10-Q 1 a10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NO. 333-71051 ------------------------ DOBSON/SYGNET COMMUNICATIONS COMPANY (Exact name of registrant as specified in its charter) 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)

(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 August 1, 2000, there were 100 shares of the registrant's $1.00 par value common stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- DOBSON/SYGNET COMMUNICATIONS COMPANY INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOBSON/SYGNET COMMUNICATIONS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

The accompanying notes are an integral part of these consolidated balance sheets. 3 DOBSON/SYGNET COMMUNICATIONS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 4 DOBSON/SYGNET COMMUNICATIONS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of this consolidated financial statement. 5 DOBSON/SYGNET COMMUNICATIONS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheets of Dobson/Sygnet Communications Company ("the Company") as of June 30, 2000 and December 31, 1999, the condensed consolidated statements of operations for the three and six months ended June 30, 2000 and 1999 and the condensed consolidated statements of cash flows for the six months ended June 30, 2000 and 1999 are unaudited. In the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of financial position, results of operations, and cash flows for the periods presented. The condensed balance sheet data at December 31, 1999 were derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles. The financial statements presented herein should be read in connection with the Company's December 31, 1999 consolidated financial statements included in the Company's 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, the Company received an equity contribution of $33.3 million from its parent company, Dobson Communications. This contribution was used to repay debt under the Company's credit facility and increased the total capital contributed by Dobson Comminications to $178.3 million. 3. RECLASSIFICATIONS Certain items have been reclassified in the 1999 consolidated financial statements to conform to the current presentation. 6 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 243,900 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. There has also been a broad trend in the wireless telecommunications industry of declining average revenue per subscriber. We believe that the downward trend results primarily from the addition of new lower usage customers who utilize wireless services for personal convenience, security or as a backup for their traditional landline telephone as well as declining average revenues per minute. Roaming revenues are revenues we derive from providing service to subscribers of other wireless providers when those subscribers "roam" into our markets and use our systems to carry their calls. Roaming accounted for 23.8%, 25.8%, 23.9%, and 25.2% of our cellular revenue for the three and six months ended June 30, 2000 and 1999, respectively. Roaming revenues typically yield higher average per minute rates and higher margins than revenues from our subscribers. We achieve these higher margins because we incur 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 $.37, $.48, $.37, and $.53 for the three and six months ended June 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 six month period ended June 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. 7 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 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 JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 OPERATING REVENUE. For the three months ended June 30, 2000, total operating revenue increased $6.3 million, or 18.1%, to $ 41.0 million from $34.7 million for the comparable period in 1999. Total service, roaming and equipment sales and other revenue represented 69.7%, 23.8% and 6.5%, respectively, of total operating revenue during the three months ended June 30, 2000 and 70.2%, 25.8%, and 4.0%, respectively, of total operating revenue during the three months ended June 30, 1999. The following table sets forth the components of our operating revenue for the three months ended June 30, 2000 and 1999:

Service revenue increased $4.3 million, or 17.3%, to $28.6 million in the three months ended June 30, 2000 from $24.3 million in the same period of 1999. This increase was primarily attributable to increased 8 penetration and usage. Our subscriber base increased 22.3% to 243,900 at June 30, 2000 from 199,500 at June 30, 1999. The average monthly service revenue per subscriber decreased to $39 from $42 for the three months ended June 30, 2000 compared to the same period in 1999. Roaming revenue increased $0.9 million, or 9.0%, to $9.8 million in the three months ended June 30, 2000 from $8.9 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 $1.3 million or 90.6%, to $2.7 million in the three months ended June 30, 2000 from $1.4 million in the same period of 1999, as we sold more equipment during the three months ended June 30, 2000 as a result of growth in subscribers. COST OF SERVICE. For the three months ended June 30, 2000, the total cost of service increased 10.9% to $8.4 million from $7.6 million for the comparable period in 1999. This increase is primarily the result of the growth in our subscribers. However, as a percentage of service and roaming revenue, cost of cellular service decreased to 21.9% for the three months ended June 30, 2000 from 22.8% 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 three months ended June 30, 2000, cost of equipment increased $2.5 million, or 103.8% to $4.9 million from $2.4 million in the same period of 1999, primarily from increases in the volume of equipment upgrades from existing subscribers and new equipment sales from the growth in subscribers. MARKETING AND SELLING COSTS. Marketing and selling costs increased $0.6 million, or 11.1%, to $6.0 million for the three month period ended June 30, 2000, from $5.4 million in the comparable period of 1999. This increase resulted mainly from an increase in advertising expenses. GENERAL AND ADMINISTRATIVE EXPENSE. For the three months ended June 30, 2000, general and administrative cost increased $1.1 million, or 20.4%, to $6.1 million from $5.0 million for the comparable period in 1999 as a result of increased infrastructure costs. As a percentage of total operating revenue, general and administrative costs increased slightly to 14.8% from 14.5% for the three month period ended June 30, 2000 compared to the same three month period in 1999. However, the Company's average monthly general and administrative costs per subscriber remained constant at $8 for the three months ended June 30, 2000 and 1999. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense remained constant at $17.5 million for the three months ended June 30, 2000 and 1999. INTEREST EXPENSE. For the three months ended June 30, 2000, interest expense increased $0.1 million, or 0.7%, to $16.1 million from $16.0 million in the same period of 1999. The increase was primarily a result of increased interest rates on our revolving credit facility in the three months ended June 30, 2000 compared to the same period in 1999. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 OPERATING REVENUE. For the six months ended June 30, 2000, total operating revenue increased $10.4 million, or 15.6%, to $76.9 million from $66.5 million for the comparable period in 1999. Total service, roaming and equipment sales and other revenue represented 69.9%, 23.9% and 6.2%, respectively, of total operating revenue during the six months ended June 30, 2000 and 70.1%, 25.2%, and 4.7%, respectively, of total operating revenue during the six months ended June 30, 1999. 9 The following table sets forth the components of our operating revenue for the three months ended June 30, 2000 and 1999:

Service revenue increased $7.1 million, or 15.2%, to $53.8 million in the six months ended June 30, 2000 from $46.7 million in the same period of 1999. This increase was primarily attributable to increased penetration and usage. Our subscriber base increased 22.3% to 243,900 at June 30, 2000 from 199,500 at June 30, 1999. The average monthly service revenue per subscriber decreased to $38 from $41 for the six months ended June 30, 2000 compared to the same period in 1999. Roaming revenue increased $1.6 million, or 9.5%, to $18.3 million in the six months ended June 30, 2000 from $16.7 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 $1.7 million or 53.3%, to $4.8 million in the six months ended June 30, 2000 from $3.1 million in the same period of 1999, as we sold more equipment during the six months ended June 30, 2000 as a result of growth in subscribers. COST OF SERVICE. For the six months ended June 30, 2000, the total cost of service increased 1.7% to $14.7 million from $14.4 million for the comparable period in 1999. However, as a percentage of service and roaming revenue, cost of cellular service decreased to 20.4% for the six months ended June 30, 2000 from 22.8% 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 six months ended June 30, 2000, cost of equipment increased $5.1 million, or 99.4% to $10.3 million from $5.2 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 $3.3 million, or 34.0%, to $13.0 million for the six month period ended June 30, 2000, from $9.7 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 six month period ended June 30, 2000 was approximately 43,000. The number of gross subscribers added in the six month period ended June 30, 1999 was approximately 34,100. GENERAL AND ADMINISTRATIVE EXPENSE. For the six months ended June 30, 2000, general and administrative cost increased $1.2 million, or 11.6%, to $11.8 million from $10.6 million for the comparable period in 1999 as a result of increased infrastructure costs. As a percentage of total operating revenue, general and administrative costs decreased to 15.3% from 15.9% for the six month period ended June 30, 2000 compared to the same six month period in 1999. In addition, the Company's average monthly general and administrative costs per subscriber decreased to $8 from $9 for the six months ended June 30, 2000 and 1999. These decreases in general and administrative costs were a result of efficiencies gained from the continued integration with our parent company, Dobson Communications. 10 DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense decreased $0.9 million, or 2.4% to $34.6 million in the six months ended June 30, 2000 from $35.5 million in the same period of 1999. This decrease is a result of the acceleration of depreciation on certain assets that were replaced in 1999. INTEREST EXPENSE. For the six months ended June 30, 2000, interest expense increased $1.1 million, or 3.5%, to $33.2 million from $32.1 million in the same period of 1999. The increase was primarily a result of increased interest rates on our revolving credit facility in the three months ended June 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, bank debt and the sale of debt securities. At June 30, 2000, we had working capital of $3.8 million (a ratio of current assets to current liabilities of 1.1:1) and an unrestricted cash balance of $1.9 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 $2.2 million compared to net cash used by operating activities of $1.1 million for the six month period ended June 30, 2000, and 1999, respectively. The increase of $3.3 million was primarily due to the change in current assets and liabilities. Net cash used in investing activities, which totaled $13.0 million and $19.8 million for the six months ended June 30, 2000, and 1999, respectively. The decrease of $6.8 million was primarily due to a decrease in the purchase of cellular licenses and properties and an increase in payables due to affiliates, offset by an increase in capital expenditures. Net cash provided by financing activities was $10.3 million and $3.7 million for the six month period ended June 30, 2000 and 1999, respectively. Financing activity for the six months ended June 30, 2000 consisted primarily of $33.3 million of capital contributions offset by repayments of long-term debt totaling $33.8 million. Our capital expenditures were $17.4 million for the six months ended June 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 $388.2 million, consisting of a $46.0 million revolving credit facility and $342.2 million of term loan facilities. As of June 30, 2000 we had $364.2 million outstanding under the facilities at a weighted average interest rate of 9.7%. Obligations under our new facilities are secured by a pledge of the capital stock of our subsidiary as well as a lien on substantially all of our assets and those of our operating subsidiary. The credit facilities require that we maintain certain financial ratios. The failure to maintain such ratios would constitute an event of default, notwithstanding our ability to meet debt service obligations. To date, we believe that we have maintained the required financial ratios. Our ability to borrow under our credit facilities will be limited by the requirement that, on a quarterly basis beginning December 31, 2000, the amount available under our credit facilities will reduce until they terminate. Our outstanding $200.0 million senior notes bear interest at a rate of 12.25% and mature in 2008. We used approximately $67.7 million of the net proceeds from the issuance of these notes to purchase securities pledged to secure the first six semi-annual interest payments, which began June 15, 1999. 11 In March 1999, we entered into an interest rate swap that effectively fixed the interest rate on $110.0 million of the principal outstanding on the credit facilities at approximately 5.48% plus a factor based on our leverage (approximately 8.77% at June 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. 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, 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 six months ended June 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 June 30, 2000, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such date. 12 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:

(b) Reports on Form 8K Not applicable 13 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. DOBSON/SYGNET COMMUNICATIONS COMPANY Date: August 2, 2000 By: /s/ EVERETT R. DOBSON ----------------------------------------- Everett R. Dobson CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: August 2, 2000 By: /s/ BRUCE R. KNOOIHUIZEN ----------------------------------------- Bruce R. Knooihuizen VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)

DOBSON SYGNET COMMUNICATIONS CO 10-Q