087,041 and $2,511,661 in 1999 and 1998,
respectively............................................ 67,492,378 66,640,301
Other intangibles, net of accumulated amortization of
$12,787,211 and $2,071,047 in 1999 and 1998,
respectively............................................ 45,421,402 52,795,841
Other..................................................... 6,945,915 3,078,134
-------------- --------------
Total other assets.................................... 1,354,354,347 1,426,085,006
-------------- --------------
Total assets.......................................... $1,655,084,049 $1,703,426,633
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
41
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 51,769,089 $ 47,536,672
Accrued expenses.......................................... 14,419,170 14,222,306
Notes payable............................................. -- 17,500,000
Deferred revenue and customer deposits.................... 7,442,585 5,738,381
Current portion of long-term debt......................... 13,041,731 198,871
Accrued dividends payable................................. 24,672,246 5,603,856
-------------- --------------
Total current liabilities............................. 111,344,821 90,800,086
-------------- --------------
OTHER LIABILITIES:
Net liabilities of discontinued operations.................. 73,523,680 7,033,166
Payables--affiliates........................................ -- 5,011,438
Long-term debt, net of current portion...................... 1,055,815,604 1,103,857,333
Deferred tax liabilities.................................... 207,991,241 245,630,000
Minority interests.......................................... 19,516,881 26,557,203
Commitments (Note 15)
Senior exchangeable preferred stock, net.................... 455,721,875 241,320,000
Class D convertible preferred stock......................... 85,000,000 85,000,000
Class F preferred stock..................................... -- 30,000,000
Class G preferred stock..................................... -- 25,000,000
STOCKHOLDERS' DEFICIT:
Class A preferred stock................................... 314,286 314,286
Class A common stock, $.001 par value, 160,250,720 shares
authorized and 63,872,059 issued in 1999 and 1998....... 63,872 63,872
Paid-in capital........................................... 18,234,773 18,234,773
Retained deficit.......................................... (316,317,323) (119,269,863)
-------------- --------------
(297,704,392) (100,656,932)
-------------- --------------
Less--
Class A common stock held in treasury (9,048,705 shares),
at cost................................................. (56,125,661) (56,125,661)
-------------- --------------
Total stockholders' deficit........................... (353,830,053) (156,782,593)
-------------- --------------
Total liabilities and stockholders' deficit........... $1,655,084,049 $1,703,426,633
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
42
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUE:
Service revenue.......................................... $ 160,074,837 $ 69,402,405 $ 38,410,263
Roaming revenue.......................................... 145,472,873 66,479,068 26,262,370
Equipment sales.......................................... 14,010,507 4,129,633 1,455,088
Other.................................................... 380,386 24,283 586,206
------------- ------------ ------------
Total operating revenue................................ 319,938,603 140,035,389 66,713,927
OPERATING EXPENSES:
Cost of service.......................................... 47,407,446 33,267,093 16,430,603
Cost of equipment........................................ 28,511,858 8,359,739 4,045,500
Marketing and selling.................................... 50,649,361 22,392,927 10,669,485
General and administrative............................... 55,481,883 26,051,564 11,555,355
Depreciation and amortization............................ 127,439,984 47,109,937 16,797,780
------------- ------------ ------------
Total operating expenses............................... 309,490,532 137,181,260 59,498,723
------------- ------------ ------------
OPERATING INCOME........................................... 10,448,071 2,854,129 7,215,204
------------- ------------ ------------
INTEREST EXPENSE........................................... (109,509,314) (38,978,898) (27,639,739)
OTHER INCOME, net.......................................... 3,853,420 3,858,290 2,776,730
------------- ------------ ------------
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES,
INCOME TAXES AND EXTRAORDINARY ITEMS..................... (95,207,823) (32,266,479) (17,647,805)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES............... (3,308,459) (2,487,441) (1,693,372)
------------- ------------ ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS........... (98,516,282) (34,753,920) (19,341,177)
INCOME TAX BENEFIT......................................... 37,436,183 11,469,000 3,624,610
------------- ------------ ------------
LOSS FROM CONTINUING OPERATIONS............................ (61,080,099) (23,284,920) (15,716,567)
DISCONTINUED OPERATIONS: (Note 3)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, net of income
tax (benefit) expense of $(29,568,003) in 1999,
$(13,352,877) in 1998 and $470,170 in 1997............... (48,242,532) (27,110,387) 332,141
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, net of income
tax benefit of $11,184,246 in 1999....................... (18,247,979) -- --
------------- ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEMS............................ (127,570,610) (50,395,307) (15,384,426)
EXTRAORDINARY EXPENSE, net of income tax benefit of
$1,149,000 in 1998 and $827,210 in 1997 (Note 6)......... -- (2,165,439) (1,349,659)
------------- ------------ ------------
NET LOSS................................................... $(127,570,610) $(52,560,746) $(16,734,085)
DIVIDENDS ON PREFERRED STOCK............................... (69,476,850) (23,955,011) (2,603,362)
------------- ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS................. $(197,047,460) $(76,515,757) $(19,337,447)
============= ============ ============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE:
Before discontinued operations and extraordinary
expense................................................ (2.38) (0.90) (0.35)
Discontinued operations.................................. (1.21) (0.51) 0.01
Extraordinary expense.................................... -- (0.04) (0.03)
------------- ------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE.................................................... $ (3.59) $ (1.45) $ (0.37)
============= ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 54,823,354 52,773,972 52,728,059
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS A
PREFERRED STOCK COMMON STOCK
------------------- --------------------- TREASURY STOCK, RETAINED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL AT COST DEFICIT
-------- -------- ---------- -------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996............... -- -- 52,728,059 52,728 5,928,709 -- (15,783,039)
Net loss...................... -- -- -- -- -- -- (16,734,085)
Cash dividends declared on
preferred stock............. -- -- -- -- -- -- (980,033)
Cash dividends declared on
common stock................ -- -- -- -- -- -- (7,633,620)
Preferred stock dividends..... -- -- -- -- -- -- (1,623,329)
Issuance of preferred stock... 100,000 100,000 -- -- -- -- --
-------- -------- ---------- ------- ----------- ------------ -------------
DECEMBER 31, 1997............... 100,000 100,000 52,728,059 52,728 5,928,709 -- (42,754,106)
Net loss...................... -- -- -- -- -- -- (52,560,746)
Conversion of Class B
Preferred Stock............. -- -- 11,144,000 11,144 12,520,350 -- --
Purchase of treasury stock, at
cost........................ -- -- -- -- -- (56,125,661) --
Issuance of preferred stock... 214,286 214,286 -- -- (214,286) -- --
Preferred stock dividends..... -- -- -- -- -- -- (23,955,011)
-------- -------- ---------- ------- ----------- ------------ -------------
DECEMBER 31, 1998............... 314,286 314,286 63,872,059 63,872 18,234,773 $(56,125,661) $(119,269,863)
Net loss...................... -- -- -- -- -- -- (127,570,610)
Preferred stock dividends..... -- -- -- -- -- -- (69,476,850)
-------- -------- ---------- ------- ----------- ------------ -------------
DECEMBER 31, 1999............... $314,286 $314,286 63,872,059 $63,872 $18,234,773 $(56,125,661) $(316,317,323)
======== ======== ========== ======= =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations............ $ (61,080,099) $ (25,450,359) $ (17,066,226)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Depreciation and amortization................ 127,439,984 47,109,937 16,797,780
Amortization of bond premium and financing
costs...................................... 6,361,864 -- --
Deferred income taxes and investment tax
credits, net............................... (37,638,759) (14,677,558) (4,108,699)
Loss on disposition of assets, net........... 146,524 158,067 205,694
Extraordinary loss on financing cost......... -- 3,314,439 2,176,867
Minority interests in income of
subsidiaries............................... 3,308,459 2,487,441 1,693,372
Equity in income of unconsolidated
partnerships............................... -- (283,798) (140,227)
Changes in current assets and liabilities--
Accounts receivable.......................... (9,055,846) (8,358,070) (7,279,109)
Inventory.................................... (2,735,817) (860,921) (143,890)
Income taxes receivable...................... 218,324 845,000 288,063
Prepaid expenses and other................... (6,436,672) 418,482 (1,422,629)
Accounts payable............................. 4,232,417 30,206,977 8,656,849
Accrued expenses............................. 196,864 (7,888,703) 6,459,876
Deferred revenue and customer deposits....... 1,704,204 1,003,412 789,889
------------- ------------- -------------
Net cash provided by operating
activities............................... 26,661,447 28,024,346 6,907,610
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (91,537,021) (55,288,571) (17,773,118)
Purchase of cellular license and properties.... (39,987,057) (945,420,000) (190,719,765)
Proceeds from sale of property, plant and
equipment.................................... 26,781,371 12,600 332,331
(Increase) decrease in deposits................ -- (149,379) 1,583,706
(Increase) decrease in receivable--affiliate... (982,141) 301,117 (2,537,600)
Decrease in payable--affiliate................. (5,011,438) (3,195,497) --
Increase in notes receivable................... -- (1,194,990) (2,585,517)
Investment in unconsolidated subsidiaries and
other, net................................... (12,769,456) 5,871,788 (5,940,344)
------------- ------------- -------------
Net cash used in investing activities...... (123,505,742) (999,062,932) (217,640,307)
------------- ------------- -------------
</TABLE>
45
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................... $ -- $ 17,500,000 $ --
Proceeds from long-term debt................... 126,000,000 940,000,000 343,500,000
Repayments from notes payable.................. (17,500,000) -- --
Repayments of long-term debt................... (161,198,869) (171,513,855) (87,171,765)
Dividend distributions--
Preferred stock.............................. (3,471,737) -- (117,186)
Common stock................................. -- -- (7,633,620)
Distributions to partners...................... -- (911,223) (458,378)
Issuance of preferred stock.................... 170,000,000 340,000,000 --
Redemption of preferred stock.................. (55,000,000) -- --
Purchase of treasury stock..................... -- (31,125,661) --
Minority investment in Dobson Tower Company.... -- 7,718,750 --
Purchase of restricted investments............. -- (67,733,293) (38,389,299)
Maturities of restricted investments........... 29,694,000 17,483,654 10,836,243
Deferred financing costs....................... (9,751,729) (62,038,663) (9,725,288)
Amortization of deferred financing costs and
bond premium................................. -- 1,230,212 1,663,818
------------- ------------- -------------
Net cash provided by financing
activities............................... 78,771,665 990,609,921 212,504,525
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................... (18,072,630) 19,571,335 1,771,828
CASH AND CASH EQUIVALENTS, beginning of year..... 22,323,734 2,752,399 980,571
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year........... $ 4,251,104 $ 22,323,734 $ 2,752,399
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--
Interest (net of amounts capitalized)........ $ 87,474,820 $ 39,113,948 $ 19,858,250
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Class G Preferred Stock for the
purchase of treasury stock................... $ -- $ 25,000,000 $ --
Conversion of Class B Preferred Stock.......... $ -- $ 12,531,394 $ --
Purchase of PCS licenses with debt issuance.... $ -- $ -- $ 4,056,204
Allocation of noncash purchase price to license
cost......................................... $ -- $ -- $ 3,747,000
Stock dividend paid through the issuance of
preferred stock.............................. $ 42,865,000 $ 16,320,000 $ 1,623,329
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
46
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Dobson Communications Corporation ("DCC" or the "Company"), through its
predecessors, was organized in 1936 as Dobson Telephone Company and adopted its
current organizational structure in 1998. The Company is a provider of rural and
suburban cellular telephone services.
1997 REORGANIZATION
DCC was incorporated as an Oklahoma corporation in February 1997. Under an
Agreement and Plan of Reorganization effective February 28, 1997 ("1997
Reorganization"), DCC acquired all of the outstanding Class A Common Stock,
Class C Common Stock and Class B Convertible Preferred Stock of Dobson Operating
Company ("DOC"). In exchange, the holders of the Class A Common Stock and
Class B Convertible Preferred Stock of DOC received equivalent shares of stock
of DCC. The holders of Class C Common Stock received 100,000 shares of Class A
Preferred Stock of DCC. In addition, DCC assumed all DOC outstanding stock
options, substituting shares of DCC Class B Common Stock for the DOC stock
subject to options. As a result of the 1997 Reorganization, DCC became the
parent company of DOC and the stock of certain subsidiaries of DOC was
distributed to DCC.
1998 REORGANIZATIONS
In conjunction with the January 1998 issuance of 175,000 shares of 12.25%
Senior Exchangeable Preferred Stock mandatorily redeemable in 2008 (see
Note 6), the Company formed three new subsidiaries: Dobson Cellular Operating
Company ("DCOC"), DOC Cellular Subsidiary Company ("DOC Cellular Subsidiary")
and Logix Communications Enterprises, Inc. ("Logix"), formerly named Dobson
Wireline Company (collectively, the "January 1998 Reorganization"). DCOC was
created as the holding company for subsidiaries formed to effect certain
cellular acquisitions. DCOC has been designated an unrestricted subsidiary under
the Senior Note Indenture which covers the DCC Senior Notes discussed in
Note 6. DOC Cellular Subsidiary was created as the holding company for the then
existing cellular subsidiaries. Logix was created as the holding company for the
Company's incumbent local exchange carrier ("ILEC"), fiber and integrated
communications provider ("ICP") operations. Logix was designated an unrestricted
subsidiary under the Senior Note Indenture and the Certificate of Designation
establishing the Senior Exchangeable Preferred Stock.
In conjunction with the December 1998 acquisition of Sygnet Wireless, Inc.
("Sygnet Acquisition"), the Company formed a new subsidiary, Dobson/Sygnet
Communications Company ("Dobson/Sygnet") (the "December 1998 Reorganization").
Dobson/Sygnet was created as the holding company for the subsidiaries acquired
in the Sygnet Acquisition. Collectively, the January 1998 Reorganization, the
September 1998 Reorganization and the December 1998 Reorganization are known as
the "1998 Reorganizations."
CAPITAL RESOURCES AND GROWTH
The Company's total indebtedness and debt service requirements have
substantially increased as a result of the transactions described in Note 9 and
the Company will be subject to significant financial restrictions and
limitations. If the Company is unable to satisfy any of the covenants under the
credit facilities described in Note 6, including financial covenants, the
Company will be unable to borrow under the credit facilities during such time
period to fund planned capital expenditures, its ongoing operations or other
permissible uses.
47
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION: (CONTINUED)
The Company's ability to manage future growth will depend upon its ability
to monitor operations, control costs, maintain effective quality controls and
significantly expand the Company's internal management, technical and accounting
systems, all of which will result in higher operating expenses. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
all majority owned subsidiaries. For financial reporting purposes, the Company
reports 100% of revenues and expenses for the markets for which it provides
cellular telecommunications service. However, in several of its markets, the
Company holds less than 100% of the equity ownership. The minority stockholders'
and partners' shares of income or losses in those markets are reflected in the
consolidated statements of operations as minority interests in income of
subsidiaries. For financial reporting purposes, the Company consolidates each
subsidiary and partnership in which it has a controlling interest (greater than
50%). Significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated partnerships where the Company does not have a
controlling interest are accounted for under the equity method.
The Company is responsible for managing and providing administrative
services for certain partnerships of which the Company is the majority partner.
The Company is accountable to the partners and shareholders for the execution
and compliance with contracts and agreements and for filing of instruments
required by law which are made on behalf of these partnerships and corporation.
The books and records of these partnerships and corporation are also maintained
by the Company.
BUSINESS SEGMENTS
The Company operates in one business segment pursuant to Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
CASH AND CASH EQUIVALENTS
Cash and cash equivalents on the accompanying consolidated balance sheets
includes cash and short-term investments with original maturities of three
months or less.
INVENTORY
The Company values its inventory at the lower of cost or market on the
first-in, first-out method of accounting.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairments of long-lived assets, certain
identifiable intangibles and goodwill when there is evidence that events or
changes in circumstances indicate that an asset's carrying value may not be
recoverable. An impairment loss is recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. The amount
of any recognized impairment would
48
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
be based on the estimated fair value of the asset subject to impairment compared
to the carrying amount of such asset. No such losses have been identified by the
Company.
CELLULAR LICENSE ACQUISITION COSTS
Cellular license acquisition costs consist of amounts paid to acquire FCC
licenses to provide cellular services. Cellular license acquisition costs are
being amortized on a straight-line basis over fifteen years. Amortization
expense of $87,625,001, $30,064,955 and $10,528,125 was recorded in 1999, 1998
and 1997, respectively.
The ongoing value and remaining useful lives of intangible and other
long-term assets are subject to periodic evaluation and the Company currently
expects the carrying amounts to be fully recoverable.
DEFERRED COSTS
Deferred costs consist primarily of fees incurred to secure long-term debt.
Deferred financing costs are being amortized on a straight-line basis over the
term of the debt of eight to ten years. Amortization expense related to these
costs of $6,364,802, $1,965,461 and $1,074,845 was recorded in 1999, 1998 and
1997, respectively.
OTHER INTANGIBLES
Other intangibles consist of amounts paid to acquire FCC licenses to provide
PCS service and amounts paid to acquire cellular customer lists. During the
fourth quarter of 1999, the Company entered into a definitive agreement to sell
its nine PCS licenses for approximately $1.1 million plus the assumption of the
Company's notes payables. Customer list acquisition costs are being amortized on
a straight-line basis over five years. Amortization expense of $10,716,164,
$1,219,940 and $851,107 was recorded in 1999, 1998 and 1997, respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included as marketing and
selling expenses in the accompanying consolidated statements of operations.
INCOME TAXES
The Company files a consolidated income tax return. Income taxes are
allocated among the various entities included in the consolidated tax return, as
agreed, based on the ratio of each entity's taxable income (loss) to
consolidated taxable income (loss). Deferred income taxes reflect the estimated
future tax effects of differences between financial statement and tax bases of
assets and liabilities at year end.
REVENUE RECOGNITION
The Company records service revenues over the period they are earned. The
cost of providing service is recognized as incurred. Airtime and toll revenue is
billed in arrears. The Company accrued estimated unbilled revenues for services
provided of approximately $2,626,000 and $3,445,000 as of December 31, 1999 and
1998, respectively, which are included in accounts receivable in the
accompanying consolidated balance sheets. Monthly access charges are billed in
advance and are reflected as deferred revenue on the
49
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accompanying consolidated balance sheets. Cellular equipment sales are
recognized when the cellular equipment is delivered to the customer. Subscriber
acquisition costs (primarily commissions and loss on equipment sales) are
expensed as incurred.
EARNINGS PER SHARE
Basic loss per common share is computed by the weighted average number of
shares of common stock outstanding during the year. Diluted net loss per common
share has been omitted because the impact of stock options and convertible
preferred stock on the Company's net loss per common share is anti-dilutive.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
SIGNIFICANT CONCENTRATIONS
In connection with providing cellular services to customers of other
cellular carriers, the Company has contractual agreements with those carriers
which provide for agreed-upon billing rates between the parties. Approximately
70%, 59% and 45% of the Company's cellular roaming revenue was earned from three
cellular carriers during the years ended December 31, 1999, 1998 and 1997,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued SFAS 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. Under SFAS 133, the
Company would record an asset of $0.5 million relating to its interest rate
hedge valuation at December 31, 1999. The Company has not determined the timing
or method of adoption of SFAS 133.
RECLASSIFICATIONS
Certain reclassifications have been made to the previously presented 1998
balances to conform them to the 1999 presentation.
3. DISCONTINUED OPERATIONS
On November 10, 1999, the Company adopted a plan to distribute the stock of
Logix on January 24, 2000, to the Company's Class A common stockholders and
Class D preferred stockholders in a tax free non-pro rata spin-off. The Company
will not recognize a gain on this distribution of Logix stock to its
stockholders since the distribution will be between entities under common
control. Operating losses of
50
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
Logix from November 10, 1999 through January 24, 2000 (the date of disposition),
net of income tax benefit was $18.2 million and was expensed as the loss on
disposal of discontinued operations in the Company's consolidated statement of
operations for the year ended 1999.
The Company's distribution of Logix stock to its stockholders may become
taxable to the Company if there is a greater than 50% change in ownership of
Logix within two years of the distribution. This contingent tax liability will
be recognized by the Company only if it becomes probable that such a change in
ownership of Logix will occur.
The wireline segment, or Logix and its subsidiaries, operates as an
integrated communications provider under the LOGIX(SM) brand name in Oklahoma
and Texas, owns local telephone exchanges in Oklahoma and operates regional
fiber optic transmission networks in Oklahoma, Texas and Colorado. Pursuant to
Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," the
consolidated financial statements have been restated for all periods presented
to reflect the wireline operations, assets and liabilities as discontinued
operations. The assets and liabilities of such operations have been classified
as "Net liabilities of discontinued operations" on the consolidated balance
sheets and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
($ IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................... $ 672 $ 31,675
Restricted investments--current............. 40,079 37,572
Other current assets........................ 28,152 36,747
Property, plant and equipment, net.......... 121,136 89,508
Restricted investments--non-current......... 21,062 61,988
Goodwill.................................... 121,280 126,244
Other assets................................ 75,557 21,769
-------- --------
Total assets.............................. 407,938 405,503
Current liabilities......................... 36,540 36,299
Long-term debt, net of current portion...... 438,330 376,149
Other liabilities........................... 6,592 88
-------- --------
Total liabilities......................... 481,462 412,536
-------- --------
Net liabilities of discontinued
operations................................ $(73,524) $ (7,033)
======== ========
</TABLE>
51
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
The net (loss) income from operations of the wireline segment was classified
on the consolidated statement of operations as "(Loss) income from discontinued
operations." Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
YEAR ENDED DECEMBER 31,
------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C>
Net revenues................................... $113,420 $ 67,703 $20,177
(Loss) Income before income taxes.............. (77,811) (40,196) 886
Income tax benefit (provision)................. 29,568 12,924 (337)
Extraordinary item, net........................ -- -- (217)
Cumulative effect of change inaccounting
principle, net............................... -- (699) --
(Loss) income from discontinued operations..... (48,243) (27,110) 332
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Newly constructed
cellular systems are added to property, plant and equipment at cost which
includes contracted services, direct labor, materials overhead and capitalized
interest. For the years ended December 31, 1999, 1998 and 1997, interest
capitalized was not material. Existing property, plant and equipment purchased
through acquisitions is recorded at its fair value at the date of the purchase.
Repairs, minor replacements and maintenance are charged to operations as
incurred. The provisions for depreciation are provided using the straight-line
method based on the estimated useful lives of the various classes of depreciable
property.
52
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT: (CONTINUED)
Listed below are the major classes of property, plant and equipment and
their estimated useful lives, in years, as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
USEFUL
LIFE 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
Cellular systems and equipment............ 3-10 $181,480,987 $143,501,214
Buildings and improvements................ 5-40 27,496,285 25,089,448
Vehicles, aircraft and other work
equipment............................... 3-10 3,371,935 4,402,975
Furniture and office equipment............ 5-10 16,258,071 14,461,676
Plant under construction.................. 23,516,198 15,232,700
Land...................................... 2,195,457 1,915,733
------------ ------------
Property, plant and equipment........... 254,318,933 204,603,746
Accumulated depreciation.................. 45,751,356 31,549,417
------------ ------------
Property, plant and equipment, net...... $208,567,577 $173,054,329
============ ============
</TABLE>
5. NOTES PAYABLE:
On December 23, 1998, the Company's subsidiary, Dobson Tower Company,
obtained a $17,500,000 term loan to finance the Sygnet Acquisition discussed in
Note 9. The term loan was repaid in October 1999, with proceeds from the sale of
substantially all of the towers which were acquired in the Sygnet acquisition as
discussed in Note 10.
6. LONG-TERM DEBT:
The Company's long-term debt as of December 31, 1999 and 1998, consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Revolving credit facilities................... $ 705,000,000 $ 740,000,000
Dobson/Sygnet Senior Notes.................... 200,000,000 200,000,000
DCC Senior Notes.............................. 160,000,000 160,000,000
Other notes payable........................... 3,857,335 4,056,204
-------------- --------------
Total debt.................................. 1,068,857,335 1,104,056,204
Less--Current maturities...................... 13,041,731 198,871
-------------- --------------
Total long-term debt........................ $1,055,815,604 $1,103,857,333
============== ==============
</TABLE>
53
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
REVOLVING CREDIT FACILITIES
The Company's revolving credit facilities consist of the following:
<TABLE>
<CAPTION>
INTEREST RATE (WEIGHTED
MAXIMUM AMOUNT OUTSTANDING AVERAGE RATE AT
CREDIT FACILITY AVAILABILITY AT DECEMBER 31, 1999 DECEMBER 31, 1999)
- --------------- ------------ -------------------- -----------------------
<S> <C> <C> <C>
Dobson/Sygnet Credit
Facilities.............. $422,000,000 $398,000,000 9.8%
DCOC Credit Facility...... 160,000,000 155,000,000 7.5%
DOC Credit Facility....... 250,000,000 152,000,000 8.0%(1)
</TABLE>
- ------------------------
(1) Weighted average computation is based on actual interest rates without
giving effect to the interest rate hedge discussed below.
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, obtained
$430 million of senior secured credit facilities ("Dobson/Sygnet Credit
Facilities") from NationsBank, N.A., consisting of (a) a $50.0 million,
7 3/4 year reducing revolving credit facility ("Revolving Credit Facility"),
(b) a $125.0 million, 7 3/4 year term loan ("Term Loan A"), (c) a
$155.0 million, 8 1/4 year term loan ("Term Loan B") and (d) a $100.0 million,
9 year term loan ("Term Loan C"). Dobson/Sygnet's obligations under the
Dobson/Sygnet Credit Facility are secured by all current and future assets of
Dobson/Sygnet. Initial proceeds were used primarily to finance the Sygnet
Acquisition described in Note 9. The Company expects to use the remaining
availability to finance Dobson/Sygnet's capital expenditures and general
operations. During 1999, the maximum availability was reduced from
$430.0 million to $422.0 million as a result of a mandatory prepayment on the
term loans of $8.0 million from the net proceeds received from Dobson Tower
Company's sale of substantially all of the towers acquired during the Sygnet
acquisition.
Commencing with the quarter ending December 31, 2000, the borrowing under
the Revolving Credit Facility and Term Loan A will reduce quarterly under the
following annual amortization schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ---- -------------------
<S> <C>
2000....................................................... 5.0%
2001....................................................... 7.5%
2002....................................................... 7.5%
2003....................................................... 12.5%
2004....................................................... 15.0%
2005....................................................... 25.0%
2006....................................................... 27.5%
</TABLE>
54
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Commencing with the quarter ending December 31, 2000, the borrowing under
the Term Loan B will reduce quarterly under the following annual amortization
schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ---- -------------------
<S> <C>
2000....................................................... 2.5%
2001....................................................... 2.5%
2002....................................................... 2.5%
2003....................................................... 7.5%
2004....................................................... 15.0%
2005....................................................... 25.0%
2006....................................................... 27.5%
2007....................................................... 17.5%
</TABLE>
Term Loan C will amortize annually under the following schedule:
<TABLE>
<CAPTION>
YEAR ANNUAL AMORTIZATION
- ---- -------------------
<S> <C>
2000-2006.................................................. 1.0%
2007....................................................... 92.0%
</TABLE>
On March 25, 1998, the Company's subsidiary DCOC established a $200 million
senior secured credit facility (the "DCOC Credit Facility"). At the same time,
the Company's subsidiary, DOC, established a $250 million senior secured credit
facility (the "DOC Credit Facility"). On May 10, 1999, the commitment level and
outstanding borrowings on the DCOC Credit Facility were reduced from the
established amount of $200.0 million to $100.0 million. Subsequently, on
July 2, 1999, the Company's lenders increased the DCOC credit facility
commitment level from $100.0 million to $160.0 million. Although the commitment
levels changed, the obligations under the DCOC Credit Facility remain secured by
all current and future assets of DCOC. In addition, the DOC Credit Facility
remains secured by all of DOC's stock and the stock or partnership interests of
its restricted subsidiaries and all assets of DOC and its restricted
subsidiaries. DCOC is designated an unrestricted subsidiary with regard to the
DOC Facility. During January 2000, the Company refinanced both the DOC and DCOC
Credit facilities with a new consolidated $800.0 million credit facility as
discussed in Note 17.
The Dobson/Sygnet Credit Facilities, the DCOC Credit Facility and the DOC
Credit Facility require the Company to maintain certain financial ratios. The
failure to maintain such ratios would constitute an event of default,
notwithstanding the Company's ability to meet its debt service obligations.
In connection with the closing of the DOC Credit Facility, the Company
extinguished its 1997 Credit Facility and recognized a pretax loss of
approximately $3.3 million as a result of writing off previously capitalized
financing costs associated with the revolving credit facility. Such amount is
included in the Company's consolidated statement of operations, net of tax, for
the year ended December 31, 1998 as an extraordinary expense.
On February 28, 1997, the Company amended and restated its existing bank
credit agreement ("1996 Credit Facility") and established the 1997 Credit
Facility. In connection with the closing of the 1997 Credit Facility, the
Company extinguished its 1996 Credit Facility and recognized a pretax loss of
approximately $2.5 million as a result of writing off previously capitalized
financing costs associated with the 1996 Credit
55
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Facility. This loss has been reflected as an extraordinary item, net of tax, in
the Company's consolidated statement of operations for the year ended
December 31, 1997.
SENIOR NOTES
On December 23, 1998, the Company's subsidiary issued $200 million of 12.25%
Senior Notes maturing in 2008 ("Dobson/Sygnet Senior Notes"). The net proceeds
were used to finance the Sygnet Acquisition described in Note 9 and to purchase
$67.7 million of securities pledged to secure payment of the first six
semi-annual interest payments on the Dobson/Sygnet Senior Notes, which began on
June 15, 1999. The pledged securities are reflected as restricted cash and
investments in the Company's consolidated balance sheets. The Dobson/Sygnet
Senior Notes are redeemable at the option of the Company in whole or in part, on
or after December 15, 2003, initially at 106.125%. Prior to December 15, 2001,
the Company may redeem up to 35% of the principal amount of the Dobson/Sygnet
Senior Notes at 112.25% with proceeds from equity offerings, provided that at
least $130 million remains outstanding.
On February 28, 1997, the Company issued $160 million of 11.75% Senior Notes
maturing in 2007 ("DCC Senior Notes"). The net proceeds were used to finance the
Maryland/Pennsylvania Acquisition described in Note 9 and to purchase securities
pledged to secure payment of the first four semi-annual interest payments on the
DCC Senior Notes, which began on October 15, 1997. The DCC Senior Notes were
redeemable at the option of the Company in whole or in part, on or after
April 15, 2002, initially at 105.875%. Subsequent to December 31, 1999, the
Company redeemed substantially all of the DCC Senior Notes for approximately
$188.4 million as discussed in Note 17.
OTHER NOTES PAYABLE
Other notes payable represents the amount financed with the United States
Government for nine PCS licenses as discussed in Note 9.
Minimum future payments of long-term debt for years subsequent to
December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 13,041,731
2001........................................................ 31,193,391
2002........................................................ 43,721,760
2003........................................................ 75,251,943
2004........................................................ 113,784,057
2005 and thereafter......................................... 778,822,722
--------------
$1,055,815,604
==============
</TABLE>
INTEREST RATE HEDGES
In March 1999, the Company entered into an interest rate swap that
effectively fixed the interest rate on $110.0 million of the principal
outstanding on the Dobson/Sygnet credit facilities at approximately 5.48% plus a
factor used on our leverage (approximately 8.76% at December 31, 1999). The term
of the interest rate swap is 24 months. In June 1999, the Company entered into
an interest rate cap agreement terminating on June 14, 2001. The cap agreement
minimizes the Company's interest rate exposure by
56
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
setting a maximum rate of 7.50% plus a factor used on our leverage
(approximately 8.89% at December 31, 1999) for $160.0 million of its
indebtedness.
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 includes the initial deposit of $67.7 million (as discussed in Note 6),
net of interest earned and payments issued to bondholders. Amortization expense
of $769,956 and $269,101 was recorded in 1999 and 1998, respectively, for bond
premiums recorded with the purchase of the restricted investments.
8. STOCKHOLDERS' DEFICIT:
As of December 31, 1999, the Company's authorized and outstanding capital
stock is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
# OF SHARES # OF SHARES PAR VALUE PREFERENCE REDEMPTION
CLASS TYPE AUTHORIZED ISSUED PER SHARE DIVIDENDS PER SHARE DATE
- --------------------- --------------- ----------- ----------- --------- ------------------ ----------- -------------
<C> <S> <C> <C> <C> <C> <C> <C>
Class A Common Stock 160,250,720(1) 63,872,059(1) $.001 As declared -- --
Class B Common Stock 31,000 -- $.001 As declared -- --
Class C Common Stock 31,000 -- $.001 As declared -- --
----------- ----------
160,312,720 63,872,059
=========== ==========
Senior Exchangeable Preferred Stock 550,000 216,210 $1.00 12.25% Cumulative $ 1,000 Jan. 15, 2008
Additional Preferred Stock 184,000 71,392 $1.00 12.25% Cumulative $ 1,000 Jan. 15, 2008
Senior Exchangeable Preferred Stock 500,000 181,229 $1.00 13% Cumulative $ 1,000 May 1, 2009
Class A Preferred Stock 450,000 100,000 $1.00 5% Non-cumulative $ 70 --
Class D Preferred Stock 90,000 75,094 $1.00 15% Cumulative $1,131.92 after
Dec. 23, 2010
Class E Preferred Stock 517,000 -- $1.00 15% Cumulative $1,131.92 after
Dec. 23, 2010
Other Preferred Stock 709,000 -- $1.00 -- -- --
----------- ----------
3,000,000 643,925
=========== ==========
<CAPTION>
OTHER
FEATURES,
RIGHTS,
PREFERENCES
CLASS AND POWERS
- --------------------- -----------
<C> <C>
Class A Voting
Class B Non-voting
Class C Non-voting
Senior Exchangeable Non-voting
Additional Non-voting
Senior Exchangeable Non-voting
Class A Non-voting
Class D Convertible
Class E Non-Voting
Other --
</TABLE>
- ----------------------------------
(1) In the table above, the Company's Class A common stock, is adjusted to
reflect the 111.44 for 1 stock split that became effective February 9, 2000.
In May 1999, the Company issued 170,000 shares of 13% senior exchangeable
preferred stock manditorily redeemable in 2009 for $1,000 per share. The net
proceeds from the private offering of the preferred stock were used to redeem
the outstanding shares of the Company's Class F and Class G Preferred Stock, to
reduce bank debt at DCOC and for general corporate purposes, including
acquisitions. Holders of the preferred stock are entitled to cumulative
quarterly dividends from the date of issuance and a liquidation preference of
$1,000 per share with rights over the other classes of capital stock and equal
to the 12.25% Senior Exchangeable Preferred Stock. On or before May 1, 2004, the
Company may pay dividends, at its option, in cash or in additional shares having
an aggregate liquidation preference equal to the amount of such dividends.
Additionally, the preferred stock is redeemable at the option of the Company on
or after May 1, 2004. Holders of the preferred stock have no voting rights.
57
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' DEFICIT: (CONTINUED)
During 1999 and 1998, the Company issued cumulative quarterly dividends in
the form of 47,956 and 11,229 additional shares of 12.25% and 13.00% Senior
Exchangeable preferred stock, respectively (resulting in a total liquidation
preference of the outstanding preferred stock of $295.2 million and $185.2
million, respectively, as of December 31, 1999) which represented non-cash
financing activity, and thus are not included in the accompanying condensed
consolidated statements of cash flows.
On December 23, 1998, the Company issued 75,093.7 shares of Class D
Convertible Preferred Stock, including 3,534 shares to its majority shareholder
for aggregate proceeds of $85 million. The Company also issued 30,000 shares of
Class F Preferred Stock to the former shareholders of Sygnet as consideration
for the Sygnet Acquisition. In addition, the Company issued 37,853 shares of
Class G Preferred Stock to its majority shareholder in exchange for 40,000
shares of the Company's Class A Common Stock which are held in treasury at
December 31, 1998.
On December 23, 1998, Fleet, the holder of Class B Preferred Stock,
converted all of its shares to Class A Common Stock. In addition, the Company
redeemed all of the outstanding shares of Class C Preferred Stock which were
held by Fleet for $1.9 million. On December 23, 1998, the Company purchased
43,345 shares of its Class A Common Stock from Fleet for approximately
$31.1 million. In addition, the Company purchased 37,853 shares of its Class A
Common Stock from its majority shareholder. In exchange, the Company issued
37,853 shares of Class G Preferred Stock to its majority shareholder. These
Class A Common Stock shares are held in treasury stock at cost.
As discussed in Note 1, effective February 28, 1997, the stockholders of DCC
and Dobson Holdings Corporation ("Dobson Holdings"), a new corporation, entered
into an agreement and plan of reorganization. Under the reorganization, Dobson
Holdings acquired all of the outstanding Class A common stock, Class C common
stock and Class B Preferred of DCC. In exchange, the holders of the Class A
common stock and Class B Preferred of DCC received equivalent shares of stock of
Dobson Holdings. The holders of the Class C common stock received 100,000 shares
of Class A preferred stock of Dobson Holdings. In addition, Dobson Holdings
assumed all DCC outstanding stock options, substituting shares of Dobson
Holdings Class B common stock for the stock subject to options. As a result,
Dobson Holdings is the parent company of DCC.
As part of the reorganization, the stock of certain subsidiaries was
distributed to Dobson Holdings so that DCC is the holding company for the
wireline and cellular subsidiaries. Additionally, DCC changed its corporate name
to DOC and Dobson Holdings changed its corporate name to DCC.
9. ACQUISITIONS:
On January 26, 1998, the Company purchased the FCC cellular license for, and
certain assets relating to Texas 16 RSA for $56.6 million. The property is
located in south-central Texas in an area bordered by Austin, Houston and San
Antonio.
On April 1, 1998, the Company acquired all of the capital stock of the
corporations which owned the Cellular 2000 Partnership. The Cellular 2000
Partnership owns the FCC cellular license and system for, and certain assets
relating to, the California 4 RSA. The total purchase price paid by the Company
was $90.9 million. The property is located in central California adjacent to
Fresno, Modesto and Yosemite National Park.
58
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS: (CONTINUED)
On June 16, 1998, the Company acquired an 86.4% interest in the Santa Cruz
Cellular Telephone Partnership ("SCCTP") for $31 million. SCCTP owns the
cellular license and other assets for the Santa Cruz MSA. The Santa Cruz MSA is
located adjacent to the California 4 RSA purchased in April 1998. Subsequent to
September 30, 1998, the Company acquired an additional 0.9% interest in SCCTP
for $0.3 million.
On July 29, 1998, the Company purchased the FCC cellular license and certain
assets of California 7 RSA for $21 million. California 7 is located in the
Imperial Valley extending from east of San Diego to the Arizona state line.
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet acquired
Sygnet Wireless, Inc. for $337.5 million. The Sygnet markets include cellular
systems in Ohio, Pennsylvania and New York covering an estimated population base
of 2.4 million.
On March 16, 1999, the Company purchased certain assets and customers
relating to the Ohio 2 RSA for $3.9 million. This completes the acquisition of
the Ohio 2 market, which began on September 2, 1998, when the Company acquired
the FCC license of Ohio 2 RSA for $39.3 million. Ohio 2 is located in north
central Ohio and covers an estimated population of 262,300 people.
On 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 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 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 December 31,
1999.
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.
59
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The acquisition transactions were accounted for as purchases and,
accordingly, their results of operations have been included in the accompanying
consolidated statements of operations from the respective dates of acquisition.
The unaudited pro forma information set forth below includes all acquisitions
for the years ended 1999 and 1998, respectively, as if the purchases occurred at
the beginning of 1998. The unaudited pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated at that time:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Operating revenue..................................... $ 330,220 $ 279,185
Loss before discontinued operations and extraordinary
items............................................... (60,679) (95,371)
Net loss.............................................. (131,972) (156,243)
Net loss applicable to common stockholders............ (201,449) (193,065)
Basic net loss applicable to common stockholders per
common share........................................ $ (3.67) $ (3.66)
</TABLE>
PCS LICENSES
In the second quarter of 1997, the Company was granted PCS licenses in the
FCC "F" Block auction for nine markets adjacent to or overlapping the Company's
existing cellular footprint in Oklahoma, Kansas and Missouri. The aggregate bid
for these licenses was $5.1 million after a 15% discount. The Company financed
approximately $4.1 million of the purchase price in July 1997 by notes payable
to the United States Government at an annual interest rate of 6.25% (see
Note 6). Interest only payments are due quarterly on January 15, April 15,
July 15 and October 15 for the first two years. The principal obligations will
be amortized quarterly over an eight-year period, which began in 1999. During
the fourth quarter of 1999, the Company entered into a definitive agreement to
sell its nine PCS licenses for $1.1 million plus the assumption of these notes
payable.
10. DISPOSITIONS:
On October 15, 1999, Dobson Tower Company, a subsidiary of the Company,
completed the sale of substantially all of the towers acquired by Dobson Tower
Company in the Sygnet acquisition to American Tower Corporation for
approximately $38.7 million. In connection with the sale, another subsidiary of
the Company, Sygnet Communications, Inc. has agreed to lease the towers back
from American Tower Corporation for an initial term of ten years.
11. EMPLOYEE BENEFIT PLANS:
401(k) PLAN
The Company maintains a 401(k) plan (the "Plan") in which substantially all
employees of the Company are eligible to participate. The Plan requires the
Company to match 100% of employees' contributions up to 4% of their salary.
Contributions to the Plan charged to the Company's operations were approximately
$698,000, $274,000 and $179,000 during the years ended December 31, 1999, 1998
and 1997, respectively.
60
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS: (CONTINUED)
STOCK OPTION PLAN
The Company has adopted a stock option plan, the 1996 Stock Option Plan, as
amended (the "Plan"). The Company accounts for the Plan under APB Opinion 25,
under which no compensation cost is recognized in the accompanying consolidated
financial statements if the option price is equal to or greater than the fair
market value of the stock at the time the option is granted.
Under the Company's Plan, the Board of Directors may grant both incentive
and non-incentive stock options for employees, officers and directors to acquire
Class B Common Stock and Class C Common Stock. Since the Plan's adoption, stock
options have been issued at the market price on the date of grant with an
expiration of ten years from the grant date. Options granted to one employee
during 1997 representing 42.9% of total options granted in 1997 and vest as
follows: options to purchase 12% of such shares first become exercisable on each
of the first five anniversaries of the grant date; options to purchase an
additional 8% of such shares first become exercisable on the same dates if
annual performance objectives are achieved, otherwise, the additional 8% of such
shares become fully vested at the end of the ten year term. The remaining
options issued in 1997 and all of the options issued in 1999 and 1996 vest at a
rate of 20% per year. The Company has reserved 30,166 shares of authorized but
unissued Class B Common Stock ("Class B") and 30,166 shares of authorized but
unissued Class C Common Stock ("Class C") for issuance under the Plan.
On January 10, 2000, the Company adopted a 2000 stock incentive plan as
discussed in Note 17.
Stock options outstanding under the Plan are presented for the periods
indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------ ------------------------
NUMBER OF OPTION PRICE NUMBER OF OPTION PRICE
SHARES RANGE SHARES RANGE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1996.... 8,374 $100 -- --
Granted.......................... 14,059 $100-$150 -- --
Exercised........................ -- -- -- --
Canceled......................... -- -- -- --
------ ---------- ----- ----------
Outstanding December 31, 1997.... 22,433 $100-$150 -- --
Granted.......................... 8,540 $300-$665 2,414 $400-$420
Exercised........................ -- -- -- --
Canceled......................... 1,207 $100 -- --
------ ---------- ----- ----------
Outstanding December 31, 1998.... 29,766 $100-$665 2,414 $400-$420
Granted.......................... -- -- 1,812 $420
Exercised........................ -- -- -- --
Canceled......................... 1,207 $100 -- --
------ ---------- ----- ----------
Outstanding December 31, 1999.... 28,559 $100-$665 4,226 $400-$420
====== ========== ===== ==========
Exercisable at December 31,
1997........................... 1,675 $100 -- --
====== ========== ===== ==========
Exercisable at December 31,
1998........................... 7,122 $100-$150 -- --
====== ========== ===== ==========
Exercisable at December 31,
1999........................... 11,338 $100-$665 482 $400-$420
====== ========== ===== ==========
</TABLE>
61
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS: (CONTINUED)
The following schedule shows the Company's net loss and net loss per share
for the last three years, had compensation expense been determined consistent
with the Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. The pro forma information presented below is based on
several assumptions and should not be viewed as indicative of the Company in
future periods.
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
($ IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported................................ (197,047) $ (76,516) $(19,337)
Pro forma.................................. (197,537) $ (76,943) $(19,540)
Basic net loss applicable to common
stockholders per common share:
As reported................................ (3.59) $ (1.45) $ (.37)
Pro forma.................................. (3.60) $ (1.46) $ (.37)
</TABLE>
Diluted net loss per common share has been omitted because the impact of
common stock equivalents is anti-dilutive.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------ ----------------------
1999 1998 1997 1999 1998
-------- -------- -------- -------- --------
(AMOUNTS EXPRESSED IN PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Interest rate........................... -- 5.60% 6.60% 5.03% 5.80%
Dividend yield.......................... -- -- -- -- --
Expected volatility..................... -- 39.79% 40.27% 44.67% 40.20%
</TABLE>
The weighted average fair value of options granted using the Black-Scholes
option pricing model for Class B in 1998 and 1997 was $205.88 and $71.42,
respectively, and for Class C in 1999 and 1998 was $267.37 and $255.23,
respectively, assuming an expected life of ten years.
12. TAXES:
Benefit for income taxes for the years ended December 31, 1999, 1998 and
1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Federal income taxes--
Deferred........................... $(31,525,000) $(10,883,000) $(3,243,000)
State income taxes (current and
deferred).......................... (5,911,000) (586,000) (382,000)
------------ ------------ -----------
Total income tax benefit........... $(37,436,000) $(11,469,000) $(3,625,000)
============ ============ ===========
</TABLE>
62
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. TAXES: (CONTINUED)
The provisions for income taxes for the years ended December 31, 1999, 1998
and 1997, differ from amounts computed at the statutory rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Income taxes at statutory rate
(34%).............................. $(33,495,000) $(11,816,000) $(6,576,000)
State income taxes, net of Federal
income tax effect.................. (3,805,000) (1,390,000) (774,000)
Losses for which no benefit is
recognized......................... -- 1,608,000 3,747,000
Other, net........................... (136,000) 129,000 (22,000)
------------ ------------ -----------
$(37,436,000) $(11,469,000) $(3,625,000)
============ ============ ===========
</TABLE>
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Current deferred income taxes:
Allowance for doubtful accounts receivable... $ 733,000 $ 812,000
Accrued liabilities.......................... 453,000 592,000
------------- -------------
Net current deferred income tax asset...... 1,186,000 1,404,000
Noncurrent deferred income taxes:
Fixed assets................................. (9,549,000) (2,440,000)
Intangible assets............................ (268,395,000) (291,375,000)
Tax credits and carryforwards................ 69,953,000 48,185,000
------------- -------------
Net noncurrent deferred income tax
liability................................ (207,991,000) (245,630,000)
------------- -------------
Total deferred income taxes................ $(206,805,000) $(244,226,000)
============= =============
</TABLE>
At December 31, 1999, the Company had NOL carryforwards of approximately
$182 million, which may be utilized to reduce future Federal income taxes
payable. These NOL carryforwards begin to expire in 2013.
13. RELATED PARTY TRANSACTIONS:
At December 31, 1999 and 1998, the Company had notes and interest receivable
of $7,088,517 and $7,047,272 due from related parties, including $284,466 and
$290,150 at December 31, 1999 and 1998, respectively, from the Company's
directors and officers. The notes bear interest at various interest rates
ranging from 4% to 14.5% at December 31, 1999.
63
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest........................................... $ 6,671,366 $ 5,846,071
Sygnet acquisition costs (see Note 9).............. 2,549,759 5,439,095
Vacation, wages and other.......................... 5,198,045 2,937,140
----------- -----------
Total accrued expenses........................... $14,419,170 $14,222,306
=========== ===========
</TABLE>
15. COMMITMENTS:
The Company entered into an equipment supply agreement on December 6, 1995,
and as amended on November 30, 1999, the Company agreed to purchase
approximately $120.0 million of cell site and switching equipment between
June 24, 1997 and December 31, 2002, to update the cellular systems for the
newly acquired and existing MSAs and RSAs. Of the commitment, approximately
$56.4 million remained at December 31, 1999.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1999. The Company agreed to purchase approximately
$81 million of cell site and switching equipment between January 13, 1999 and
January 12, 2002, to update the cellular systems for the newly acquired and
existing MSAs and RSAs. Of this commitment, approximately $26.8 million remained
at December 31, 1999.
Future minimum lease payments required under operating leases that have an
initial or remaining noncancellable lease term in excess of one year at
December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $10,744,212
2001........................................................ 9,206,449
2002........................................................ 7,464,238
2003........................................................ 6,490,625
2004........................................................ 5,515,393
2005 and thereafter......................................... 25,154,032
</TABLE>
Lease expense under the above leases was approximately $8,071,000,
$3,034,000 and $866,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Unless otherwise noted, the carrying value of the Company's financial
instruments approximates fair value. The Company estimates the fair value of its
long-term debt based on quoted market prices for publicly traded debt or on the
current rates available to the Company for debt with similar terms and remaining
maturation.
64
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
Indicated below are the carrying amounts and estimated fair values of the
Company's financial instruments as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Revolving credit
facilities......... $705,000,000 $705,000,000 $740,000,000 $740,000,000
Dobson/Sygnet Senior
Notes.............. 200,000,000 220,000,000 200,000,000 205,000,000
DCC Senior Notes..... 160,000,000 184,800,000 160,000,000 163,200,000
Other notes payable.. 3,857,253 3,891,574 4,056,204 4,057,164
Interest rate
hedge.............. -- 502,546 -- (5,407,420)
</TABLE>
17. SUBSEQUENT EVENTS:
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 (see below),
subject to adjustment in the event of any stock dividend, stock split,
recapitalization, reorganization or certain defined change of control events.
Shares subject to previously expired, cancelled, forfeited or terminated options
become available again for grants of options. The shares that we will issue
under the plan will be newly issued shares.
On January 14, 2000, the Company obtained a new $800.0 million credit
facility which was used primarily to:
- consolidate the indebtedness of two of the Company's previous credit
facilities;
- repurchase $159.7 million 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 new
acquisitions.
On January 14, 2000, the Company completed a tender offer for
$159.7 million principal amount of its $160 million principal amount of its
11.75% senior notes for approximately $188.4 million. The premium paid for the
tender of these Senior Notes will be recorded as an extraordinary loss in the
first quarter of 2000.
On January 24, 2000, the Company distributed the stock of Logix
Communications Enterprises, Inc. to certain of our stockholders, as discussed in
Note 3.
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;
65
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS: (CONTINUED)
- the retirement of the Company's Class A preferred stock;
- the creation of a new Class D common stock to be issued upon the exercise
of options under the Company's amended 1996 stock 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 of
$549.5 million. The Company used $53.3 million of the net proceeds to pay
accrued dividends on its Class D preferred stock and to redeem all remaining
shares of its Class E preferred stock. An additional $402.5 million was used as
a capital contribution to its joint venture with AT&T Wireless to acquire
American Cellular Corporation. The Company intends to use the balance of the net
proceeds for working capital and other general corporate purposes.
On January 31, 2000, the Company completed the purchase of Alaska 3 RSA for
approximately $12.0 million. Alaska 3 is located in southeast portion of Alaska
and has a total population of approximately 74,000.
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 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 base of approximately 113,000.
On February 25, 2000, the Company and AT&T Wireless, through an
equally-owned joint venture, acquired American Cellular for approximately
$2.5 billion, including fees and expenses. American Cellular is one of the
largest independent rural cellular telephone operators in the United States.
American Cellular's systems cover a total population of approximately
4.8 million, and as of December 31, 1999 it had approximately 431,200
subscribers with an aggregate market penetration of approximately 8.8%. American
Cellular serves markets in portions of Kentucky, Michigan, Minnesota, New York,
Ohio, Pennsylvania, Tennessee, West Virginia and Wisconsin. Following completion
of this acquisition, the Company will operate American Cellular's systems.
American Cellular's management organization, billing system, network
infrastructure and marketing programs are substantially similar to the
Company's.
66
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information called for by Items 10 through 13 we refer you to our Proxy
Statement for our 2000 annual meeting of shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1999
and which is incorporated herein by reference.
67
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of Dobson Communications Corporation
are included in Item 8:
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
(2) Schedule II -- Valuation Allowance Accounts
All other schedules have been omitted since the required information is not
present, or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
68
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Dobson Communications Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Dobson
Communications Corporation and subsidiaries included in this Form 10-K and have
issued our report thereon dated February 25, 2000. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed on Page 79, Item 14(a)2 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated statements taken as a
whole.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
February 25, 2000
69
<PAGE>
SCHEDULE II
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE OF VALUATION
ALLOWANCE ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
YEAR EXPENSES DEDUCTIONS OF YEAR
------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts Receivable:
1999........................................ $2,043,200 $5,878,230 $6,087,389 $1,834,041
1998........................................ 632,661 2,394,204 983,665 2,043,200
1997........................................ 325,619 1,553,512 1,246,470 632,661
</TABLE>
Allowance for doubtful accounts are deducted from accounts receivable in the
balance sheet.
(3) Exhibits.
70
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
------- ------------------------------------------------------------ -----------------
<C> <S> <C>
2.1 Asset Purchase Agreement dated October 9, 1997 between
Texas 16 Cellular Telephone Company and Dobson Cellular of
Texas, Inc. (1) [2.1]
2.2.1 Stock Purchase Agreement dated November 17, 1997 as amended
by Amendment No. 1 thereto effective as of March 18, 1998
between the shareholders of Cellular 2000 Telephone Co.
listed therein and Dobson Cellular of California, Inc. (2) [2.6.1]
2.2.2 Stock Purchase Agreement dated March 19, 1998 between RSA
339, Inc. and AT&T Wireless Services, Inc. and Dobson
Cellular of California, Inc. (2) [2.6.2]
2.3 Securities Purchase Agreement dated March 25, 1998 between
Santa Cruz Cellular Telephone, Inc. and its shareholders and
optionholders listed therein and Dobson Cellular of
California, Inc. (2) [2.7]
2.4 Agreement and Plan of Merger dated July 28, 1998 between
Sygnet Wireless, Inc. and Dobson/Sygnet Operating Company
(formerly known as Front Nine Operating Company) (without
schedules). (3) [2.0]
2.5 Asset Purchase Agreement dated August 20, 1998, between Ohio
Wireless Communications, L.L.C. and Dobson Cellular of
Sandusky. (4) [2.9]
2.6 Asset Purchase Agreement dated as of September 2, 1998
between A-1 Cellular of Texas, L.P. and Dobson Cellular of
Navarro, Inc. (4) [2.10]
2.7 Asset Purchase Agreement dated November 24, 1998 between
First Cellular of Maryland, Inc. and Dobson Cellular of
Maryland, Inc. (4) [2.11]
2.8 Agreement to furnish unfiled schedules. (4) [2.12]
2.9 Asset Purchase Agreement dated September 8, 1999 by and
between ACC Arizona Cellular Communications, Inc. and Dobson
Cellular of Imperial, Inc. (13) [2.9]
2.10 Asset Purchase Agreement dated September 30, 1999 between
Alaska 3 Cellular, LLC and Dobson Cellular Systems, Inc. (13) [2.10]
2.11 Agreement and Plan of Merger dated October 5, 1999 among ACC
Acquisition LLC, ACC Acquisition Co. and American Cellular
Corporation. (13) [2.11]
2.12 Asset Purchase Agreement dated October 6, 1999 between
Pacific Telecom Cellular of Alaska RSA 1, Inc. and Dobson
Cellular Systems, Inc. (13) [2.12]
2.13 Asset Purchase Agreement dated October 25, 1999 between
Trillium Cellular Corp., Interstate Cellular Holdings Corp.,
Universal Telecell, Inc. (d/b/a Unitel Wireless
Communications Systems, Inc.) and Dobson Cellular Systems,
Inc. (13) [2.13]
2.14 License Acquisition Agreement dated November 9, 1999 among
DCC PCS, Inc., Royal Wireless, L.L.C., Arnage Wireless,
L.L.C. and (with respect to Section 10.12 only) AT&T
Wireless Services, Inc. (13) [2.14]
2.15 Agreement and Plan of Recapitalization among Dobson
Communications Corporation, Dobson Operating Company, Dobson
CC Limited Partnership, Russell L. Dobson, J.W. Childs
Equity Partners II, L.P., AT&T Wireless, Inc. and the other
stockholders of Dobson Communications Corporation's Class A
Common Stock and Class D Preferred Stock. (14) [2.1]
2.16 Asset Purchase Agreement dated as of December 14, 1999
between Lake Huron Cellular Corp. and Dobson Cellular
Systems, Inc. (13) [2.16]
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
------- ------------------------------------------------------------ -----------------
<C> <S> <C>
2.17 Asset Purchase Agreement dated January 5, 2000 for Texas 9
by and between Lone Star Cellular, Inc., PCM, Inc. and
Dobson Cellular Systems, Inc. (13) [2.17]
2.18 AT&T Stock Purchase Agreement (14) [2.2]
3.1 Registrant's Amended and Restated Certificate of
Incorporation. (14) [3.1]
3.2 The Registrant's Amended and Restated Bylaws. (13) [3.2]
4.1 Third Amended and Restated Credit Agreement among the Agents
and Lenders named therein and Dobson Operating Company dated (6) [4.1]
March 25, 1998, as amended. (7) [10.1]
4.2 $120 million Revolving Credit Agreement among Dobson
Cellular Operations Company and the Agents and Lenders named (6) [4.2]
therein dated as of March 25, 1998, as amended. (7) [10.1]
4.3 $80 million 364-Day Revolving Credit and Term Loan Agreement
among Dobson Cellular Operations Company and the Agents and
Lenders named therein dated as of March 25, 1998, as (6) [4.3]
amended. (7) [10.1]
4.4 Credit Agreement among the Agents and Lenders named therein
and Dobson/Sygnet Operating Company, dated as of
December 23, 1998. (4) [4.4]
4.5 $17.5 million Term Loan Agreement between Dobson Tower
Company and NationsBank, N.A. dated as of December 23, 1998. (4) [4.5]
4.6 Amended, Restated, and Consolidated Revolving Credit and
Term Loan Agreement dated as of January 18, 2000 among
Dobson Operating Company, L.L.C., Banc of America
Securities, LLC, Bank of America, N.A., Lehman Commercial
Paper Inc. and Toronto Dominion (Texas) Inc., and First
Union National Bank and PNC Bank, National Association, and
the Lenders. (13) [4.6]
4.7 Telephone Loan Contract dated as of November 7, 1958 between
Dobson Telephone Company, Inc. and United States of America. (8) [4.2]
4.8 Telephone Loan Contract dated as of March 19, 1956 between
McLoud Telephone Company and United States of America. (8) [4.3]
4.9 Telephone Loan Contract dated as of January 15, 1993 between
Dobson Telephone Company, Inc., Rural Telephone Bank and
United States of America. (8) [4.4]
4.10 Restated Mortgage, Security Agreement and Financing
Statement dated as of May 15, 1993 between Dobson Telephone
Company, Rural Telephone Bank and United States of America. (8) [4.5]
4.11 Indenture dated as of February 28, 1997 between the
Registrant, as Issuer, and United States Trust Company of
New York, as Trustee. (8) [4.6]
4.12 Escrow and Security Agreement dated February 28, 1997 among
the Registrant as Pledgor, and Morgan Stanley & Co.
Incorporated, Alex. Brown & Sons Incorporated, First Union
Capital Markets, and NationsBanc Capital Markets, Inc., as
Placement Agents, and United States Trust Company of New
York, as Trustee. (8) [4.9]
4.13 Agreement to furnish unfiled debt instruments. (2) [4.12]
4.14 Indenture dated December 23, 1998 between Dobson/Sygnet
Communications Company, as Issuer, and United States Trust
Company of New York, as Trustee. (3) [4.1]
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
------- ------------------------------------------------------------ -----------------
<C> <S> <C>
4.15 Collateral Pledge and Security Agreement dated December 23,
1998 between Dobson/Sygnet Communications Company, as
Pledgor, and NationsBanc Montgomery Securities LLC, Lehman
Brothers Inc., First Union Capital Markets, a division of
Wheat First Securities, Inc. and TD Securities (USA) Inc.,
as Initial Purchasers, and United States Trust Company of
New York, as Trustee. (4) [4.18]
4.16 Form of Certificate representing Common Stock. (13) [4.16]
10.1.1* Registrant's 1996 Stock Option Plan, as amended. (4) [10.1.1]
10.1.2* 1998 Stock Option Plan of Logix Communications Enterprises,
Inc. (f/k/a Dobson Wireline Company). (4) [10.1.2]
10.1.3* Form of 2000-1 Amendment to the DCC 1996 Stock Option Plan (13) [10.1.3]
10.1.4* Form of Dobson Communications Corporation 2000 Stock
Incentive Plan (14) [10.5]
10.2.2 Promissory Note dated February 10, 1997 of G. Edward Evans
in the amount of $300,000 in favor of Western Financial
Services Corp. (8) [10.2.1]
10.2.3 Stock Purchase Agreement, dated as of March 26, 1998,
between the shareholders of American Telco Inc. and American
Telco Network Services, Inc. and Logix Communications
Enterprises, Inc. (f/k/a Dobson Wireline Company). (9) [2.1]
10.2.3.1 First Amendment to Stock Purchase Agreement among American
Telco Inc. and American Telco Network Services, Inc. and
Logix Communications Enterprises, Inc. (f/k/a Dobson
Wireline Company). (9) [2.2]
10.2.4 Stock Purchase Agreement, dated December 23, 1998 among the
Registrant, the Fleet Investors and the other entities
listed therein. (4) [10.2.5]
10.2.5 Asset Purchase Agreement dated December 23, 1998 by and
between Sygnet Communications, Inc. and Dobson Tower
Company. (4) [10.2.6]
10.2.6 Asset Purchase Agreement dated July 6, 1999 by and among
American Tower Corporation, American Tower, LP, Dobson Tower
Company and the Registrant as Sole Shareholder of Dobson
Tower, as amended. (13) [10.2.6.1]
10.2.7 Master Site License Agreement dated December 23, 1998 by and
between Sygnet Communications, Inc. and Dobson Tower
Company. (4) [10.2.7]
10.3.1* Letter dated June 3, 1996 from Registrant to Bruce R.
Knooihuizen describing employment arrangement. (8) [10.3.2]
10.3.2* Letter dated October 15, 1996 from Fleet Equity Partners to
Justin L. Jaschke regarding director compensation. (8) [10.3.3]
10.3.3* Letter dated December 26, 1996 from Registrant to G. Edward
Evans describing employment arrangement. (8) [10.3.1]
10.3.4* Letter dated September 16, 1997 from Registrant to William
J. Hoffman, Jr. describing employment arrangement. (2) [10.3.4]
10.3.5* Letter dated October 28, 1997 from Registrant to R. Thomas
Morgan describing employment arrangement. (2) [10.3.5]
10.3.6* Letter dated August 25, 1998 from Registrant to Richard D.
Sewell, Jr. describing employment arrangement. (4) [10.3.6]
10.3.7* Consulting Agreement dated December 21, 1998 between
Registrant and Albert H. Pharis, Jr. (4) [10.3.7]
10.3.8* Consulting Agreement dated August 15, 1998 between the
Registrant and Russell L. Dobson and Addendum thereto dated
October 1, 1998 (13) [10.3.8]
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
------- ------------------------------------------------------------ -----------------
<C> <S> <C>
10.3.9* Letter dated September 24, 1998 from Registrant to Craig T.
Sheetz describing employment arrangement. (13) [10.3.9]
10.4.1 North American Cellular Network Services Agreement dated
August 26, 1992 between North American Cellular Network,
Inc. and Dobson Cellular Systems, Inc. (8) [10.4.2]
10.4.2 Agreement for DS-3 service dated December 16, 1993 between
Logix Communications Corporation (f/k/a Dobson Fiber
Company) and NTS Communications, Inc. and Addendum thereto
dated June 1, 1994. (8) [10.4.1]
10.4.3 General Purchase Agreement dated January 13, 1998 between
Lucent Technologies, Inc. and Dobson Cellular Systems, Inc. (2) [10.4.7]
10.4.4 Operating Agreement dated January 16, 1998 between AT&T
Wireless Services, Inc. and Dobson Cellular Systems, Inc. (13) [10.4.4]
10.4.5 Fourth Amended General Purchase Agreement dated January 5,
1999 between Northern Telecom Inc. and Registrant. (2) [10.4.8]
10.6 Second Amended and Restated Partnership Agreement of Gila
River Cellular General Partnership dated September 30, 1997. (11) [10.8]
10.7.1 Investment and Transaction Agreement, dated December 23,
1998, among the Registrant, Dobson CC Limited Partnership
and J. W. Childs Equity Partners II, L.P. (without
exhibits). (4) [10.8.1]
10.7.2 Stockholder and Investor Rights Agreement, dated
December 23, 1998 among the Registrant and the shareholders
listed therein, (without exhibits). (4) [10.8.2]
10.7.2.1 Amendment to Stockholder and Investors Rights Agreement,
dated April 13, 1999 among the Registrant and the
Shareholders listed therein (without exhibits). (4) [10.8.2.1]
10.7.2.2 Amended and Restated Stockholders and Investor Rights
Agreement dated September 17, 1999 by and among the
Registrant and the Cash Equity Investors, as listed and
defined therein (without exhibits). (13) [10.7.2.2]
10.7.2.3 Stockholder and Investor Rights Agreement, dated
January 31, 2000 among the Registrant and the Shareholders
listed therein (without exhibits) (13) [10.7.2.3]
10.7.3 Investors Agreement, dated December 23, 1998, among the
Registrant, and certain shareholders of Sygnet Wireless,
Inc. and their affiliates listed therein. (4) [10.8.3]
10.8 License Agreement dated February 15, 1999 between Registrant
and H.O. Systems, Inc. (10) [10.8]
10.9* Form of Dobson Communications Corporation Director
Indemnification Agreement. (13) [10.9]
10.10 Agreement and Plan of Reorganization and Corporation
Separation. (13) [10.10]
10.11 Agreement to Provide Indemnity, dated January 24, 2000 by
and among Dobson Communications Corporation and Dobson CC
Limited Partnership. (13) [10.11]
10.12 Second Amended and Restated Limited Liability Company
Agreement of ACC Acquisition LLC between AT&T Wireless
Services JV Co. and Dobson JV Company dated as of
January 31, 2000. (14) [10.1]
10.12.1 Amended and Restated Supplemental Agreement among AT&T
Wireless, Dobson Communications Corporation, Dobson CC
Limited Partnership, and other signatories thereto, dated
February 25, 2000. (14) [10.1.1]
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
------- ------------------------------------------------------------ -----------------
<C> <S> <C>
10.13 Amended and Restated Management Agreement between Dobson
Cellular Systems, Inc. and ACC Acquisition LLC dated as of
January 31, 2000. (14) [10.2]
10.13.1 Letter to Management Agreement between Dobson Cellular
Systems, Inc. and ACC Acquisition LLC dated as of
January 31, 2000. (13) [10.13.1]
10.14 Amended and Restated Operating Agreement dated January 31,
2000 by and between AT&T Wireless Services, Inc., on behalf
of itself and its Affiliate (as defined therein) and ACC
Acquisition L.L.C., on behalf of itself and its Affiliates
(as defined therein). (14) [10.3]
10.15 Amended and Restated Operating Agreement dated January 31,
2000 by and between Dobson Cellular Systems, Inc., on behalf
of itself and its Affiliates (as defined therein) and ACC
Acquisition L.L.C., on behalf of itself and its Affiliates
(as defined therein). (14) [10.4]
21 List of Subsidiaries. (13) [21]
27 Financial Data Schedule. (5)
99.1* Form of Dobson Communications Corporation 2000 Stock
Incentive Plan Incentive Stock Option Agreement. (13) [99.1]
99.2* Form of Dobson Communications Corporation 2000 Stock
Incentive Plan Nonqualified Stock Option Agreement. (13) [99.2]
</TABLE>
- ------------------------
* Management contract or compensatory plan or arrangement.
(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
April 10, 1998, as the exhibit number indicated in brackets and incorporated
by reference herein.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 as the exhibit number indicated in brackets and
incorporated by reference herein.
(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
January 7, 1999, as the exhibit number indicated in brackets and
incorporated by reference herein.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form S-4
(Registration No. 333-71633), as the exhibit number indicated in brackets
and incorporated by reference herein.
(5) Filed herewith.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-4
(Registration No. 333-50107), as the exhibit number indicated in brackets
and incorporated by reference herein.
(7) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
May 27, 1999, as the exhibit number indicated in brackets and incorporated
by reference herein.
(8) Filed as an exhibit to the Registrant's Registration Statement of Form S-4
(Registration No. 333-23769), as the exhibit number indicated in brackets
and incorporated by reference herein.
(9) Filed as an exhibit to the Registrant's Current Report on Form 8-K on
June 30, 1998, as the exhibit number indicated in brackets and incorporated
by reference herein.
(10) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 as the exhibit number indicated in brackets and
incorporated by reference herein.
(11) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
October 15, 1997 and amended on November 6, 1997, as the exhibit number
indicated in brackets and incorporated by reference herein.
75
<PAGE>
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1999 as the exhibit number indicated in brackets
and incorporated by reference herein.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-90759), as the exhibit number indicated in brackets
and incorporated by reference herein.
(14) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
March 9, 2000, as the exhibit number indicated in brackets and incorporated
by reference herein.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 14th day of March,
2000.
<TABLE>
<S> <C> <C>
DOBSON COMMUNICATIONS CORPORATION
By /s/ EVERETT R. DOBSON
------------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
Chairman of the Board,
/s/ EVERETT R. DOBSON President and Chief
------------------------------------------- Executive Officer (principal March 14, 2000
Everett R. Dobson executive officer)
/s/ BRUCE R. KNOOIHUIZEN Vice President and Chief
------------------------------------------- Financial Officer (principal March 14, 2000
Bruce R. Knooihuizen financial officer)
/s/ TRENT LEFORCE Corporate Controller
------------------------------------------- (principal accounting March 14, 2000
Trent LeForce officer)
/s/ STEPHEN T. DOBSON
------------------------------------------- Secretary/Treasurer, Director March 14, 2000
Stephen T. Dobson
/s/ RUSSELL L. DOBSON
------------------------------------------- Director March 14, 2000
Russell L. Dobson
/s/ JUSTIN L. JASCHKE
------------------------------------------- Director March 14, 2000
Justin L. Jaschke
/s/ ALBERT H. PHARIS, JR.
------------------------------------------- Director March 14, 2000
Albert H. Pharis, Jr.
/s/ DANA L. SCHMALTZ
------------------------------------------- Director March 14, 2000
Dana L. Schmaltz
</TABLE>
77
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,251,104
<SECURITIES> 0
<RECEIVABLES> 52,355,414
<ALLOWANCES> 52,355,414
<INVENTORY> 7,894,329
<CURRENT-ASSETS> 92,162,125
<PP&E> 208,567,577
<DEPRECIATION> 208,567,577
<TOTAL-ASSETS> 1,655,084,049
<CURRENT-LIABILITIES> 111,344,821
<BONDS> 1,055,815,604
540,721,875
314,286
<COMMON> 63,872
<OTHER-SE> (298,082,550)
<TOTAL-LIABILITY-AND-EQUITY> 1,655,084,049
<SALES> 14,010,507
<TOTAL-REVENUES> 319,938,603
<CGS> 28,511,858
<TOTAL-COSTS> 309,490,532
<OTHER-EXPENSES> (3,853,420)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,509,314
<INCOME-PRETAX> (98,516,282)
<INCOME-TAX> 37,436,183
<INCOME-CONTINUING> (61,080,099)
<DISCONTINUED> (66,490,511)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,570,610)
<EPS-BASIC> (3.59)
<EPS-DILUTED> (3.59)
</TABLE>
