<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 000-29225
------------------------
DOBSON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 73-1513309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13439 NORTH BROADWAY EXTENSION 73114
SUITE 200 (Zip Code)
OKLAHOMA CITY, OKLAHOMA
(Address of principal executive
offices)
</TABLE>
(405) 529-8500
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of October 31, 2000, there were 27,953,597 shares of the registrant's
$.001 par value Class A Common Stock outstanding; 65,311,716 shares of the
registrant's $.001 par value Class B Common Stock outstanding; and 4,832 shares
of the registrant's $.001 par value Class D Common Stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999... 4
Condensed Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 2000.............. 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999.................. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition 18
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 2. Changes in Securities and Use of Proceeds................... 29
Item 3. Defaults Upon Senior Securities............................. 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 5. Other Information........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 148,815,950 $ 4,251,104
Restricted cash and investments........................... 24,735,000 22,919,339
Accounts receivable, net.................................. 84,034,479 52,355,414
Other current assets...................................... 21,841,366 12,636,268
-------------- --------------
Total current assets.................................... 279,426,795 92,162,125
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 297,247,205 208,567,577
-------------- --------------
OTHER ASSETS:
Receivables--affiliates................................... 16,243,809 8,257,403
Restricted investments.................................... 13,201,521 26,426,470
Cellular license acquisition costs, net................... 1,450,438,141 1,199,810,779
Deferred costs, net....................................... 79,585,517 67,492,378
Other intangibles, net.................................... 52,002,145 45,421,402
Investment in joint venture............................... 352,063,457 --
Other..................................................... 7,515,186 6,945,915
-------------- --------------
Total other assets...................................... 1,971,049,776 1,354,354,347
-------------- --------------
Total assets.......................................... $2,547,723,776 $1,655,084,049
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 81,793,168 $ 51,769,089
Accrued expenses.......................................... 33,294,020 14,419,170
Deferred revenue and customer deposits.................... 11,957,117 7,442,585
Current portion of long-term debt......................... 34,249,070 13,041,731
Accrued dividends payable................................. 12,548,155 24,672,246
-------------- --------------
Total current liabilities............................... 173,841,530 111,344,821
-------------- --------------
NET LIABILITIES OF DISCONTINUED OPERATIONS.................. -- 73,523,680
LONG-TERM DEBT, net of current portion...................... 1,513,941,061 1,055,815,604
DEFERRED CREDITS............................................ 169,410,948 207,991,241
MINORITY INTERESTS.......................................... 21,577,953 19,516,881
SENIOR EXCHANGEABLE PREFERRED STOCK, net.................... 502,975,398 455,721,875
CLASS D CONVERTIBLE PREFERRED STOCK......................... -- 85,000,000
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Preferred Stock................................... -- 314,286
Class A Common Stock, $.001 par value 175,000,000 and
160,250,720 shares authorized and 27,953,597 and
63,872,059 shares issued at September 30, 2000 and
December 31, 1999, respectively......................... 27,954 63,872
Class B Common Stock, $.001 par value 70,000,000 shares
authorized and 65,311,716 shares issued at September 30,
2000.................................................... 65,312 --
Class D Common Stock, $.001 par value 33,000 shares
authorized and 4,832 shares issued at September 30,
2000.................................................... 5 --
Paid-in capital........................................... 613,985,570 18,234,773
Retained deficit.......................................... (448,101,955) (316,317,323)
-------------- --------------
165,976,886 (297,704,392)
Less--
Class A Common Stock held in treasury (9,048,705 shares), at
cost...................................................... -- (56,125,661)
-------------- --------------
Total stockholders' equity (deficit).................... 165,976,886 (353,830,053)
-------------- --------------
Total liabilities and stockholders' equity............ $2,547,723,776 $1,655,084,049
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Service revenue........................................... $ 72,839,321 $ 53,066,232 $ 196,011,509 $ 150,032,420
Roaming revenue........................................... 64,473,748 43,990,647 163,798,400 107,295,804
Equipment revenue and other............................... 6,424,671 3,934,234 17,950,047 9,952,331
------------ ------------ ------------- -------------
Total operating revenues................................ 143,737,740 100,991,113 377,759,956 267,280,555
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Cost of service........................................... 35,927,716 25,875,970 88,156,815 67,903,162
Cost of equipment......................................... 11,283,954 6,702,972 33,838,918 18,561,827
Marketing and selling..................................... 17,102,475 13,247,426 50,724,293 34,957,280
General and administrative................................ 17,915,895 14,727,809 51,827,716 40,795,364
Depreciation and amortization............................. 44,779,932 30,119,492 122,875,495 100,019,510
------------ ------------ ------------- -------------
Total operating expenses................................ 127,009,972 90,673,669 347,423,237 262,237,143
------------ ------------ ------------- -------------
OPERATING INCOME:........................................... 16,727,768 10,317,444 30,336,719 5,043,412
OTHER INCOME (EXPENSE):
Interest expense.......................................... (41,238,330) (26,836,414) (107,377,903) (82,364,725)
Other income, net......................................... 2,515,403 1,507,652 7,496,964 3,411,347
------------ ------------ ------------- -------------
LOSS BEFORE MINORITY INTERESTS IN INCOME OF SUBSIDIARIES,
INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEMS..................................................... (21,995,159) (15,011,318) (69,544,220) (73,909,966)
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES................ (1,406,861) (644,695) (3,703,912) (2,124,884)
LOSS FROM INVESTMENT IN JOINT VENTURE, net of income tax
benefit of $6,237,644 and $15,726,865 for the three and
nine months ended September 30, 2000, respectively........ (12,476,935) -- (30,436,542) --
------------ ------------ ------------- -------------
LOSS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEMS....................................... (35,878,955) (15,656,013) (103,684,674) (76,034,850)
INCOME TAX BENEFIT.......................................... 8,892,764 5,952,054 27,834,289 28,891,955
------------ ------------ ------------- -------------
LOSS FROM CONTINUING OPERATIONS............................. (26,986,191) (9,703,959) (75,850,385) (47,142,895)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax benefit
of $9,826,211 and $25,626,241 for the three and nine
months ended September 30, 1999, respectively............. -- (16,032,240) -- (41,811,237)
------------ ------------ ------------- -------------
LOSS BEFORE EXTRAORDINARY ITEMS............................. (26,986,191) (25,736,199) (75,850,385) (88,954,132)
EXTRAORDINARY EXPENSE, net of income tax benefit of
$12,495,341 for the nine months ended September 30,
2000...................................................... -- -- (20,387,134) --
------------ ------------ ------------- -------------
NET LOSS.................................................... (26,986,191) (25,736,199) (96,237,519) (88,954,132)
DIVIDENDS ON PREFERRED STOCK................................ (17,099,664) (18,640,823) (109,070,793) (50,512,778)
------------ ------------ ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................. $(44,085,855) $(44,377,022) $(205,308,312) $(139,466,910)
============ ============ ============= =============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
Before discontinued operations and extraordinary
expense................................................. $ (0.47) $ (0.52) $ (2.10) $ (1.78)
Discontinued operations................................... -- (0.29) -- (0.76)
Extraordinary expense..................................... -- -- (0.23) --
------------ ------------ ------------- -------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE..................................................... $ (0.47) $ (0.81) $ (2.33) $ (2.54)
============ ============ ============= =============
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............ 93,788,684 54,823,354 87,941,001 54,823,354
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- --------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999..................... 314,286 $ 314,286 63,872,059 $ 63,872 -- $ --
Net loss............................ -- -- -- -- -- --
Distribution of Logix............... -- -- -- -- -- --
Recapitalization.................... (314,286) (314,286) (63,872,059) (63,872) 65,311,716 65,312
Issuance of common stock............ -- -- 27,953,597 27,954 -- --
Preferred stock dividends........... -- -- -- -- -- --
-------- --------- ----------- -------- ---------- -------
September 30, 2000.................... -- $ -- 27,953,597 $ 27,954 65,311,716 $65,312
======== ========= =========== ======== ========== =======
<CAPTION>
CLASS D
COMMON STOCK TREASURY
--------------------- PAID-IN STOCK RETAINED
SHARES AMOUNT CAPITAL AT COST DEFICIT
-------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
December 31, 1999..................... -- $ -- $ 18,234,773 $(56,125,661) $(316,317,323)
Net loss............................ -- -- -- -- (96,237,519)
Distribution of Logix............... -- -- -- -- 73,523,680
Recapitalization.................... 49,169,282 56,125,661 --
Issuance of common stock............ 4,832 5 546,581,515 -- --
Preferred stock dividends........... -- -- -- -- (109,070,793)
----- ---------- ------------ ------------ -------------
September 30, 2000.................... 4,832 $ 5 $613,985,570 $ -- $(448,101,955)
===== ========== ============ ============ =============
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
5
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations....................... $ (75,850,385) $ (47,142,895)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization........................... 122,875,495 100,019,510
Amortization of bond premium and financing cost......... 8,001,573 4,871,321
Deferred income taxes and investment tax credits, net... (26,084,952) (26,280,200)
Minority interests in income of subsidiaries............ 3,703,912 2,124,884
Loss from investment in joint venture................... 30,436,542 --
Other................................................... (50,478) 99,850
Changes in current assets and liabilities--
Accounts receivable..................................... (31,679,065) (11,041,109)
Other current assets.................................... (11,073,695) (1,381,856)
Accounts payable........................................ 30,024,079 (16,598,561)
Accrued expenses........................................ 18,874,850 8,220,264
Deferred revenue and customer deposits.................. 4,514,532 1,529,912
------------- -------------
Net cash provided by operating activities............. 73,692,408 14,421,120
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (99,677,213) (40,173,598)
Acquisitions.............................................. (369,391,867) (46,437,966)
Investment in joint venture............................... (382,500,000) --
Increase in payable-affiliate............................. -- (5,011,438)
Increase in receivables-affiliate......................... (7,986,406) (924,718)
Proceeds from sale of assets.............................. 2,310,942 --
Other investing activities................................ (1,756,633) (3,726,945)
------------- -------------
Net cash used in investing activities................. (859,001,177) (96,274,665)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,308,735,000 79,000,000
Repayments of long-term debt.............................. (829,458,359) (141,098,664)
Cash dividends............................................ (1,927) (3,471,621)
Issuance of preferred stock............................... -- 170,000,000
Proceeds from equity offering............................. 545,365,158 --
Redemption of preferred stock............................. (53,295,725) (55,000,000)
Deferred financing costs.................................. (28,010,402) (8,694,596)
Premium on redemption of Senior Notes..................... (23,869,310) --
Maturities of restricted investments, net of interest..... 10,870,000 19,134,000
Other financing activities................................ (460,820) --
------------- -------------
Net cash provided by financing activities............. 929,873,615 59,869,119
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 144,564,846 (21,984,426)
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,251,104 22,323,734
------------- -------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 148,815,950 $ 339,308
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest, net of amounts capitalized.................. $ 91,147,330 $ 50,070,818
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Conversion of Class D Preferred Stock to old Class A
Common Stock.............................................. $ 58,200,000 $ --
Conversion of Class D Preferred Stock to Class E Preferred
Stock and old Class A Common Stock...................... $ 46,610,325 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
The condensed consolidated balance sheet of Dobson Communications
Corporation ("DCC") and subsidiaries (collectively with DCC, the "Company") as
of September 30, 2000, the condensed consolidated statements of operations for
the three and nine months ended September 30, 2000 and 1999, the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 2000 and the condensed consolidated statements of cash flows for
the nine months ended September 30, 2000 and 1999 are unaudited. In the opinion
of management, such financial statements include all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation of
financial position, results of operations, and cash flows for the periods
presented.
The condensed balance sheet data at December 31, 1999 were derived from
audited financial statements, but do not include all disclosures required by
generally accepted accounting principles. The financial statements presented
herein should be read in connection with the Company's December 31, 1999
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
1. ORGANIZATION
The Company, through its predecessors, was organized in 1936 as Dobson
Telephone Company and adopted its current organizational structure in 2000. The
Company is a provider of rural and suburban cellular telephone services.
Management of the Company completed a recapitalization of the Company
immediately prior to and in conjunction with its initial public offering of its
common stock on February 9, 2000. This recapitalization included:
- the conversion and redemption of its outstanding Class D preferred stock
and Class E preferred stock for cash and the issuance of old Class A
common stock;
- the conversion of old Class A common stock into Class B common stock;
- the creation of Class A common stock issued in the Company's initial
public offering;
- a 111.44 for 1 stock split of new Class B common stock;
- the retirement of the Company's Class A preferred stock; and
- the creation of a new Class D common stock to be issued upon the exercise
of options under the Company's amended 1996 option plan.
Subsequent to this recapitalization, the Company has outstanding only
Class A common stock, Class B common stock, Class D common stock, 12.25% senior
preferred stock and 13% senior preferred stock.
On February 9, 2000, the Company completed its initial public offering of
25 million shares of Class A common stock, and the sale of an additional
1.5 million shares of Class A common stock to AT&T Wireless, for net proceeds
(after commissions and expenses) of $545.4 million. The Company used
$53.3 million of the net proceeds to pay accrued dividends on its Class D
preferred stock and to redeem its Class E preferred stock. An additional
$382.5 million was used as a capital contribution to its joint venture with AT&T
Wireless which acquired American Cellular Corporation. The Company used the
balance of the net proceeds for working capital and other general corporate
purposes.
7
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
2. ACQUISITIONS
RECENT ACQUISITIONS
On September 21, 2000, the Company completed the purchase of Oklahoma 6 RSA
for approximately $72.0 million. The total population base for the Oklahoma 6
RSA is approximately 221,000. The Oklahoma 6 RSA covers seven counties in
central and eastern Oklahoma, including the cities of Henryetta, McAlester,
Muskogee, Okmulgee and Seminole.
On July 17, 2000 the Company acquired from Florida Cellular, a Florida
general partnership for $7.0 million, Missouri 2 RSA, consisting of Harrison,
Grundy, Sullivan, Mercer and Putnam Counties (or portions thereof) in Missouri.
On October 2, 2000, the Company sold Putnam and Sullivan Counties in
Missouri 2 RSA to USCOC of Missouri 5 RSA, Inc. for approximately $2.0 million.
On May 1, 2000, the Company completed the purchase of Texas 9 RSA for
approximately $125.0 million. Texas 9 RSA is located between Dallas/Fort Worth
and Abilene and adjoins the Company's Texas 10 property. It has a population
base of approximately 190,000 and encompasses the towns of Brownwood,
Stephenville, Hamilton and Hillsboro.
On March 3, 2000, the Company completed the purchase of Michigan 10 RSA for
approximately $34.0 million. Michigan 10 RSA is located in the eastern portion
of the lower-peninsula of Michigan. The Michigan 10 market area, which is mostly
surrounded by Saginaw Bay and Lake Huron, has an estimated total population of
approximately 138,000.
On February 25, 2000, the Company and AT&T Wireless, through our
equally-owned joint venture, acquired American Cellular Corporation for
approximately $2.5 billion, including fees and expenses. American Cellular's
systems cover a total population of approximately 4.8 million. American Cellular
serves markets in portions of Illinois, Kentucky, Michigan, Minnesota, New York,
Ohio, Pennsylvania, Tennessee, West Virginia and Wisconsin.
On February 17, 2000, the Company completed the purchase of Alaska 1 RSA for
approximately $16.0 million. Alaska 1 is located in east central Alaska,
covering the Fairbanks area, with a population of approximately 113,000.
On February 11, 2000, the Company completed the purchase of Michigan 3 RSA
for approximately $97.0 million. This market is located in northwest Michigan
and has a total population of approximately 166,000.
On January 31, 2000, the Company completed the purchase of Alaska 3 RSA for
approximately $12.0 million. Alaska 3 is located in the southeast portion of
Alaska and has a total population of approximately 74,000.
On December 14, 1999, the Company purchased Pennsylvania 2 RSA for
$6.0 million. Pennsylvania 2 is located in Northwest Pennsylvania and covers an
estimated population base of 90,000.
On September 15, 1999, the Company purchased Arizona 1 RSA for
$24.0 million. Arizona 1 is located in the Northwest corner of the state and
covers an estimated population base of approximately 135,000.
8
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
On June 24, 1999, the Company's wholly-owned subsidiary, Dobson Cellular of
Maryland, purchased the Maryland 1 RSA for $9.1 million. Maryland 1 is located
in the westernmost county of the state and a small section of West Virginia and
covers an estimated population base of approximately 56,400.
On June 1, 1999, the Company completed the purchase of certain assets and
customers relating to the Texas 10 RSA. This completed the acquisition of the
Texas 10 market, which began on December 2, 1998, when the Company acquired the
FCC license of Texas 10 RSA for $55.0 million. Texas 10 is located in central
Texas and covers an estimated population of 317,900.
On March 16, 1999, the Company purchased certain assets and customers
relating to the Ohio 2 RSA for $3.9 million. This completes the acquisition of
the Ohio 2 market, which began on September 2, 1998, when the Company acquired
the FCC license of Ohio 2 RSA for $39.3 million. Ohio 2 is located in north
central Ohio and covers an estimated population of 262,300 people.
The acquisition transactions were accounted for as purchases, and
accordingly, their results of operations have been included in the accompanying
condensed consolidated statements of operations from the respective dates of
acquisition. The unaudited pro forma information set forth below includes all
acquisitions, which occurred during 1999 and 2000, as if the purchases occurred
at the beginning of each period presented. The unaudited pro forma information
is presented for informational purposes only and is not necessarily indicative
of the results of operations that actually would have been achieved had the
acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue.......................... $146,817 $121,111 $ 396,329 $ 326,524
Net loss................................... (27,928) (30,320) (112,067) (125,445)
Net loss applicable to common
stockholders............................. (45,027) (48,961) (221,138) (175,958)
Basic net loss applicable to common
stockholders per common share............ $ (0.48) $ (0.52) $ (2.36) $ (1.88)
</TABLE>
3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
The Company owns a 50% interest in a joint venture that owns American
Cellular. This investment is accounted for on the equity method. The following
is a summary of the significant
9
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
3. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP (CONTINUED)
financial information for American Cellular as of and for the three months ended
September 30, 2000 and the period from acquisition, February 25, 2000 to
September 30, 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD FROM FEBRUARY 25, 2000
SEPTEMBER 30, 2000 TO SEPTEMBER 30, 2000
------------------ -----------------------------
($ IN THOUSANDS) ($ IN THOUSANDS)
<S> <C> <C>
Revenue........................... $110,507 $238,132
Operating income.................. 12,549 19,749
Net loss.......................... (24,954) (60,873)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------
($ IN THOUSANDS)
<S> <C>
Current assets.............................................. $ 91,886
Property, plant and equipment, net.......................... 184,914
Intangible assets........................................... 2,455,803
Other assets................................................ 6,308
Current liabilities......................................... 129,756
Long-term debt.............................................. 1,666,000
Other liabilities........................................... 260,279
Shareholders' equity........................................ 704,127
</TABLE>
4. DISCONTINUED OPERATIONS
On January 24, 2000, the Company distributed the stock of its former
subsidiary, Logix Communications Enterprises, Inc ("Logix"), to certain of the
Company's shareholders. Logix' operating results through the date of the
spin-off on January 24, 2000, were reported as a loss from discontinued
operations in the Company's consolidated financial statements at December 31,
1999. Therefore, beginning in January 2000, the Company no longer included the
operating results of Logix in its financial results.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," the consolidated financial statements have been restated for all
periods presented to reflect the Logix operations, assets and liabilities as
discontinued operations. The assets and liabilities of such operations have been
classified as "Net
10
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
4. DISCONTINUED OPERATIONS (CONTINUED)
liabilities of discontinued operations" on the December 31, 1999 consolidated
balance sheet and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
($ IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 672
Restricted investments--current............................. 40,079
Other current assets........................................ 28,152
Property, plant and equipment, net.......................... 121,136
Restricted investments--non-current......................... 21,062
Goodwill.................................................... 121,280
Other assets................................................ 75,557
--------
Total assets................................................ 407,938
--------
Current liabilities......................................... 36,540
Long-term debt, net of current portion...................... 438,330
Other liabilities........................................... 6,592
--------
Total liabilities........................................... 481,462
--------
Net liabilities of discontinued operations.................. $(73,524)
========
</TABLE>
The net loss from operations of the wireline segment was classified on the
condensed consolidated statements of operations as "Loss from discontinued
operations." Summarized results of discontinued operations are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net revenues.............................. $ 28,619 $ 85,359
Loss before income taxes.................. (25,858) (67,437)
Income tax benefit........................ 9,826 25,626
Loss from discontinued operations......... $(16,032) $(41,811)
</TABLE>
11
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
5. LONG-TERM DEBT
The Company's long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Revolving credit facilities................. $1,046,511,754 $ 705,000,000
Dobson/Sygnet Senior Notes.................. 200,000,000 200,000,000
DCC 10 7/8% Senior Notes, net of discount... 297,791,155 --
DCC 11 3/4% Senior Notes.................... 340,000 160,000,000
Other notes payable......................... 3,547,222 3,857,335
-------------- --------------
Total debt................................ 1,548,190,131 1,068,857,335
Less-Current maturities..................... 34,249,070 13,041,731
-------------- --------------
Total long term debt...................... $1,513,941,061 $1,055,815,604
-------------- --------------
</TABLE>
REVOLVING CREDIT FACILITIES
The Company's revolving credit facilities consist of the following:
<TABLE>
<CAPTION>
AMOUNT INTEREST RATE
MAXIMUM OUTSTANDING AT WEIGHTED AVERAGE RATE
CREDIT FACILITY AVAILABILITY SEPTEMBER 30, 2000 AT SEPTEMBER 30, 2000(1)
--------------- ------------ ------------------ ------------------------
<S> <C> <C> <C>
Dobson/Sygnet Credit
Facilities.............. $362,750,000 $341,261,754 10.0%
DOC LLC Credit Facility... 923,250,000 705,250,000 9.7%
</TABLE>
------------------------
(1) Weighted average computation is based on actual interest rates without
giving effect to the interest rate hedge discussed below.
On January 14, 2000, the Company obtained an $800.0 million credit facility
and increased it by $125.0 million to $925.0 million on May 1, 2000. The
original proceeds from the $800.0 million credit facility were used primarily
to:
- consolidate the indebtedness of Dobson Cellular Operations Company, a
subsidiary, under a $160.0 million credit facility and Dobson Operating
Company, a subsidiary, under a $250.0 million senior secured credit
facility;
- repurchase $159.7 million outstanding principal amount of the Company's
11.75% senior notes due 2007; and
- pay the cash portion of the costs of certain of the Company's pending
acquisitions.
The increase of $125.0 million was used to fund the acquisition of Texas 9
RSA on May 1, 2000.
At September 30, 2000, this credit facility included a $300 million
revolving credit facility and $623.3 million of term loan facilities consisting
of a Term A Facility of $350 million, a Term B Facility of $148.9 million and an
additional Term B Facility of $124.4 million (collectively the "DOC LLC Credit
Facility"). All of these loans will mature by 2008.
12
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
This credit facility is structured as a loan to the Company's subsidiary,
Dobson Operating Co., L.L.C., the successor by merger to Dobson Cellular
Operating Company and Dobson Operating Company, with guarantees from certain of
its subsidiaries and the Company. Advances bear interest, at the Company's
option, on a prime rate or LIBOR formula. The Company's obligations under the
credit facility are secured by:
- a pledge of the membership interests in the borrower;
- stock and partnership interests of certain of the borrower's subsidiaries;
and
- liens on substantially all of the assets of the borrower and the
borrower's restricted subsidiaries including FCC licenses, but only to the
extent such licenses can be pledged under applicable law.
The Company is required to amortize the Term A Facility with quarterly
principal payments of $5.0 million commencing June 30, 2001, increasing over the
term of the loan to quarterly principal payments of $25.0 million. The Company
is required to amortize the Term B Facility with quarterly principal payments of
$375,000 from March 31, 2000 through December 31, 2006 and with quarterly
principal payments of $34.9 million during 2007. The Company is required to
amortize the additional $125.0 million portion of the Term B Facility with
quarterly principal payments of $312,500 from June 30, 2000 through March 31,
2007 and with quarterly principal payments of $29.1 million from June 30, 2007
through March 31, 2008. In addition, under certain circumstances, the Company is
required to make prepayments of proceeds received from significant asset sales,
new borrowings and sales of equity, other than this offering, and a portion of
excess cash flow. The Company has the right to prepay the credit facility in
whole or in part at any time.
The Company's new credit facility imposes a number of restrictive covenants
that, among other things, limit the Company's ability to incur additional
indebtedness, create liens, make capital expenditures and pay dividends.
The Company's subsidiary, Sygnet Wireless, Inc., is a party to a credit
agreement for an aggregate of $362.8 million, consisting of a $42.5 million
revolving credit facility and $320.3 million of term loan facilities
(collectively the "Sygnet credit facilities"). Interest on the revolving credit
facility and the term loan facilities is based on a prime rate or a LIBOR
formula, and has ranged between 8.3% and 10.0% since inception. As of
September 30, 2000, the Company had $341.3 million outstanding under the Sygnet
credit facilities and the Company had $21.5 million of availability under the
Sygnet credit facilities.
The obligations under the Sygnet credit facilities are secured by a pledge
of the capital stock of Dobson/Sygnet's operating subsidiary as well as a lien
on substantially all of the assets of Dobson/ Sygnet and its operating
subsidiary. The Sygnet credit facilities require that Dobson/Sygnet and the
Company maintain certain financial ratios. The failure to maintain these ratios
would constitute an event of default, notwithstanding Dobson/Sygnet's ability to
meet its debt service obligations. The Sygnet credit facilities amortize
quarterly. The $42.5 million revolving credit facility terminates on
September 23, 2006. The $320.3 million term loans terminate on December 23,
2007.
13
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
DOBSON/SYGNET SENIOR NOTES
On December 23, 1998, the Company's subsidiary, Dobson/Sygnet, issued
$200 million of 12.25% Senior Notes maturing in 2008 ("Dobson/Sygnet Senior
Notes"). The net proceeds were used to finance the Sygnet Acquisition in
December 1998 and to purchase $67.7 million of securities pledged to secure
payment of the first six semi-annual interest payments on the Dobson/Sygnet
Senior Notes, which began on June 15, 1999. The pledged securities are reflected
as restricted cash and investments in the Company's consolidated balance sheets.
The Dobson/Sygnet Senior Notes are redeemable at the option of the Company in
whole or in part, on or after December 15, 2003, initially at 106.125%. Prior to
December 15, 2001, the Company may redeem up to 35% of the principal amount of
the Dobson/ Sygnet Senior Notes at 112.25% with proceeds from equity offerings,
provided that at least $130 million remains outstanding.
SENIOR NOTES
On June 15, 2000, the Company issued $300 million principal amount of its
10 7/8% senior notes maturing on July 1, 2010. The Company used $204.0 million
of the net proceeds to pay down the DOC LLC credit facility. The Company has and
will continue to use the balance of the net proceeds for working capital and
other general corporate purposes. The notes are redeemable at any time. In
addition, the Company may redeem up to 35% of the notes before July 1, 2003 with
the net cash proceeds from certain equity offerings.
OTHER NOTES PAYABLE
Other notes payable represents the amount financed with the United States
Government for nine PCS licenses. The Company has entered into a definitive
agreement to sell eight of the Company's nine PCS licenses for $1.1 million plus
the reimbursement of all interest and principal actually paid by the Company
from the date of the agreement through the closing date and the assumption of
the remaining notes payable. This agreement is scheduled to close November 26,
2000.
INTEREST RATE HEDGES
The Company pays interest on its bank credit facilities based on a variable
factor, such as LIBOR or prime rate. The Company will from time to time enter
into derivative contracts to reduce exposure against rising interest rates.
The Company has entered into a $135 million derivative contract on the DOC
LLC Credit Facility whereby the interest rate on $135 million of the facility
ranges from a cap of 8.5% to a floor of 7.0% plus a factor based on DOC LLC's
leverage (total weighted average rate of approximately 9.7% for the three months
ended September 30, 2000). The agreement expires in March 2002. Additionally,
the Company has entered into a $165 million derivative contract on the DOC LLC
Credit Facility whereby the interest rate on $165 million of the facility has a
cap of 8.5% plus a factor based on DOC LLC's leverage (total weighted average
rate of approximately 9.4% for the three months ended September 30, 2000). The
agreement expires in March 2002. DOC LLC also has an interest rate cap agreement
of $160 million that expires in June 2001. Under this agreement the maximum rate
the Company will pay
14
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
on the $160 million of its DOC LLC credit facility is 7.5% plus a factor based
on the Company's leverage (total weighted average rate of approximately 9.4% for
the three months ended September 30, 2000).
The Company has entered into a $110 million interest rate swap agreement
under the Sygnet credit facility which caps the interest rate on $110 million of
the facility at 5.48% plus a factor based on Dobson/Sygnet's leverage (total
rate of approximately 8.8% at September 30, 2000). The agreement expires in
March 2001.
6. STOCKHOLDERS' EQUITY
The Company issued preferred stock dividends of $109.1 million for the nine
months ended September 30, 2000 consisting of approximately $48.7 million of
dividends on its 12.25% and 13% Senior Exchangeable Preferred Stock through the
issuance of additional shares of such Preferred Stock and $60.4 million of
dividends on their previous Class D and Class E shares of Preferred Stock.
As of September 30, 2000, 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
----- --------------- ----------- ----------- ---------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A.............. Common Stock 175,000,000 27,953,597 $.001 As declared -- --
Class B.............. Common Stock 70,000,000 65,311,716 $.001 As declared -- --
Class C.............. Common Stock 4,226 -- $.001 As declared -- --
Class D.............. Common Stock 33,000 4,832 $.001 As declared -- --
----------- ----------
245,037,226 93,270,145
----------- ----------
Jan. 15,
Senior Exchangeable.. Preferred Stock 734,000 315,257 $1.00 12.25% Cumulative $ 1,000 2008
Senior Exchangeable.. Preferred Stock 500,000 199,759 $1.00 13% Cumulative $ 1,000 May 1, 2009
After
Dec. 23,
Class E.............. Preferred Stock 40,000 -- $1.00 15% Cumulative $1,131.92 2010
Other................ Preferred Stock 4,726,000 -- $1.00 -- -- --
----------- ----------
6,000,000 515,016
----------- ----------
<CAPTION>
OTHER
FEATURES,
RIGHTS,
PREFERENCES
AND
CLASS POWERS
----- -----------
<S> <C>
Class A.............. Voting
Class B.............. Voting
Class C.............. Voting
Class D.............. Voting
Senior Exchangeable.. Non-voting
Senior Exchangeable.. Non-voting
Class E.............. Non-voting
Other................ --
</TABLE>
Each share of the Company's Class D common stock is convertible into 111.44
shares of Class A common stock at the option of the holder. Due to this
conversion feature, the Company's calculation of its weighted average common
shares outstanding is performed on an as converted basis, as discussed in
Note 8 below.
The Company adopted the 2000 stock incentive plan on January 10, 2000. The
maximum number of shares for which the Company may grant options under the plan
is 4,000,000 shares of post recapitalization Class A common stock, subject to
adjustment in the event of any stock dividend, stock split, recapitalization,
reorganization or certain defined change of control events. On May 10, 2000, the
Company granted options to purchase approximately 2,190,000 shares of common
stock under this 2000 stock incentive plan. Shares subject to previously
expired, cancelled, forfeited or terminated options
15
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
become available again for grants of options. The shares that the Company will
issue under the plan will be newly issued shares.
7. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of interest pledge deposits for the
Dobson/Sygnet Senior Notes. The Dobson/Sygnet Senior Notes interest pledge
deposit of approximately $35.9 million includes the initial deposit of
$67.7 million, net of interest earned and payments issued to bondholders.
Amortization expense of $400,495 and $604,407 was recorded for the nine months
ended September 30, 2000 and 1999, respectively, for bond premiums recorded with
the purchase of the restricted investments.
8. EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
requires two presentations of income per share--"basic" and "diluted." Basic
income per share is computed by dividing income available to shareholders (the
numerator) by the weighted-average number of shares (the denominator) for the
period. The computation of diluted income per share is similar to basic income
per share, except that the denominator is increased to include the number of
additional shares that would have been outstanding if the potentially dilutive
shares, such as options, had been issued.
The Company's Class D common stock is convertible into 111.44 shares of
Class A common stock at the option of the holder. Due to this conversion
feature, basic loss per common share is computed by the weighted average number
of shares of common stock outstanding on an as converted basis for the period
described. Diluted net loss per common share has been omitted because the impact
of stock options and convertible preferred stock on the Company's net loss per
common share is anti-dilutive.
9. RECENT PRONOUNCEMENTS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized as a component of
comprehensive income or in current earnings. SFAS 133, as amended by SFAS 137,
Derivatives and Hedging-Deferral of the Effective Date of FASB Statement
No. 133, will be effective for fiscal years beginning after June 15, 2000. In
addition, SFAS 138, was issued in June 2000 as an amendment to SFAS 133 and
addresses issues causing implementation difficulties. Under SFAS 133, the
Company would record an asset of $0.62 million relating to its interest rate
hedge valuation at September 30, 2000. The Company has not determined the method
of adoption of SFAS 133.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements ("SAB 101")." This bulletin
establishes more clearly defined revenue recognition criteria than previously
existing accounting pronouncements and specifically addresses revenue
16
<PAGE>
DOBSON COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
9. RECENT PRONOUNCEMENTS (CONTINUED)
recognition requirements for nonrefundable fees, such as activation fees,
collected by a company upon entering into an arrangement with a customer. On
June 26, 2000, Staff Accounting Bulletin No. 101B, was issued and delays the
required implementation date for SAB 101 until the quarter ending December 31,
2000. The Company believes that the impact of this bulletin is not material to
its financial position and results of operations.
10. COMMITMENTS
Effective December 6, 1995 (as amended through June 30, 2000), the Company
entered into an equipment supply agreement in which the Company agreed to
purchase approximately $215.0 million of cell site and switching equipment
between June 24, 1997 and December 31, 2002 to update the cellular systems for
newly acquired and existing MSAs and RSAs. Of this commitment, approximately
$97.6 million remained at September 30, 2000.
The Company entered into an additional equipment supply agreement with a
second vendor on January 13, 1998 (as amended through April 13, 2000). The
Company agreed to purchase approximately $131.0 million of cell site and
switching equipment between January 13, 1998 and January 12, 2002 to update the
cellular systems for newly acquired and existing MSAs and RSAs. Of this
commitment, $53.0 million remained at September 30, 2000.
11. RECLASSIFICATIONS
Certain items have been reclassified in the 1999 consolidated financial
statements to conform to the current presentation.
12. SUBSEQUENT EVENT
On November 1, 2000, the Company completed the purchase of Georgia 1 RSA for
approximately $70.0 million. Georgia 1 covers eight counties in north and
central Georgia, and covers an estimated population base of approximately
237,000.
On November 6, 2000, the Company entered into an agreement with AT&T
Wireless Services, Inc. providing for the purchase by AT&T Wireless of
$200.0 million liquidation preference amount of the Company's Class A
Convertible Preferred Stock. The agreement is subject to approval by the board
of directors of the Company, AT&T Corp., the parent of AT&T Wireless, to
regulatory approvals, and to customary closing conditions.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We provide rural and suburban cellular telephone services. We began
providing cellular telephone service in 1990 in Oklahoma and the Texas
Panhandle. We have expanded our cellular operations rapidly since then,
primarily through acquisitions. As of September 30, 2000, our cellular systems
covered a total population of approximately 6.8 million and we had 596,900
subscribers.
On February 25, 2000, our equally-owned joint venture with AT&T Wireless
acquired American Cellular for approximately $2.5 billion, including fees and
expenses. As of September 30, 2000, American Cellular's systems covered a total
population of approximately 4.9 million and had 514,400 subscribers, primarily
in rural areas of the midwestern and eastern United States. We account for our
interest in the American Cellular joint venture using the equity method of
accounting. On May 30, 2000, we entered into an agreement with AT&T
Wireless, Inc. to expand the operations of the joint venture into northeastern
Oklahoma and several adjacent counties in Kansas. Under this agreement, AT&T
contributed the PCS licenses to the joint venture, and we contributed
approximately $17.0 million in cash.
Since 1996 we have completed 23 acquisitions of cellular licenses and
systems and related assets for an aggregate purchase price of $2.5 billion,
including 50% of the purchase price of American Cellular, increasing the total
proportionate population served by our systems to approximately 9.3 million. Our
recent acquisitions affect the comparability of our historical results of
operations for the periods discussed.
REVENUE
Our cellular revenues consist of service, roaming and equipment sales and
other revenues. There has been an industry trend of declining average revenue
per minute, as competition among service providers has led to reductions in
rates for airtime and subscriptions and other charges. We believe that the
impact of this trend will be mitigated by increases in the number of cellular
telecommunications subscribers and the number of minutes of usage per
subscriber.
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 44.8%,
43.6%, 43.4%, and 40.1% of our operating revenue for the three months ended
September 30, 2000 and 1999 and the nine months ended September 30, 2000 and
1999, respectively. Roaming revenues typically yield higher average per minute
rates and higher margins than revenues from our subscribers. We achieve these
higher margins because we incur immaterial incremental costs related to
equipment, customer service or collections to earn roaming revenues.
Our overall cellular penetration rates increased for the nine-month period
ended September 30, 2000 compared to the same period in 1999 due to the
incremental penetration gains in existing markets. We believe that as our
cellular penetration rates increase, the increase in new subscriber revenue will
exceed the loss of revenue attributable to the customer churn rate.
We include any toll, or long-distance, revenues related to our cellular and
roaming services in service revenues and roaming revenues. Our roaming yield
(roaming service revenues, which include airtime, toll charges and surcharges,
divided by roaming minutes of use) was $0.42, $0.46, $0.43, and $0.50 per minute
for the three months ended September 30, 2000 and 1999 and the nine months ended
September 30, 2000 and 1999, respectively. Despite the decline in our roaming
yield, we have experienced increases in overall roaming revenues due to
increases in roaming minutes of use.
We derive revenues from charges to our subscribers when those subscribers
roam into other wireless providers' markets. Through 1999, our accounting
practice was to net those revenues against
18
<PAGE>
the associated expenses charged to us by third-party wireless providers (that
is, the fees we pay the other wireless providers for carrying our subscribers'
calls on their network) and to record the net expense as cost of service.
Historically, we have been able to pass through to our subscribers the majority
of the costs charged to us by third- party wireless providers. Recently, the
industry has been increasing the use of pricing plans that include flat rate
pricing and larger home areas. Under these types of plans, amounts charged to us
by other wireless providers may not necessarily be passed through to our
subscribers. Therefore, we have changed our accounting procedures to report
these revenues and expenses separately in our statements of operations and have
reclassified prior year amounts to reflect this change in accounting.
COSTS AND EXPENSES
Our primary operating expense categories include cost of service, cost of
equipment, marketing and selling, general and administrative and depreciation
and amortization.
Our cost of service consists primarily of costs to operate and maintain our
facilities utilized in providing service to customers and amounts paid to
third-party cellular providers for providing service to our subscribers when our
subscribers roam into their markets.
Our cost of equipment represents the cost associated with telephone
equipment and accessories sold to customers. In recent years, we and other
cellular providers, have increased the use of discounts on phone equipment and
free phone promotions, as competition between service providers has intensified.
As a result, we have incurred, and expect to continue to incur, losses on
equipment sales, which have resulted in increased marketing and selling costs
per gross additional subscriber. While we expect to continue these discounts and
promotions, we believe that the use of such promotions will result in increased
revenue from increases in the number of cellular subscribers.
Our marketing and selling costs include advertising, compensation paid to
sales personnel and independent agents and all other costs to market and sell
cellular products and services and costs related to customer retention. We pay
commissions to direct sales personnel for new business generated. Independent
sales agents receive commissions for generating new sales and ongoing sales to
existing customers.
Our general and administrative costs include all infrastructure costs such
as customer support, billing, collections, and corporate administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
DISCONTINUED OPERATIONS
On January 24, 2000, we distributed the stock of our former subsidiary,
Logix Communications Enterprises, Inc., to certain of our shareholders. Logix is
accounted for as a discontinued operation in our consolidated financial
statements.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statement numbers.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
OPERATING REVENUE. For the three months ended September 30, 2000, total
operating revenue increased $42.7 million, or 42.3%, to $143.7 million from
$101.0 million for the comparable period in
19
<PAGE>
1999. Total service, roaming and equipment sales and other revenue represented
50.7%, 44.8% and 4.5%, respectively, of total operating revenue during the three
months ended September 30, 2000 and 52.5%, 43.6% and 3.9%, respectively, of
total operating revenue during the three months ended September 30, 1999.
The following table sets forth the components of our operating revenue for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue......................................... $ 72,839 $ 53,066
Roaming revenue......................................... 64,474 43,991
Equipment sales and other............................... 6,425 3,934
-------- --------
Total............................................. $143,738 $100,991
======== ========
</TABLE>
Service revenue increased $19.7 million, or 37.3%, to $72.8 million in the
three months ended September 30, 2000 from $53.1 million in the same period of
1999. In the third quarter of 2000, service revenue of $9.2 million was
attributable to markets acquired since September 30, 1999. The remaining
increase of $10.5 million was primarily attributable to increased penetration
and usage in the existing company markets. Our subscriber base increased 40.8%
to 596,900 at September 30, 2000 from 424,000 at September 30, 1999. At
September 30, 2000, the subscriber base for markets we acquired since
September 30, 1999 totaled approximately 96,100. Our average monthly service
revenue per subscriber remained constant at $43 for the three months ended
September 30, 2000 and 1999 respectfully.
Roaming revenue increased $20.5 million, or 46.6%, to $64.5 million in the
three months ended September 30, 2000 from $44.0 million for the comparable
period of 1999. In the third quarter of 2000, roaming revenue of $10.0 million
was attributable to markets acquired since September 30, 1999. The remaining
increase of $10.5 million was primarily attributable to increased roaming
minutes in our existing markets due to expanded coverage areas and increased
usage in these markets.
Equipment sales and other revenue of $6.4 million in the three months ended
September 30, 2000 represented an increase of $2.5 million, or 63.3%, from
$3.9 million in the same period of 1999, as we sold more equipment during the
three months ended September 30, 2000 as a result of growth in subscribers.
COST OF SERVICE. For the three months ended September 30, 2000, the total
cost of service increased $10.0 million, or 38.8% to $35.9 million from
$25.9 million for the comparable period in 1999. This increase was primarily
attributable to the increased number of subscribers. As a percentage of service
and roaming revenue, cost of cellular service decreased to 26.2% for the three
months ended September 30, 2000 from 26.7% for the same period in 1999. This
decrease was primarily a result of a reduction in rates charged by third-party
cellular providers for providing service to our subscribers.
COST OF EQUIPMENT. For the three months ended September 30, 2000, cost of
equipment increased $4.6 million, or 68.3% to $11.3 million during 2000 from
$6.7 million in the same period of 1999, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$3.9 million, or 29.1%, to $17.1 million for the three month period ended
September 30, 2000 from $13.2 million in the comparable period of 1999. This was
primarily a result of an increase in gross subscriber additions. The number of
gross subscribers added in the third quarter of 2000 was approximately 56,000.
The number of gross subscribers added in the third quarter 1999 was
approximately 45,300.
20
<PAGE>
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $3.2 million, or 21.6%, to $17.9 million for the three month period
ended September 30, 2000 from $14.7 million for the same period in 1999. This
increase year over year is a result of increased infrastructure costs such as
customer service, billing, collections and administrative costs as a result of
our overall growth. However, our average monthly general and administrative
costs per subscriber decreased to $10 from $12 for the three months ended
September 30, 2000 and 1999 respectfully.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended
September 30, 2000, depreciation and amortization expense increased
$14.7 million, or 48.7% to $44.8 million from $30.1 million in the same period
of 1999. The increase is a result of depreciation and amortization on assets
that were acquired during the fourth quarter of 1999 and the first nine months
of 2000.
INTEREST EXPENSE. For the three months ended September 30, 2000, interest
expense increased $14.4 million, or 53.7%, to $41.2 million from $26.8 million
in the same period of 1999. The increase was primarily a result of increased
borrowings to finance our acquisitions.
OTHER INCOME (EXPENSE), NET. For the three months ended September 30, 2000,
our other income increased $1.0 million, or 66.8%, to $2.5 million from
$1.5 million for the comparable 1999 period. The increase was primarily the
result of an increase in interest income that we earned on excess proceeds from
our initial public offering.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the three months ended
September 30, 2000, our minority interests in income of subsidiaries increased
$0.8 million or 118.2% to $1.4 million from $0.6 million in the same period of
1999. This was a result of the increased income earned from subsidiaries in
established markets in which we do not own a 100% interest.
LOSS FROM INVESTMENT IN JOINT VENTURE. For the three months ended
September 30, 2000, we incurred a loss, net of income tax benefits, from our
American Cellular joint venture totaling $12.5 million. This loss represents our
fifty-percent ownership in American Cellular for the quarter ended
September 30, 2000.
LOSS FROM DISCONTINUED OPERATIONS. For the three months ended
September 30, 1999, our loss, net of income tax benefits, from discontinued
operations totaled $16.0 million. As previously discussed, we distributed the
capital stock of Logix to our current stockholders on January 24, 2000, and will
no longer include Logix' financial results in our consolidated operations.
NET LOSS. For the three months ended September 30, 2000, our net loss was
$27.0 million. Our net loss increased $1.3 million, or 4.9%, from $25.7 million
in the three months ended September 30, 1999. The increase in our net loss is
primarily attributable to our loss from investment in our joint venture and our
increase in interest expense resulting from our 1999 and 2000 business
acquisitions and financings offset by the increase in operating income and the
spin off of our discontinued operations.
DIVIDENDS ON PREFERRED STOCK. For the three months ended September 30,
2000, our dividends on preferred stock decreased slightly by $1.5 million, or
8.3%, to $17.1 million from $18.6 million for the comparable 1999 period.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
OPERATING REVENUE. For the nine months ended September 30, 2000, total
operating revenue increased $110.5 million, or 41.3%, to $377.8 million from
$267.3 million for the comparable period in 1999. Total service, roaming and
equipment sales and other revenue represented 51.9%, 43.4% and 4.7%,
respectively, of total operating revenue during the nine months ended
September 30, 2000 and 56.1%, 40.2% and 3.7%, respectively, of total operating
revenue during the nine months ended September 30, 1999.
21
<PAGE>
The following table sets forth the components of our operating revenue for
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue......................................... $196,012 $150,032
Roaming revenue......................................... 163,798 107,296
Equipment sales and other............................... 17,950 9,952
-------- --------
Total............................................. $377,760 $267,280
======== ========
</TABLE>
Service revenue increased $46.0 million, or 30.6%, to $196.0 million in the
nine months ended September 30, 2000 from $150.0 million in the same period of
1999. In the nine months ended September 30, 2000, service revenue of
$20.2 million was attributable to markets acquired since September 30, 1999. The
remaining increase of $25.8 million was primarily attributable to increased
penetration and usage in the existing company markets. Our subscriber base
increased 40.8% to approximately 596,900 at September 30, 2000 from
approximately 424,000 at September 30, 1999. At September 30, 2000, the
subscriber base for markets we acquired since September 30, 1999 totaled
approximately 96,100. Our average monthly service revenue per subscriber
decreased 4.7% to $41 for the nine months ended September 30, 2000 from $43 for
the comparable period in 1999 due to the addition of new lower rate subscribers
and competitive market pressures.
Roaming revenue increased $56.5 million, or 52.7%, to $163.8 million in the
nine months ended September 30, 2000 from $107.3 million for the comparable
period of 1999. In the nine months ended September 30 2000, roaming revenue of
$18.8 million was attributable to markets acquired since September 30, 1999. The
remaining increase of $37.7 million was primarily attributable to increased
roaming minutes in our existing markets due to expanded coverage areas and
increased usage in these markets.
Equipment sales and other revenue of $18.0 million in the nine months ended
September 30, 2000 represented an increase of $8.0 million, or 80.4%, from
$10.0 million in the same period of 1999, as we sold more equipment during the
nine months ended September 30, 2000 as a result of growth in subscribers.
COST OF SERVICE. For the nine months ended September 30, 2000, the total
cost of service increased $20.3 million, or 29.8% to $88.2 million from
$67.9 million for the comparable period in 1999. This increase was primarily
attributable to the increased number of subscribers. As a percentage of service
and roaming revenue, cost of cellular service decreased to 24.5% for the nine
months ended September 30, 2000 from 26.4% for the same period in 1999. This
decrease was primarily a result of a reduction in rates charged by third-party
cellular providers for providing service to our subscribers.
COST OF EQUIPMENT. For the nine months ended September 30, 2000, cost of
equipment increased $15.2 million, or 82.3% to $33.8 million during 2000 from
$18.6 million in the same period of 1999, primarily from increases in the volume
of equipment sold due to the growth in subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$15.7 million, or 45.1%, to $50.7 million for the nine month period ended
September 30, 2000 from $35.0 million in the comparable period of 1999. This was
primarily a result of an increase in gross subscriber additions. The number of
gross subscribers added in the nine months ended September 30, 2000 was 165,500.
The number of gross subscribers added in the nine months ended September 30,
1999 was 121,000.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased $11.0 million, or 27.0%, to $51.8 million for the nine month period
ended September 30, 2000 from $40.8 million for the
22
<PAGE>
same period in 1999. This increase year over year is a result of increased
infrastructure costs such as customer service, billing, collections and
administrative costs as a result of our overall growth. However, our average
monthly general and administrative costs per subscriber decreased to $11 from
$12 for the nine months ended September 30, 2000 and 1999. The decrease in
general and administrative costs per subscriber is a result of efficiencies
gained from the integration of acquired companies.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended
September 30, 2000, depreciation and amortization expense increased
$22.9 million, or 22.9% to $122.9 million from $100.0 million in the same period
of 1999. This increase is a result of depreciation and amortization on assets
that were acquired during 2000.
INTEREST EXPENSE. For the nine months ended September 30, 2000, interest
expense increased $25.0 million, or 30.4%, to $107.4 million from $82.4 million
in the same period of 1999. The increase was primarily a result of increased
borrowings to finance our acquisitions.
OTHER INCOME (EXPENSE), NET. For the nine months ended September 30, 2000,
our other income increased $4.1 million, or 119.8%, to $7.5 million from
$3.4 million for the comparable 1999 period. The increase was primarily the
result of an increase in interest income that we earned on excess proceeds from
our initial public offering.
MINORITY INTERESTS IN INCOME OF SUBSIDIARIES. For the nine months ended
September 30, 2000, our minority interests in income of subsidiaries increased
$1.6 million or 74.3% to $3.7 million from $2.1 million in the same period of
1999. This was a result of the increased income earned from subsidiaries in
which we do not own a 100% interest.
LOSS FROM INVESTMENT IN JOINT VENTURE. For the nine months ended
September 30, 2000, we incurred a loss, net of income tax benefits, from our
American Cellular joint venture totaling $30.4 million. This loss represents our
fifty-percent ownership in American Cellular for the period from acquisition
(February 25, 2000) to September 30, 2000.
LOSS FROM DISCONTINUED OPERATIONS. For the nine months ended September 30,
1999, our loss, net of income tax benefits, from discontinued operations totaled
$41.8 million. As previously discussed, we distributed the capital stock of
Logix to our current stockholders on January 24, 2000, and will no longer
include Logix' financial results in our consolidated operations.
EXTRAORDINARY ITEM. For the nine months ended September 30, 2000, we
incurred an extraordinary loss of $20.4 million, net of income tax benefits.
This loss was a result of a tender premium paid on the early redemption of the
Company's 11.75% Senior Notes and the writing off of previously capitalized
financing costs associated with the 11.75% Senior Notes and the previous DOC and
DCOC credit facilities which were refinanced in January 2000.
NET LOSS. For the nine months ended September 30, 2000, our net loss was
$96.2 million. Our net loss increased $7.2 million, or 8.2%, from $89.0 million
in the nine months ended September 30, 1999. The increase in our net loss is
primarily attributable to our loss from investment in our joint venture, our
extraordinary item and our increase in interest expense resulting from our 1999
and 2000 business acquisitions and financings.
DIVIDENDS ON PREFERRED STOCK. For the nine months ended September 30, 2000,
our dividends on preferred stock increased $58.6 million, or 115.9%, to
$109.1 million from $50.5 million for the comparable 1999 period. This increase
was primarily the result of a $60.4 million dividend recognized upon the
conversion of our Class D Preferred Stock into Class E Preferred Stock and old
Class A Common Stock.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have required, and will likely continue to require, substantial capital
to further develop, expand and upgrade our cellular systems and those we may
acquire. We have financed our operations through cash flows from operating
activities, bank debt and the sale of debt and equity securities.
NET CASH FLOW
At September 30, 2000, we had working capital of $105.6 million (a ratio of
current assets to current liabilities of 1.6:1) and an unrestricted cash balance
of $148.8 million, which compares to a working capital deficit of $(19.2)
million (a ratio of current assets to current liabilities of .8:1) and an
unrestricted cash balance of $4.3 million at December 31, 1999.
Our net cash provided by operating activities totaled $73.7 million for the
nine month period ended September 30, 2000, while the net cash provided by
operating activities totaled $14.4 million for the same period of 1999. The
increase of $59.3 million was primarily due to the loss from our investment in
joint venture and the change in current assets and liabilities.
Our net cash used in investing activities totaled $(859.0) million and
$(96.3) million for the nine months ended September 30, 2000 and 1999,
respectively. The increase of $762.7 million was primarily due to additional
acquisitions during 2000, including our investment in American Cellular.
Acquisitions, including our investment in American Cellular, and their related
costs accounted for $751.9 million and $46.4 million and capital expenditures
were $99.7 million and $40.2 million for the nine month periods ended
September 30, 2000 and 1999, respectively.
Net cash provided by financing activities was $929.9 million the nine month
period ended September 30, 2000 compared to $59.9 million for the same period of
1999. Financing activity sources for the nine months ended September 30, 2000
consisted primarily of net proceeds from the initial public offering of our
common stock and bank facilities.
The minority partners in our partnerships that own certain of our cellular
operations receive distributions equal to their share of the profit multiplied
by estimated income tax rates. Under our bank credit agreements, our minority
partners are not entitled to receive any cash distributions in excess of amounts
required to meet income tax obligations until all indebtedness of their
respective partnerships to us is paid or extinguished.
CAPITAL RESOURCES
On January 14, 2000, we obtained an $800.0 million credit facility and
increased it by $125.0 million to $925.0 million on May 1, 2000. The original
proceeds from the $800.0 million credit facility were used primarily to:
- consolidate the indebtedness of our Dobson Cellular Operations Company
subsidiary under a $160.0 million credit facility and our Dobson Operating
Company subsidiary under a $250.0 million senior secured credit facility;
- repurchase $159.7 million outstanding principal amount of our 11.75%
senior notes due 2007; and
- pay the cash portion of the costs of certain of our pending acquisitions.
The increase of $125.0 million was used to fund the acquisition of Texas 9
RSA on May 1, 2000.
At September 30, 2000, this credit facility included a $300 million
revolving credit facility and $623.3 million of term loan facilities consisting
of a Term A Facility of $350 million, a Term B Facility of $148.9 million and an
additional Term B Facility of $124.4 million. All of these loans will mature by
2008.
24
<PAGE>
This credit facility is structured as a loan to our subsidiary, Dobson
Operating Co., L.L.C., the successor by merger to Dobson Cellular Operating
Company and Dobson Operating Company, with guarantees from certain of its
subsidiaries and us. Advances bear interest, at our option, on a prime rate or
LIBOR formula. The weighted average interest rate was 9.4% as of September 30,
2000. 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. The company is required to amortize the additional
$125.0 million portion of the Term B Facility with quarterly principal payments
of $312,500 from June 30, 2000, through March 31, 2007 and with quarterly
principal amounts of $29.1 million from June 30, 2007 through March 31, 2008. In
addition, under certain circumstances, we are required to make prepayments of
proceeds received from significant asset sales, new borrowings and sales of
equity, other than this offering, and a portion of excess cash flow. We have the
right to prepay the credit facility in whole or in part at any time. As of
September 30, 2000, we had $705.3 million outstanding under the credit facility.
Our new credit facility imposes a number of restrictive covenants that,
among other things, limit our ability to incur additional indebtedness, create
liens, make capital expenditures and pay dividends.
Our subsidiary, Sygnet Wireless, Inc., is a party to a credit agreement for
an aggregate of $362.8 million, consisting of a $42.5 million revolving credit
facility and $320.3 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 10.0% since inception. As of
September 30, 2000, we had $341.3 million outstanding under the Sygnet credit
facilities and we had $21.5 million of availability under the Sygnet credit
facilities.
The obligations under the Sygnet credit facilities are secured by a pledge
of the capital stock of Dobson/Sygnet's operating subsidiary as well as a lien
on substantially all of the assets of Dobson/Sygnet and its operating
subsidiary. The Sygnet credit facilities require that Dobson/Sygnet and we
maintain certain financial ratios. The failure to maintain these ratios would
constitute an event of default, notwithstanding Dobson/Sygnet's ability to meet
its debt service obligations. The Sygnet credit facilities amortize quarterly.
The $42.5 million revolving credit facility terminates on September 23, 2006.
The $320.3 million term loans terminate on December 23, 2007. The weighted
average interest rate on the Dobson/Sygnet credit facilities was 10.0% as of
September 30, 2000.
Dobson/Sygnet has outstanding $200.0 million aggregate principal amount of
senior notes that mature in 2008. The Dobson/Sygnet notes bear interest at an
annual rate of 12.25%, payable semi-annually on each June 15 and December 15,
which began 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
25
<PAGE>
semi-annual interest payments on the notes. The restricted cash and investments
balance at September 30, 2000, relating to these purchased securities was
$35.9 million.
On January 14, 2000, we repurchased $159.7 million of our outstanding
$160.0 million aggregate principal amount of Senior Notes which mature in
April 2007 and accrued interest at an annual rate of 11.75%, payable
semi-annually on each April 15 and October 15. We repurchased our outstanding
senior notes with funds available under our new credit facility described above.
On June 15, 2000, we completed the private placement for the $300.0 million
principle amount of 10 7/8% Senior Notes due 2010. The offering resulted in net
proceeds totaling $290.2 million. We used $207.0 million of the proceeds to
repay indebtedness under the revolving credit facility of our subsidiary, Dobson
Operating Co. LLC, and will use the remaining balance for working capital and
other general corporate purposes.
As of September 30, 2000, we had issued and outstanding 12.25% senior
preferred stock and 13% senior preferred stock with aggregate liquidation values
of $323.5 million and $204.2 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
Our capital expenditures (excluding cost of acquisitions and discontinued
operations) were $99.7 million for the nine months ended September 30, 2000 and
we expect our capital expenditures to be approximately $140.0 to $150.0 million
for all of 2000. We have not budgeted any amounts to be expended in 2000 with
respect to the systems, which may be acquired in acquisitions, or our PCS
system. The amount and timing of capital expenditures may vary depending on the
rate at which we expand and develop our cellular systems and whether we
consummate additional acquisitions.
We have agreed to purchase approximately $215.0 million of cell site and
switching equipment from Nortel Networks Corp. prior to November 2001. Of this
commitment, approximately $97.6 million remained outstanding at September 30,
2000. Under another equipment supply agreement, we agreed to purchase
approximately $131.0 million of cell site and switching equipment from Lucent
Technologies Inc. by January 13, 2002. Of this commitment, $53.0 million
remained outstanding at September 30, 2000. Purchases made under these
commitments will be financed using funds available under our credit facilities.
We expect to fulfill our purchase commitments under both of these agreements
with purchases budgeted for 2000 and 2001.
The American Cellular joint venture has a bank credit facility of
$1.75 billion with Bank of America N.A., as Administrative Agent and a group of
participating lenders. As of September 30, 2000 there was approximately
$84.0 million of credit availability under this facility. 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 to $75.0 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, our June 15, 2000 sale of $300.0 million principal amount of
10 7/8% Senior Notes and cash flows from operations should be sufficient to
allow us to consummate our
26
<PAGE>
pending acquisitions and are expected to be sufficient to satisfy our currently
expected capital expenditures, working capital and debt service obligations.
Also, we intend to participate in the FCC's reauction of C and F block PCS
licenses. We intend to finance any purchases in the reauction with proceeds from
the sale to AT&T Wireless of $200.0 million liquidation preference amount of our
Class A Convertible Preferred Stock, additional bank credit we may obtain and
other equity or debt financing available to us. 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
establishes uniform hedge accounting criteria for all derivatives requiring
companies to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Under SFAS 133, derivatives will be
recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized in current earnings.
SFAS 133, as amended by SFAS 137, Derivatives and Hedging-Deferral of the
Effective Date of FASB Statement No. 133, will be effective for fiscal years
beginning after June 15, 2000. In addition, SFAS 138 was issued in June 2000 as
an amendment to SFAS 133 and addresses issues causing implementation
difficulties. Under SFAS 133, we would record an asset of $0.62 million relating
to our interest rate hedge valuation at September 30, 2000. We have not
determined the method of adoption of SFAS 133.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." This bulletin establishes more
clearly defined revenue recognition criteria than previously existing accounting
pronouncements and specifically addresses revenue recognition requirements for
nonrefundable fees, such as activation fees, collected by a company upon
entering into an arrangement with a customer. On June 26, 2000, Staff Accounting
Bulletin No. 101B, was issued and delays the required implementation date for
SAB 101 until the quarter ending December 31, 2000. We believe that the impact
of this bulletin is not material to our financial position and results of
operations.
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including planned capital
expenditures and acquisitions, are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These plans involve a number of risks and uncertainties. Important factors
that could cause actual capital expenditures, acquisition activity or our
performance to differ materially from the plans include, without limitation, our
ability to satisfy the financial covenants of our outstanding debt and preferred
stock instruments and to raise additional capital; our ability to manage our
rapid growth successfully and to compete effectively in our cellular business
against competitors with greater financial, technical, marketing and other
resources; changes in end-user requirements and preferences; the development of
other technologies and products that may gain more commercial acceptance than
ours; and adverse regulatory changes. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to update or revise these forward-looking
statements to reflect
27
<PAGE>
events or circumstances after the date hereof including, without limitation,
changes in our business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in interest rates. Market risk is
the potential loss arising from adverse changes in market prices and rates,
including interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes. The objective of our financial
risk management is to minimize the negative impact of interest rate fluctuations
on our earnings and equity. The counterparty is a major financial institution.
As of September 30, 2000, we had interest rate protection under various
derivative contracts totaling $460 million on our $923.3 million DOC LLC credit
facility. The terms of these agreements expire from June 2001 to March 2002. In
addition, we have an interest rate hedge on $110 million of our outstanding
indebtedness under the Sygnet credit facilities. Increases in interest expense
related to the interest rate hedge for the nine months ended September 30, 2000
and 1999 were reflected in income and were immaterial.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. Based
on our market risk sensitive instruments outstanding at September 30, 2000, we
have determined that there was no material market risk exposure to our
consolidated financial position, results of operations or cash flows as of such
date.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
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]
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
--------------------- ----------- ----------------------------------
<C> <S> <C>
2.9 Asset Purchase Agreement dated September 8, 1999 by and
between ACC Arizona Cellular Communications, Inc. and
Dobson Cellular of Imperial, Inc. (9) [2.9]
2.10 Asset Purchase Agreement dated September 30, 1999 between
Alaska 3 Cellular, LLC and Dobson Cellular Systems, Inc. (9) [2.10]
2.11 Agreement and Plan of Merger dated October 5, 1999 among ACC
Acquisition LLC, ACC Acquisition Co. and American Cellular
Corporation. (9) [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. (9) [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. (9) [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. (9) [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. (9) [2.15]
2.16 Asset Purchase Agreement for Michigan 10. (9) [2.16]
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. (9) [2.17]
2.18 AT&T Stock Purchase Agreement dated February 4, 2000. (9) [2.18]
3.1 Registrant's Amended and Restated Certificate of
Incorporation. (9) [3.1]
3.2 Registrant's Amended and Restated Bylaws. (9) [3.2]
4.1 Credit Agreement among the Agents and Lenders named therein
and Dobson/Sygnet Operating Company, dated as of
December 23, 1998. (4) [4.4]
4.2 $17.5 million Term Loan Agreement between Dobson Tower
Company and NationsBank, N.A. dated as of December 23,
1998. (4) [4.5]
4.3 Amended, Restated, and Consolidated Revolving Credit and
Term Loan Agreement dated as of January 18, 2000 among
Dobson Operating Company, Banc of America Securities, LLC,
Bank of America, N.A., Lehman Commercial Paper Inc. and TD
Securities (USA) Inc., and First Union National Bank and
PNC Bank, National Association, and the Lenders. (9) [4.6]
4.4 Indenture dated as of February 28, 1997 between the
Registrant, as Issuer, and United States Trust Company of
New York, as Trustee. (6) [4.6]
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
--------------------- ----------- ----------------------------------
<C> <S> <C>
4.5 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. (6) [4.9]
4.6 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]
4.7 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]
4.8 Form of Common Stock Certificate. (9) [4.16]
4.9 Indenture dated June 22, 2000 by the Registrant and United
States Trust Company of New York, as Trustee (10) [4]
10.1.1* Registrant's 1996 Stock Option Plan, as amended. (4) [10.1.1]
10.1.2* Form of 2000-1 Amendment to the DCC 1996 Stock Option Plan. (9) [10.1.3]
10.1.3* Form of Dobson Communications Corporation 2000 Stock
Incentive Plan. (9) [10.1.4]
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. (6) [10.2.1]
10.2.3 Stock Purchase Agreement, dated December 23, 1998 among the
Registrant, the Fleet Investors and the other entities
listed therein. (4) [10.2.5]
10.2.4 Asset Purchase Agreement dated December 23, 1998 by and
between Sygnet Communications, Inc. and Dobson Tower
Company. (4) [10.2.6]
10.2.5.1 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. (9) [10.2.6.1]
10.2.6 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. (6) [10.3.2]
10.3.2* Letter dated October 15, 1996 from Fleet Equity Partners to
Justin L. Jaschke regarding director compensation. (6) [10.3.3]
10.3.3* Letter dated December 26, 1996 from Registrant to G. Edward
Evans describing employment arrangement. (6) [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]
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
--------------------- ----------- ----------------------------------
<C> <S> <C>
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. (9) [10.3.8]
10.3.9* Letter dated September 24, 1998 from Registrant to Craig T.
Sheetz describing employment arrangement. (9) [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. (6) [10.4.2]
10.4.2 General Purchase Agreement dated January 13, 1998 between
Lucent Technologies, Inc. and Dobson Cellular Systems,
Inc. (2) [10.4.7]
10.4.3 Amendment No. 1 to General Purchase Agreement between the
Registrant and Lucent Technologies, Inc. (11) [10.4.3]
10.4.4 Operating Agreement dated January 16, 1998 between AT&T
Wireless Services, Inc. and Dobson Cellular Systems, Inc. (9) [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]
10.4.6 Fifth Amended General Purchase Agreement between Northern
Telecom Inc. and Registrant (11) [10.4.6]
10.4.7 Sixth Amended General Purchase Agreement between Nortel
(formerly Northern Telecom) and Registrant (11) [10.4.7]
10.6 Second Amended and Restated Partnership Agreement of Gila
River Cellular General Partnership dated September 30,
1997. (8) [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). (9) [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). (9) [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. (7) [10.9]
</TABLE>
32
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<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION METHOD OF FILING
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<C> <S> <C>
10.9* Form of Dobson Communications Corporation Director
Indemnification Agreement. (9) [10.9]
10.10 Agreement and Plan of Reorganization and Corporation
Separation. (9) [10.10]
10.11 Agreement by and among Dobson Communications Corporation and
Dobson's shareholders regarding the distribution of Logix
Communications Enterprises, Inc. stock. (9) [10.11]
10.12 Registration Rights Agreement dated June 22, 2000 between
Dobson Communications Corporation, Banc of America
Securities LLC, Lehman Brothers Inc. and Deutsche Bank
Securities Inc. (10) [10.1]
10.13 Amendment, Waiver and Consent to the Dobson Operating Co.
credit agreement dated as of June 19, 2000 among Dobson
Operating Co., L.L.C., as Borrower, Bank of
America, N.A., as Administrative Agent, Required Lenders
and Guarantors (10) [10.2]
10.14 Stock Purchase Agreement Between AT&T Wireless
Services, Inc. and Dobson Communications Corporation dated
as of November 6, 2000. (5)
27 Financial Data Schedule-Nine Months Ended September 30, 2000 (5)
</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 of Form S-4
(Registration No. 333-23769), as the exhibit number indicated in brackets
and incorporated by reference herein.
(7) 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.
(8) 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.
(9) 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.
(10) Filed as an exhibit to the Registrant's Current Report on Form 8-K filed on
July 6, 2000, as the exhibit number indicated in brackets and incorporated
by reference herein.
(11) Filed as an exhibit to the Registrants' Registration Statement on
Form S-4/A (Registration No. 333-41512), as the exhibit number indicated in
brackets and incorporated by reference herein.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 6, 2000, which
reported the completion of a private offering under Rule 144A and Regulation S
of $300 million of 10 7/8% senior notes due 2010 under "Item 5. Other Events."
33
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
DOBSON COMMUNICATIONS CORPORATION
(registrant)
Date: November 10, 2000 /s/ EVERETT R. DOBSON
-----------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 10, 2000 /s/ BRUCE R. KNOOIHUIZEN
-----------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
34
