<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 333-71051
------------------------
DOBSON/SYGNET COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 73-1547216
(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 November 1, 2000, there were 100 shares of the registrant's $1.00 par
value common stock outstanding.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
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 Cash Flows for the Nine
months Ended September 30, 2000 and 1999.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosure about Market Risk... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities and Use of Proceeds................... 14
Item 3. Defaults Upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,653,865 $ 2,259,212
Restricted cash and investments........................... 24,735,000 22,919,339
Accounts receivable, net.................................. 22,746,669 15,671,828
Other current assets...................................... 4,367,641 4,309,261
------------ ------------
Total current assets.................................. 53,503,175 45,159,640
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 70,765,194 57,389,201
OTHER ASSETS:
Receivables-affiliates.................................... 499,693 --
Restricted investments.................................... 13,201,521 26,426,470
Cellular license acquisition costs, net................... 632,784,123 666,857,580
Deferred financing costs, net............................. 41,819,131 45,526,469
Customer list, net........................................ 28,848,426 35,253,674
Other..................................................... 391,779 707,733
------------ ------------
Total other assets.................................... 717,544,673 774,771,926
------------ ------------
Total assets.......................................... $841,813,042 $877,320,767
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,490,911 $ 9,530,798
Accrued expenses.......................................... 10,387,735 4,708,873
Deferred revenue and customer deposits.................... 3,946,200 3,334,015
Current portion of long-term debt......................... 21,062,500 11,125,000
------------ ------------
Total current liabilities............................. 45,887,346 28,698,686
------------ ------------
Payables-affiliates....................................... 20,098,443 11,178,994
Long-term debt, net of current portion.................... 520,199,254 586,875,000
Deferred income taxes..................................... 131,929,050 152,354,284
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value, 500 shares authorized and
100 shares issued and outstanding....................... 100 100
Additional paid-in capital................................ 203,500,000 145,000,000
Retained deficit.......................................... (79,801,151) (46,786,297)
------------ ------------
Total stockholder's equity............................ 123,698,949 98,213,803
------------ ------------
Total liabilities and stockholder's equity............ $841,813,042 $877,320,767
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Service revenue....................... $30,994,869 $25,450,143 $ 84,753,815 $ 72,105,360
Roaming revenue....................... 11,824,762 11,654,977 30,165,139 28,404,857
Equipment sales and other............. 2,027,794 1,359,934 6,794,765 4,469,843
----------- ----------- ------------ ------------
Total operating revenue............. 44,847,425 38,465,054 121,713,719 104,980,060
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Cost of service....................... 9,903,148 8,115,039 24,596,726 22,559,834
Cost of equipment..................... 4,075,601 3,241,716 14,353,591 8,395,736
Marketing and selling................. 5,803,604 5,736,966 18,818,387 15,446,842
General and administrative............ 6,500,993 4,985,972 18,296,739 15,555,170
Depreciation and amortization......... 16,852,611 15,972,203 51,478,132 51,464,728
----------- ----------- ------------ ------------
Total operating expenses............ 43,135,957 38,051,896 127,543,575 113,422,310
----------- ----------- ------------ ------------
OPERATING INCOME (LOSS)................. 1,711,468 413,158 (5,829,856) (8,442,250)
INTEREST EXPENSE........................ (16,071,767) (16,506,529) (49,273,801) (48,576,054)
OTHER INCOME, net....................... 525,471 1,173,445 1,853,893 3,431,802
----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES................ (13,834,828) (14,919,926) (53,249,764) (53,586,502)
INCOME TAX BENEFIT...................... 5,257,233 5,669,572 20,234,910 20,362,874
----------- ----------- ------------ ------------
NET LOSS.............................. $(8,577,595) $(9,250,354) $(33,014,854) $(33,223,628)
=========== =========== ============ ============
BASIC NET LOSS APPLICABLE TO COMMON
STOCKHOLDER PER COMMON SHARE.......... $ (85,776) $ (92,504) $ (330,149) $ (332,236)
=========== =========== ============ ============
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................... 100 100 100 100
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
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.................................................. $(33,014,854) $(33,223,628)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization........................... 51,478,132 51,464,728
Amortization of financing costs......................... 3,907,333 3,930,490
Deferred income taxes................................... (20,425,234) (21,891,813)
Other................................................... (4,146) 116,147
Changes in current assets and liabilities--
Accounts receivable..................................... (7,679,816) (5,095,468)
Other current assets.................................... 480,911 (745,393)
Accounts payable........................................ 2,904,247 3,413,215
Accrued expenses........................................ 5,678,862 (5,293,946)
Deferred revenues and customer deposits................. 612,185 897,435
------------ ------------
Net cash provided by (used in) operating activities... 3,937,620 (6,428,233)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (25,749,317) (15,235,302)
Purchase of cellular licenses and properties.............. -- (9,596,898)
Increase in receivable-affiliate.......................... (499,693) --
Increase in payable-affiliate............................. 8,919,449 5,075,457
Proceeds from sales of assets............................. 38,881 --
Other investing activities................................ 315,954 4,000
------------ ------------
Net cash used in investing activities................. (16,974,726) (19,752,743)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt.............................. (72,738,246) (17,000,000)
Proceeds from long-term debt.............................. 16,000,000 16,000,000
Capital contribution...................................... 58,500,000 --
Maturity of restricted investments, net of interest....... 10,870,000 9,970,000
Other financing activities................................ (199,995) (1,277,701)
------------ ------------
Net cash provided by financing activities............. 12,431,759 7,692,299
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (605,347) (18,488,677)
CASH AND CASH EQUIVALENTS, beginning of period.............. 2,259,212 20,262,977
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,653,865 $ 1,774,300
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 21,414,508 $ 22,630,553
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DOBSON/SYGNET COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheets of Dobson/Sygnet Communications
Company ("the Company") as of September 30, 2000 and December 31, 1999, the
condensed consolidated statements of operations for the three and nine months
ended September 30, 2000 and 1999 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 Form 10-K for the
fiscal year ended December 31, 1999.
1. ORGANIZATION
The Company was incorporated under the name Front Nine Holdings, Inc. as an
Oklahoma corporation on July 23, 1998. Subsequently, the Company changed its
name to Dobson/Sygnet Communications Company and amended its certificate of
incorporation on December 2, 1998 to reflect this change. The Company is a
wholly owned subsidiary of Dobson Communications Corporation ("Dobson
Communications").
2. STOCKHOLDER'S EQUITY
On March 31, 2000 and July 28, 2000, the Company received equity
contributions of $33.3 million and $25.2 million, respectively, from its parent
company, Dobson Communications. These contributions were used to repay debt
under the Company's credit facility and increased the total capital contributed
by Dobson Communications to $203.5 million.
3. RECLASSIFICATIONS
Certain items have been reclassified in the 1999 consolidated financial
statements to conform to the current presentation.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We own and operate cellular telephone systems serving a large cluster of
properties with a population of approximately 2.4 million and
244,700 subscribers located in northeastern Ohio, western Pennsylvania and
western New York. Our cellular systems are located in Youngstown, Ohio, Erie,
Pennsylvania, and in primarily rural and suburban areas between the Cleveland,
Akron-Canton, Pittsburgh, Buffalo and Rochester metropolitan areas. The
following discussion and analysis is of the financial condition and results of
our operations.
REVENUE
Our cellular revenues consist of service revenue, roaming revenue 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, 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 26.4%,
30.3%, 24.8%, and 27.0% of our cellular revenue for the three and 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 virtually no costs
related to equipment, customer service or collections to earn roaming revenues.
We include any toll, or long-distance, revenues related to our cellular and
roaming services in service revenues and roaming revenues. Our roaming yield,
which is our roaming service revenues, including airtime, toll charges and
surcharges, divided by roaming minutes of use, was $0.39, $0.42, $0.38, and
$0.48 for the three and nine months ended September 30, 2000 and 1999,
respectively. Despite the decline in our roaming yield, we have seen overall
roaming revenues increase due to growth 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 the associated expenses charged to us
by third-party wireless providers (that is, the fees we pay the other wireless
providers for carrying our subscribers' calls on their network) and to record
the net expense as cost of service. Historically, we have been able to pass
through to our subscribers the majority of the costs charged to us by
third-party wireless providers. Recently, the industry has been moving to
pricing plans that include flat rate pricing and larger home areas. Under these
types of plans, amounts charged to us by other wireless providers may not
necessarily be passed through to our subscribers. Therefore, we have changed our
accounting procedures to report these revenues and expenses separately in our
statement of operations and have restated prior year amounts to reflect this
change in accounting principle.
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 our markets. We believe that as our cellular
penetration rates increase, the increase in new subscriber revenues will
continue to exceed the loss of revenues attributable to our cellular churns.
COSTS AND EXPENSES
Our primary operating expense categories include cost of service, cost of
equipment, marketing and selling, general and administrative and depreciation
and amortization.
7
<PAGE>
Our cost of service consists primarily of costs to operate and maintain our
facilities utilized in providing service to customers and amounts paid to
third-party cellular providers for providing service to our subscribers when our
subscribers roam into their markets.
Our cost of equipment represents the cost associated with telephone
equipment and accessories sold to customers. In recent years, we and other
cellular providers have increased the use of discounts on phone equipment and
free phone promotions as competition between service providers has intensified.
As a result, we have incurred, and expect to continue to incur, losses on
equipment sales, which have resulted in increased marketing and selling costs
per gross additional subscriber. While we expect to continue these discounts and
promotions, we believe that these promotions will result in increased revenue
from increases in the number of cellular subscribers.
Our marketing and selling costs include advertising, compensation paid to
sales personnel and independent agents and all other costs to market and sell
cellular products and services and costs related to customer retention. We pay
commissions to direct sales personnel for new business generated. Independent
sales agents receive commissions for generating new sales and ongoing sales to
existing customers.
Our general and administrative costs include all infrastructure costs,
including costs for customer support, billing, collections, and corporate
administration.
Our depreciation and amortization expense represents the costs associated
with the depreciation of our fixed assets and the amortization of our intangible
assets, primarily cellular license acquisition costs and customer lists.
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 $6.3 million, or 16.6%, to $44.8 million from
$38.5 million for the comparable period in 1999. Total service, roaming and
equipment sales and other revenue represented 69.1%, 26.4% and 4.5%,
respectively, of total operating revenue during the three months ended
September 30, 2000 and 66.2%, 30.3%, and 3.5%, respectively, of total operating
revenue during the three months ended September 30, 1999.
The following table sets forth the components of our operating revenue for
the three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue........................................... 30,995 25,450
Roaming revenue........................................... 11,824 11,655
Equipment sales and other................................. 2,028 1,360
------- -------
Total..................................................... $44,847 $38,465
======= =======
</TABLE>
Service revenue increased $5.5 million, or 21.8%, to $31.0 million in the
three months ended September 30, 2000 from $25.5 million in the same period of
1999. This increase was primarily attributable to increased penetration and
usage. Our subscriber base increased 15.8% to 244,700 at September 30, 2000 from
211,300 at September 30, 1999. The average monthly service revenue per
8
<PAGE>
subscriber increased to $42 from $41 for the three months ended September 30,
2000 compared to the same period in 1999.
Roaming revenue increased $0.1 million, or 1.5%, to $11.8 million in the
three months ended September 30, 2000 from $11.7 million for the comparable
period of 1999. This increase was primarily attributable to increased roaming
minutes due to expanded coverage areas and increased usage in our markets offset
by scheduled declines in rates paid to or by our major roaming partners.
Equipment sales and other revenue increased $0.6 million or 49.1%, to
$2.0 million in the three months ended September 30, 2000 from $1.4 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 22.0% to $9.9 million from $8.1 million for the
comparable period in 1999. This increase is primarily the result of the growth
in our subscribers. In addition, as a percentage of service and roaming revenue,
cost of cellular service increased to 23.1% for the three months ended
September 30, 2000 from 21.9% for the same period in 1999. This increase is
primarily the result of growth in off-system minutes and their related expenses.
COST OF EQUIPMENT. For the three months ended September 30, 2000, cost of
equipment increased $0.9 million, or 25.7% to $4.1 million from $3.2 million in
the same period of 1999, primarily from increases in the volume of equipment
upgrades from existing subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$0.1 million, or 1.2%, to $5.8 million for the three month period ended
September 30, 2000, from $5.7 million in the comparable period of 1999. This
increase resulted mainly from a marginal increase in advertising expenses.
GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended
September 30, 2000, general and administrative costs increased $1.5 million, or
30.4%, to $6.5 million from $5.0 million for the comparable period in 1999 as a
result of increased infrastructure costs associated with growth in subscribers.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $0.9 million or 5.5%, to $16.9 million for the three months
ended September 30, 2000, from $16.0 million in the comparable period of 1999 as
a result of depreciation on 1999 and 2000 fixed asset additions.
INTEREST EXPENSE. For the three months ended September 30, 2000, interest
expense decreased $0.4 million, or 2.6%, to $16.1 million from $16.5 million in
the same period of 1999. The decrease resulted primarily from a decrease in our
outstanding debt balance for the three months ended September 30, 2000 compared
to the same period in 1999.
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 $16.7 million, or 15.9%, to $121.7 million from
$105.0 million for the comparable period in 1999. Total service, roaming and
equipment sales and other revenue represented 69.6%, 24.8% and 5.6%,
respectively, of total operating revenue during the nine months ended
September 30, 2000 and 68.7%, 27.0%, and 4.3%, respectively, of total operating
revenue during the nine months ended September 30, 1999.
9
<PAGE>
The following table sets forth the components of our operating revenue for
the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Service revenue......................................... 84,754 72,105
Roaming revenue......................................... 30,165 28,405
Equipment sales and other............................... 6,795 4,470
-------- --------
Total................................................... $121,714 $104,980
======== ========
</TABLE>
Service revenue increased $12.7 million, or 17.5%, to $84.8 million in the
nine months ended September 30, 2000 from $72.1 million in the same period of
1999. This increase was primarily attributable to increased penetration and
usage. Our subscriber base increased 15.8% to 244,700 at September 30, 2000 from
211,300 at September 30, 1999. The average monthly service revenue per
subscriber decreased to $40 from $41 for the nine months ended September 30,
2000 compared to the same period in 1999.
Roaming revenue increased $1.8 million, or 6.2%, to $30.2 million in the
nine months ended September 30, 2000 from $28.4 million for the comparable
period of 1999. This increase was primarily attributable to increased roaming
minutes due to expanded coverage areas and increased usage in our markets offset
by scheduled declines in rates paid to or by our major roaming partners.
Equipment sales and other revenue increased $2.3 million or 52.0%, to
$6.8 million in the nine months ended September 30, 2000 from $4.5 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 9.0% to $24.6 million from $22.6 million for the
comparable period in 1999. However, as a percentage of service and roaming
revenue, cost of cellular service decreased to 21.4% for the nine months ended
September 30, 2000 from 22.5% for the same period in 1999. This decrease is
primarily the result of a reduction in rates charged by third-party cellular
providers for providing service to our subscribers.
COST OF EQUIPMENT. For the nine months ended September 30, 2000, cost of
equipment increased $6.0 million, or 71.0% to $14.4 million from $8.4 million in
the same period of 1999, primarily from increases in the volume of equipment
upgrades from existing subscribers and equipment sales to new subscribers.
MARKETING AND SELLING COSTS. Marketing and selling costs increased
$3.4 million, or 21.8%, to $18.8 million for the nine month period ended
September 30, 2000, from $15.4 million in the comparable period of 1999. This
increase resulted mainly from an increase in new subscribers added period to
period which caused higher compensation and commission expenses as well as an
increase in advertising and promotional expenses. The number of gross
subscribers added in the nine month period ended September 30, 2000 was
approximately 61,000. The number of gross subscribers added in the nine month
period ended September 30, 1999 was approximately 54,800.
GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months ended
September 30, 2000, general and administrative costs increased $2.7 million, or
17.6%, to $18.3 million from $15.6 million for the comparable period in 1999 as
a result of increased infrastructure costs associated with growth in
subscribers.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense remained constant at $51.5 million for the nine months ended
September 30, 2000 compared to the same period of 1999.
10
<PAGE>
INTEREST EXPENSE. For the nine months ended September 30, 2000, interest
expense increased $0.7 million, or 1.4%, to $49.3 million from $48.6 million in
the same period of 1999. The increase was primarily a result of increased
interest rates on our revolving credit facility for the nine months ended
September 30, 2000 compared to the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have required, and will likely continue to require, substantial capital
to further develop, expand and upgrade our cellular telephone systems and those
we may acquire. We have financed our operations through cash flows from
operating activities and bank debt.
At September 30, 2000, we had working capital of $7.6 million (a ratio of
current assets to current liabilities of 1.2:1) and an unrestricted cash balance
of $1.7 million, which compares to working capital of $16.5 million (a ratio of
current assets to current liabilities of 1.6:1) and an unrestricted cash balance
of $2.3 million at December 31, 1999.
Our net cash provided by operating activities totaled $3.9 million compared
to net cash used by operating activities of $6.4 million for the nine month
period ended September 30, 2000, and 1999, respectively. The increase of
$10.3 million was primarily due to the change in current assets and liabilities.
Net cash used by investing activities, was $17.0 million for the nine months
ended September 30, 2000, compared to net cash used by investing activities of
$19.8 million for the nine months ended September 30, 1999. The decrease of
$2.8 million was primarily due to the increase in payables due to affiliates,
the decrease in the purchase of additional licenses and properties during 2000,
offset by an increase in capital expenditures.
Net cash used by financing activities was $12.4 million for the nine months
ended September 30, 2000, compared to net cash provided by financing activities
of $7.7 million for the nine month period ended September 30, 1999. Financing
activity for the nine months ended September 30, 2000 consisted primarily of
$58.5 million of capital contributions offset by repayments of long-term debt
totaling $72.7 million.
Our capital expenditures were $25.7 million for the nine months ended
September 30, 2000 and we expect our capital expenditures to be approximately
$30.0 to $35.0 million for all of 2000. 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.
Our subsidiary, Sygnet Wireless, Inc.'s credit facilities aggregate
$362.8 million, consisting of a $42.5 million revolving credit facility and
$320.3 million of term loan facilities. As of September 30, 2000 we had
$341.3 million outstanding under the facilities at a weighted average interest
rate of 10.0%. Obligations under our new facilities are secured by a pledge of
the capital stock of our subsidiary as well as a lien on substantially all of
our assets and those of our operating subsidiary. The credit facilities require
that we maintain certain financial ratios. The failure to maintain such ratios
would constitute an event of default, notwithstanding our ability to meet debt
service obligations. To date, we believe that we have maintained the required
financial ratios. Our ability to borrow under our credit facilities will be
limited by the requirement that, on a quarterly basis, the amount available
under our credit facilities will reduce until they terminate. Our outstanding
$200.0 million senior notes bear interest at a rate of 12.25% and mature in
2008. We used approximately $67.7 million of the net proceeds from the issuance
of these notes to purchase securities pledged to secure the first six
semi-annual interest payments, which began June 15, 1999.
In March 1999, we entered into an interest rate swap that effectively fixed
the interest rate on $110.0 million of the principal outstanding on the credit
facilities at approximately 5.48% plus a factor
11
<PAGE>
based on our leverage (approximately 8.77% at September 30, 2000). The term of
the interest rate swap is 24 months.
Although we cannot provide any assurance, we believe that, assuming
successful implementation of our strategy, including the further development of
our cellular systems and significant and sustained growth in our cash flow,
borrowings under the credit facilities, and cash flow from operations, will be
sufficient to satisfy our currently expected capital expenditures, working
capital and debt service obligations. However, we will need to refinance the
credit facilities and the senior notes at their maturities. Our ability to do so
will depend on, among other things, our financial condition at the time, the
restrictions in the instruments governing our indebtedness and other factors,
including market conditions beyond our control. The actual amount and timing of
our future capital requirements may differ materially from our estimates as a
result of, among other things, the demand for our services and regulatory,
technological and competitive developments. Sources of additional financing may
include commercial bank borrowings, vendor financing and the sale of equity or
debt securities. We cannot assure you that any such financing will be available
on acceptable terms or at all.
EFFECT OF NEW ACCOUNTING STANDARDS
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Derivatives and Hedging ("SFAS 133").
SFAS 133 establishes uniform hedge accounting criteria for all derivatives
requiring companies to formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. Under SFAS 133, derivatives will
be recorded in the balance sheet as either an asset or liability measured at its
fair value, with changes in the fair value recognized in current earnings.
SFAS 133, as amended by SFAS 137, Derivatives and Hedging-Deferral of the
Effective Date of FASB Statement No. 133, will be effective for fiscal years
beginning after June 15, 2000. In addition, SFAS 138, was issued in June 2000 as
an amendment to SFAS 133 and addresses issues causing implementation
difficulties. Under SFAS 133, we would record an asset of $0.62 million relating
to its 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
("SAB 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, 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 or our performance to differ materially from the
plans include, without limitation, our ability to satisfy the financial
covenants of our outstanding debt instruments and to raise additional capital;
our ability to manage our rapid growth successfully and to compete effectively
in our cellular business against competitors with greater financial, technical,
marketing and other resources; changes in end-user requirements and preferences;
the development of other technologies and products that may gain more commercial
acceptance than those of ours; and adverse regulatory changes. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. We undertake no obligation to update or revise
these forward-looking statements to reflect events or circumstances after the
date hereof including,
12
<PAGE>
without limitation, changes in our business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk relates to changes in interest rates. Market risk is
the potential loss arising from adverse changes in market prices and rates,
including interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes. The objective of our financial
risk management is to minimize the negative impact of interest rate fluctuations
on our earnings and equity. In March 1999, we entered into an interest rate swap
that effectively fixed the interest rate on $110.0 million of the principal
outstanding on our credit facilities. Increases in interest expense related to
the interest rate swap for the nine months ended September 30, 2000 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.
13
<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 8K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
--------------------- ----------- --------------------------------
<C> <S> <C>
3.1 Registrant's Amended Certificate of Incorporation. (3) [3.1]
3.2 Registrant's Amended Bylaws. (3) [3.2]
4.1 Indenture dated December 23, 1998 between Registrant, as
Issuer, and United States Trust Company of New York, as
Trustee. (1) [4.1]
4.2 Form of Note under Indenture (contained in Exhibit 4.1
hereto). (1) [4.1]
4.3 Pledge Agreement dated December 23, 1998 between Registrant,
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. (3) [4.3]
4.4 Credit Agreement among the Agents and Lenders named therein
and Dobson/Sygnet Operating Company, dated as of
December 23, 1998. (3) [4.5]
10.1 Asset Purchase Agreement dated December 23, 1998 by and
between Sygnet Communications, Inc. and Dobson Tower
Company. (3) [10.1]
10.2 Master Site License Agreement dated December 23, 1998 by and
between Sygnet Communications, Inc. and Dobson Tower
Company. (3) [10.2]
10.3.1 Cellular One License Agreement effective December 1, 1996,
between Cellular One Group and Eric Cellular Telephone
Company. (3) [10.3.1]
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
--------------------- ----------- --------------------------------
<C> <S> <C>
10.3.2 Cellular One License Agreement, effective as of
December 17, 1996, between Cellular One Group and Sygnet
Communications, Inc. (PA-1). (3) [10.3.2]
10.3.3 Cellular One License Agreement, effective as of November 7,
1996, between Cellular One Group and Sygnet
Communications, Inc. (PA-6). (3) [10.3.3]
10.3.4 Cellular One License Agreement, effective as of January 30,
1997, between Cellular One Group and Sygnet
Communications, Inc. (PA-7). (3) [10.3.4]
10.3.5 Cellular One License Agreement, effective as of January 1,
1997, between Cellular One Group and Sygnet
Communications, Inc. (NY-3). (3) [10.3.5]
10.4 Intercarrier Services Agreement dated April 25, 1995 between
Youngstown Cellular Telephone Company and EDS Personal
Communications Corporation, with Amendment dated
April 10, 1996. (2) [10.13]
10.4.1 Amendment No. 2 dated August 1, 1997 to Intercarrier
Services Agreement dated April 25, 1995 between Youngstown
Cellular Telephone Company and EDS Personal Communications
Corporation. (3) [10.4.1]
10.5 Northern Telecom, Inc. DMS-MTX Cellular Supply Agreement
dated June 1, 1996 between Youngstown Cellular Telephone
Company and Northern Telecom, Inc. (3) [10.12]
10.5.1 Amendment No. 1 dated April 15, 1998 to Northern Telecom
Inc. DMS-MTX Cellular Supply Agreement dated June 1, 1996
between Youngstown Cellular Telephone Company and Northern
Telecom, Inc. (3) [10.5.1]
21 Subsidiaries. (3) [21]
27 Financial Data Schedule-Nine Months Ended September 30, 2000 (4)
</TABLE>
------------------------
(1) Filed as an exhibit to the Current Report on Form 8-K of Dobson
Communications Corporation (333-23769) filed on January 7, 1999, as the
exhibit number indicated in brackets and incorporated by reference herein.
(2) Filed as an exhibit to the Sygnet Wireless, Inc. Registration Statement on
Form S-1 (Registration No. 333-10161), as the exhibit number indicated in
brackets and incorporated by reference herein.
(3) Filed as an exhibit to Dobson/Sygnet Communications Company's Registration
Statement on Form S-4 (Registration No. 333-710191), as the exhibit number
indicated in brackets and incorporated by reference herein.
(4) Filed herewith.
(b) Reports on Form 8K
Not applicable
15
<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/SYGNET COMMUNICATIONS COMPANY
Date: November 10, 2000 By: /s/ EVERETT R. DOBSON
-----------------------------------------
Everett R. Dobson
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: November 10, 2000 By: /s/ BRUCE R. KNOOIHUIZEN
-----------------------------------------
Bruce R. Knooihuizen
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
16
