| DOBSON COMMUNICATIONS CORP Item 1A Risk Factors We face a variety of risks that are inherent in our business and our industry, including operational, legal and regulatory risks |
| The following are some of the more significant factors that could affect our business and our results of operations |
| We caution the reader that the list of factors may not be exhaustive |
| Other factors may exist that we cannot anticipate or that we do not consider to be significant based on information that is currently available |
| We have a history of net losses and a history of being highly leveraged |
| We may incur additional losses in the future and operating results have and could continue to fluctuate significantly on a quarterly and annual basis |
| Also, we may need to obtain further financing or refinance current debt, which may or may not be available to us on acceptable terms |
| We sustained losses from continuing operations of dlra121dtta6 million for the year ended December 31, 2005, dlra52dtta1 million for the year ended December 31, 2004 and dlra50dtta7 million for the year ended December 31, 2003 |
| We 21 _________________________________________________________________ [73]Table of Contents may incur additional losses during the next several years while we continue to expend funds to develop our wireless systems and grow our subscriber base |
| In addition, our future operating results and cash flows will be subject to quarterly and annual fluctuations due to many factors, some of which are outside of our control |
| These factors include increased costs we may incur in connection with the further development, expansion and upgrade of our wireless systems, and fluctuations in the demand for our services |
| We cannot assure you that we will achieve or sustain profitability |
| At December 31, 2005, our total indebtedness was dlra2cmam469dtta5 million and at December 31, 2004, our total indebtedness was dlra2cmam456dtta1 million |
| We may need additional borrowings to operate our business or we may have to refinance our current notes at their final maturities |
| We cannot assure you that we will be able to obtain needed financing or refinance current debt, if that were to be needed to maintain our business strategy |
| We depend on roaming revenue for a substantial portion of our total revenue |
| If our long-term roaming agreements are terminated or the terms of such arrangements become less favorable to us, or the amount of roaming traffic under these agreements decrease materially, our business could be harmed |
| Our roaming revenue accounted for approximately 22prca of our operating revenue for the year ended December 31, 2005, 20prca of our operating revenue for the year ended December 31, 2004 and 27prca of our operating revenue for the year ended December 31, 2003 |
| Cingular Wireless accounted for the vast majority of our roaming minutes-of-use and roaming revenue for these periods |
| On August 12, 2005, we entered into a new roaming agreement with Cingular Wireless |
| See “Business-Roaming |
| ” At times, we have experienced, and may in the future experience, declines in our roaming traffic as a result of our roaming partners limiting the ability of their subscribers to roam on our network, particularly in areas where they also provide wireless services |
| The loss of this roaming traffic could adversely affect our results |
| With the exception of certain provisions of our operating agreements with Cingular Wireless, generally our roaming agreements do not prohibit our roaming partners from competing directly with us in our markets |
| Cingular Wireless may terminate our preferred roaming provider status if we fail to maintain certain technical and quality standards or if we experience a change in control (as defined in our roaming agreement) |
| Our roaming agreement with Cingular Wireless is scheduled to expire on August 12, 2009 and the noncompetition provisions are scheduled to expire June 30, 2008 |
| Cingular Wireless may terminate the noncompetition provisions of our operating agreements if we (a) fail to timely complete our build-out of our GSM network, (b) fail to meet certain technical and quality standards or (c) otherwise breach our agreements with it |
| To the extent Cingular Wireless terminates our preferred roaming status, enters into preferred roaming agreements with our competitors or competes against us in our markets, it may materially adversely affect our roaming revenue |
| Our roaming partners may terminate their agreements with us if our quality of service does not continue to meet designated technical and quality standards or if we are unable to control fraudulent use |
| Moreover, we cannot assure you that any of our roaming agreements will not be terminated or renegotiated on terms that are less favorable to us |
| In addition, these agreements provide for scheduled declining roaming rates over the next several years |
| In addition, the loss of subscribers by Cingular Wireless could adversely affect our revenue because their loss of customers means that there may be fewer subscribers to roam on our networks |
| We may experience a high rate of customer turnover, which would adversely affect our financial performance |
| Due to significant competition in the industry and general economic conditions, among other things, an increase in our churn rate may occur and our future rate of customer turnover may be higher than our historical rate or projections |
| A high rate of customer turnover adversely affects our competitive position, liquidity, results of operations and costs of, or losses incurred in, obtaining new subscribers, especially because we subsidize a significant portion of the costs of initial purchases of handsets by new customers |
| Factors that may contribute to higher churn include inability or unwillingness of customers to pay resulting in involuntary deactivations, customer mix and credit class, and, in particular, sub-prime credit class customers, customer credit terms, deposit requirements for sub-prime customers, number of customers receiving services under contracts with terms of a year or 22 _________________________________________________________________ [74]Table of Contents greater, attractiveness of competitors’ products, services and pricing, network coverage and performance relative to competitors, customer service, and other competitive factors, including the implementation by the FCC of wireless local number portability, or WLNP WLNP, allows customers to keep their wireless phone number when switching to a different service provider |
| We implemented WLNP in all of our markets by the FCC deadline date of May 2004, but portability problems resulting from other carriers’ actions may nevertheless adversely affect us and/or our customers or prospective customers |
| Our customer churn has increased recently which we believe is due in part to the impact of WLNP We anticipate WLNP will continue to adversely affect our churn rate and may also increase price competition |
| We may be required to grant promotional credits, subsidize product upgrades, and/or reduce pricing to match competitors’ initiatives and to retain customers, which could adversely impact our operating results |
| The wireless industry is experiencing rapid technological change, and we may lose customers if we fail to keep up with these changes |
| The wireless telecommunications industry is experiencing significant technological change, as evidenced by the ongoing improvements in the capacity and quality of digital technology, the development and commercial acceptance of advanced wireless data services, shorter development cycles for new products and enhancements and changes in end-user requirements and preferences |
| We may lose customers if we fail to keep up with these changes |
| We depend on roaming partners to provide service for our subscribers who travel outside of our coverage areas |
| We rely on agreements with other wireless communications service providers to provide roaming capabilities to our customers in the areas of the United States that our network does not serve |
| We may not be able to obtain or maintain roaming agreements with other providers on terms that are acceptable to us |
| In addition, the quality of service that a wireless provider delivers during a roaming call may be inferior to the quality of service we provide, the prices of a roaming call may not be competitive with prices of other wireless providers for such call, and our customers may not be able to use any of the advanced features, such as voicemail notification, that are available within our network |
| We are controlled by Dobson CC Limited Partnership through its ownership of our Class B common stock |
| As of December 31, 2005, Dobson CC Limited Partnership, or DCCLP, owned shares of our common stock representing approximately 56dtta9prca of the total voting power of our outstanding common stock |
| DCCLP will be able to control the election of a majority of the members of our board of directors and the vote on substantially all other matters, including significant corporate transactions such as the approval of a merger or other transactions involving a sale of us |
| The interests of DCCLP may conflict with the interests of our other security holders |
| DCCLP may take action it believes will benefit its equity investment in us even though such actions might not be in your best interests as a holder of our Debentures or Class A common stock |
| ETC revenues are growing considerably as we gain ETC status in more states, however, if rulings were made to change the current calculation or allocation of ETC revenues, it could have an adverse effect on our financial results |
| We have applied for and been granted ETC designation in certain states in which we provide wireless service to qualifying high cost areas |
| Success in obtaining and maintaining ETC status has and may continue to make available to us an additional source of revenue that would be used to provide, maintain and improve the service we provide in those high-cost areas |
| However, if changes to the current calculation or allocation of ETC revenues were to be made, it could have an adverse effect on our revenues and thus, our financial results |
| We face intense competition from other wireless providers |
| The wireless telecommunications industry is highly competitive |
| The viability of our business will depend upon, among other things, our ability to compete with other providers of wireless telecommunications services, 23 _________________________________________________________________ [75]Table of Contents especially on price, reliability, quality of service, availability of voice and data features and customer care |
| In addition, the pricing of our services may be affected by competition, including the entry of new service providers into our markets |
| Some of the providers with which we compete have significant infrastructure in place and have been operational for many years with substantial existing subscriber bases and may have greater capital resources than we do |
| As the FCC continues to allocate spectrum to new entrants, we will face new competitors for both mobile and fixed telecommunications services |
| We will also compete with resellers of wireless communications services in each of our markets |
| We expect competition in the wireless telecommunications industry to be dynamic and intense as a result of the entrance of new competition, the development and deployment of new technologies, products and services, changes in consumer preferences and demographic trends |
| With many of our competitors targeting the same customers, we may not be able to attract and retain customers and grow our customer base |
| In addition, market prices for wireless services have declined over the last several years and may continue to decline in the future due to increased competition |
| While we try to maintain or grow our ARPU, we cannot assure you that we will be able to do so |
| We expect significant competition among wireless providers to continue to drive service and equipment prices lower |
| This may lead to increasing movement of customers between competitors |
| If market prices continue to decline it could adversely affect our revenue, which would have a material adverse effect on our financial condition and results of operations |
| The wireless industry is also experiencing significant technological change |
| Cable companies and other competitive carriers are providing telecommunications services to the home, and of these, some carriers are providing local and long distance voice services using Voice over Internet Protocol, or VoIP In particular circumstances, these carriers may be able to avoid payment of access charges to local exchange carriers for the use of their networks on long distance calls |
| Cost savings for these carriers could result in increased competition for telecommunications services for both the wireless and wireline industry |
| As a result of these changes, the future prospects of the wireless and wireline industry and the success of our services remain uncertain |
| Our implementation of a new technology has resulted in network capacity constraints, heightened customer churn and increased costs |
| Our current networks primarily utilize two distinct digital voice technologies GSM/GPRS/EDGE and TDMA GSM/GPRS/EDGE has become the predominant global standard |
| Beginning in 2004 and continuing through 2005, we deployed GSM/GPRS/EDGE technology in all of our networks |
| However, we have experienced and may continue to experience general periodic technical difficulties and network coverage issues as we further upgrade and enhance our GSM/GPRS/EDGE technology, which may adversely affect the reliability of our network and the quality of our service |
| In addition, we have expended, and may need to continue to expend additional capital to address these reliability issues, which may include costs associated with engineering, additional equipment and the need for additional spectrum in certain markets |
| These costs may be significant |
| As customers migrate from TDMA to GSM/GPRS/EDGE service, some have perceived shortcomings in the coverage and quality of GSM/GPRS/EDGE service which in some cases has led them to switch from our service to the offerings of a competitor, thereby increasing our churn rate |
| Increased churn rates, as described above, may adversely affect our revenues and profitability and may damage our reputation, which could affect our ability to attract new subscribers |
| In addition, network quality issues could affect our roaming arrangements |
| We have experienced network capacity constraints relating to the migration of our TDMA customers to GSM/GPRS/EDGE and continue to attempt to address these issues |
| To the extent we are required to spend significant amounts on our network, we will have less money available for marketing and subscriber acquisition activities, which would affect the number of new subscribers |
| Our transition from TDMA to next generation technologies could continue to have a negative impact on customer satisfaction and retention and our financial results |
| We have completed overlaying GSM/GPRS/EDGE networks on our existing TDMA networks, and our customers using TDMA handsets have been migrating to handsets using the upgraded technology |
| As these customers continue to migrate and as roaming usage by our roaming partners’ GSM/GPRS/EDGE or TDMA customer’s increases, we must allocate spectrum and capacity based on anticipated customer usage of the existing and new technologies |
| If we do not allocate spectrum and capacity appropriately, our service quality could continue 24 _________________________________________________________________ [76]Table of Contents to suffer, and our customer satisfaction and retention could continue to decrease, which could have an adverse effect on our results of operations |
| In addition, as our current customers continue to migrate from TDMA handsets to GSM/GPRS/EDGE handsets, our cost of equipment may increase as a result of increases in handset subsidies that we give to subscribers purchasing new handsets |
| In addition, transitioning spectrum capacity from TDMA networks to GSM/GPRS/EDGE networks also leads to increases in equipment costs |
| In certain markets, we may need additional spectrum |
| We cannot assure you that additional spectrum will be available on acceptable terms or that we will have sufficient sources of financing |
| Further, reliance on our customer service functions may increase as we upgrade our wireless systems |
| Our inability to timely and efficiently meet the demands for these services could continue to lead to customer dissatisfaction and decreased retention |
| We may also experience increased billing and technical support costs as a result of maintaining both TDMA and upgraded networks in our service areas, which would adversely affect our results of operations |
| Our choice for the next generation of technology, EDGE, is a new technology and could quickly become obsolete and/or not commercially accepted, which could result in a delay in offering new services |
| New high-speed wireless services are now being offered by wireless carriers in the United States |
| These services combine the attributes of faster speed, greater data capability, better portability and greater functionality than services provided over existing second-generation networks |
| We have chosen the EDGE technology to enhance the performance of our network to accommodate these new services |
| Cingular Wireless also has chosen EDGE, but we believe that there will be multiple, competing technological standards, several options within each standard, vendor-proprietary variations and rapid technological innovation |
| Other technologies could emerge as preferred data networks for some services and, if those technologies are widely accepted, we may miss the opportunity to offer those services because of our technology choice |
| In addition, EDGE could receive less active support from equipment vendors and/or be less commercially accepted by users, which could be detrimental to our competitive position, financial condition and results of operations |
| System failures could result in reduced user traffic and reduced revenue and could harm our reputation |
| Our technical infrastructure (including our network infrastructure for mobile telecommunications services and our internal network infrastructure supporting functions such as billing and customer care) is vulnerable to damage or interruption from information and telecommunication technology failures, power loss, floods, windstorms, fires, earthquakes, terrorism, intentional wrongdoing and similar events |
| Unanticipated problems at our facilities, system failures, hardware or software failures, computer viruses or hacker attacks could affect the quality of our services and cause service interruptions |
| Any of these occurrences could result in reduced user traffic, higher churn, reduced revenues, and increased costs, and could harm our reputation and have a material adverse effect on our business |
| We have committed a substantial amount of capital and will need to continue to provide substantial amounts of capital to continuously upgrade and enhance our wireless voice networks to offer advanced data services, but there can be no assurance that widespread demand for these services will develop |
| While demand for our advanced data services is growing, it is currently a small portion of our revenues |
| Continued growth in wireless data services is dependent on increased development and availability of popular applications and improved availability of handsets and other wireless devices with features, functionality and pricing desired by customers |
| If our choice for next generation technology, EDGE, does not have ample applications and devices developed for its use or does not become commercially acceptable, our revenues and competitive position would be materially and adversely affected |
| We cannot give assurance that there will be significant demand for advanced wireless data services or that data revenues will constitute a significant portion of our total revenues in the near future, nor can we provide assurance that this demand will develop at a level that will allow us to earn a reasonable return on our investment |
| 25 _________________________________________________________________ [77]Table of Contents The restrictive covenants in our debt and preferred stock instruments may limit our operating flexibility |
| Our failure to comply with these covenants could result in defaults under our debt instruments even though we may be able to meet our debt service obligations |
| The instruments governing our debt and preferred stock instruments impose significant operating and financial restrictions on us |
| These restrictions significantly limit, among other things, our ability to incur additional indebtedness, pay dividends, repay junior indebtedness, sell assets, make investments, engage in transactions with affiliates, engage in sale and leaseback transactions, create liens and engage in certain types of mergers or acquisitions |
| Our future debt instruments may have similar or more restrictive covenants |
| These restrictions could limit our ability to obtain future financings, make capital expenditures, withstand a future downturn in our business or the economy in general, or otherwise take advantage of business opportunities that may arise |
| If we fail to comply with these restrictions, the note holders or lenders under any debt instrument could declare a default under the terms of the relevant indebtedness even though we are able to meet debt service obligations and, because our indebtedness has cross-default and cross-acceleration provisions, could cause all of our debt to become immediately due and payable |
| We cannot assure you that we would have sufficient funds available, or that we would have access to sufficient capital from other sources, to repay any accelerated debt |
| Even if we could obtain additional financing, we cannot assure you that the terms would be favorable to us |
| In addition, the capital stock of Dobson Operating Co |
| and Dobson Cellular and substantially all of Dobson Cellular’s assets are subject to liens in favor of the lenders under Dobson Cellular’s senior secured credit facility and the holders of Dobson Cellular’s senior secured notes |
| This may further limit our and Dobson Cellular’s flexibility in obtaining secured or unsecured financing in the future |
| We rely on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure |
| If these suppliers or vendors experience problems or favor our competitors, we may not be able to obtain sufficient quantities of the products and services we require to operate our businesses successfully |
| We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure |
| If these suppliers experience interruptions or other problems delivering these network components on a timely basis or favor our competition over us, our subscriber growth and operating results of our operating companies could suffer significantly |
| Our initial choice of a network infrastructure supplier can, where proprietary technology of the supplier is an integral component of the network, cause us to be effectively locked into one of a few suppliers for key network components |
| As a result, we have become reliant upon a limited number of network equipment manufacturers, including Nortel and Ericsson |
| In the event it becomes necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive terms on a timely basis or at all |
| Our operations are subject to governmental regulation that could have an adverse effect on our business |
| The telecommunications industry is subject to federal, state and other regulations that are continually evolving |
| The FCC and state regulatory agencies continue to issue rules implementing the requirements of the Telecommunications Act of 1996, or the 1996 Act, as well as in furtherance of other regulatory objectives |
| We are subject to siting regulations which could materially affect our ability to build new cell sites and expand our coverage |
| As new telecommunications laws and regulations are issued, we may be required to modify our business plans or operations |
| We cannot assure you that we can do so in a cost-effective manner |
| In addition, the failure by us to comply with applicable governmental regulations could result in the loss of our licenses or the assessment of penalties or fines or otherwise have a material adverse effect on our results of operations |
| For a more detailed description of the regulatory framework we operate in, see “Business-Regulation |
| ” Further, federal or state governments could make regulations or take other actions that might have a material adverse effect on our business |
| The changes could materially and adversely affect our business prospects and operating results |
| In addition, all telecommunications service providers are obligated to contribute to the federal Universal Service Fund in accordance with a formula presently based upon a percentage of interstate revenue |
| The contribution formula may change in ways that would materially adversely affect us |
| Universal Service Funds 26 _________________________________________________________________ [78]Table of Contents are used, among other things, to provide local telephone service to individuals or families qualifying for federal assistance or households in remote areas |
| Many states, including those we operate in, are implementing local universal service programs that would require carriers to contribute additional funds |
| We are subject to environmental regulation and environmental compliance expenditures and liabilities |
| Our business is subject to many environmental laws and regulations, particularly with respect to owned or leased real property underlying our tower sites |
| Compliance with these laws and regulations is a factor in our business |
| We have incurred and expect to continue to incur expenditures to comply with applicable environmental laws and regulations |
| Moreover, some or all of the environmental laws and regulations to which we are subject could become more stringent or more stringently enforced in the future |
| Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions |
| In addition to operational standards, environmental laws also impose obligations to clean up contaminated properties or to pay for the cost of such remediation |
| We could become liable, either contractually or by operation of law, for such remediation costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property |
| Based on the environmental site assessments conducted for owned or leased sites, we are not aware of any existing conditions that are likely to result in material costs or liabilities to us |
| However, there can be no assurance that such conditions do not exist or that all potential instances of soil or groundwater contamination have been identified, even where site assessments have been conducted |
| Moreover, future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to material remediation costs |
| The loss of any of our licenses could adversely affect our ability to provide wireless service |
| In the United States, cellular, personal communications services and microwave licenses are valid for ten years from the effective date of the license |
| Failure to renew a license will result in the loss of a licensee’s right to use the frequencies covered by the expired license |
| Licensees may renew their licenses for additional ten year periods by filing a renewal application with the FCC The renewal applications are subject to FCC review and are put out for public comment to ensure that the licensees meet their licensing requirements and comply with other applicable FCC mandates |
| Although to date the FCC has renewed each of our licenses for which a renewal application was required for a new ten-year term, the FCC may deny our license renewal applications for cause after appropriate notice and hearing |
| Denial of any renewal application could adversely affect our ability to continue to provide service in that license area |
| We may not be able to obtain additional spectrum, which may adversely affect our ability to implement our business plan |
| We also may be required to obtain additional spectrum in our service areas to facilitate upgrades of our existing networks |
| We may seek to acquire additional spectrum, including through participation as a bidder, or member of a bidding group, in auctions administered by the FCC We may not be able to acquire any additional spectrum or the additional capital necessary for such acquisition may not be available to us on acceptable terms or at all |
| If sufficient additional capital is not available to us for any such spectrum acquisition, the amount of funding available to us for our existing business would be reduced |
| In some of our service areas, additional spectrum may not be available on commercially reasonable terms or at all |
| The acquisition of additional spectrum also requires approval by the FCC Failure to obtain additional spectrum may cause delays in our upgrades or result in other network issues, which could have a negative impact on our roaming arrangements |
| We depend in large part on the efforts of our key personnel |
| The loss of our key personnel in a competitive employment environment could affect our growth and future success |
| Our future success depends in large part on the continued employment of our key employees |
| There is intense competition for qualified personnel in our industry, and the limited availability of qualified individuals could become an issue of increasing concern in the future |
| Our financial condition depends upon qualified personnel 27 _________________________________________________________________ [79]Table of Contents successfully implementing our business plan |
| If we lose any of our key employees, our business could be adversely affected |
| We may not be able to successfully integrate acquired or exchanged properties, which could have an adverse effect on our financial results |
| We seek to improve our networks and service areas through selective acquisitions of other providers’ properties and other assets, and we may exchange our properties or assets for those properties and assets |
| We will be required to integrate into our operations any properties we acquire, which may have network technologies, billing systems, customer care systems, and other operational characteristics that differ significantly from those of our networks |
| If we are unsuccessful in integrating such acquisitions or exchanges, our results of operations may be harmed |
| Concerns that the use of wireless handsets may pose health and safety risks may discourage the use of our wireless handsets |
| In addition, the costs relating to compliance with safety requirements, requirements to provide access to persons with disabilities, and potential litigation could have a material adverse effect on our business, financial condition and results of operations |
| Media reports have suggested and lawsuits have been filed against wireless service providers, including us, and equipment manufacturers alleging that radio frequency emissions from wireless handsets may be linked with health risks, including cancer, and interference with various electronic medical devices, including hearing aids and pacemakers |
| To the extent we are named in any such litigation, we will be forced to defend ourselves |
| If we do not prevail in such litigation, or are forced to pay damages, we could experience a material adverse effect on our business, financial condition or results of operations |
| Due to our size, we are unable to influence the design and manufacturing of wireless equipment |
| Concerns over radio frequency emissions may discourage the use of wireless communications devices, which could adversely affect our business |
| In addition, the FCC requires that certain transmitters, including mobile and portable transmitting devices used in wireless handsets, meet specific radio frequency exposure standards |
| The FCC also requires that providers of telecommunications services ensure that the services are accessible to and usable by individuals with disabilities, if readily achievable |
| Compliance with any new restrictions could materially increase our costs |
| Due to safety concerns, some state and local legislatures have passed or are considering legislation restricting the use of wireless telephones while driving automobiles |
| Concerns over safety risks and the effect of future legislation, if adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services |
| In addition, it may discourage use of our wireless devices and decrease our revenues from customers who now use their wireless telephones while driving |
| Further, litigation relating to accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage awards, adverse publicity and further government regulation |
| Any or all of these results, if they occur, could have a material adverse effect on our results of operations and financial condition |