<PAGE>
UNITED STATES
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 September 30, 1998
[ ] 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. 333-58693
LOGIX COMMUNICATIONS ENTERPRISES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1533356
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3555 N.W. 58th Street
Suite 600
Oklahoma City, Oklahoma 73112
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(405) 516-8400
----------------------------------------------------
(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 NO X
--- ---
At December 15, 1998, there were 71,250,000 shares of the registrant's $.01
par value Class A Common Stock outstanding.
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
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, 1998 and
December 31, 1997................................................................... 3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997....................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997......................................................... 6
Notes to Condensed Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk........................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 25
Item 2. Changes in Securities and Use of Proceeds........................................... 25
Item 3. Defaults Upon Senior Securities..................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................. 25
Item 5. Other Information................................................................... 25
Item 6. Exhibits and Reports on Form 8-K.................................................... 25
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 66,278,275 $ 254,269
Restricted cash and investments 43,448,009 -
Accounts receivable, net 12,665,515 1,792,231
Other current assets 1,016,474 965,295
------------ ------------
Total current assets 123,408,273 3,011,795
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 54,096,601 35,976,412
------------ ------------
OTHER ASSETS:
Receivables - affiliates - 8,206,935
Restricted cash and investments 80,443,624 -
Goodwill, net 124,481,033 -
Excess purchase cost over original cost
of assets acquired, net 2,604,773 2,676,203
Deferred costs, net 10,997,096 1,128,447
Other intangibles, net 4,823,422 -
Investment in unconsolidated
partnership and other 1,564,654 953,564
------------ ------------
Total other assets 224,914,602 12,965,149
------------ ------------
Total assets $402,419,476 $ 51,953,356
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 10,666,611 $ 1,131,185
Payables - affiliates 552,373 -
Accrued expenses 13,905,957 204,380
Current portion of long-term debt 1,312,994 1,140,824
Deferred revenue and customer deposits 329,766 67,448
------------ ------------
Total current liabilities 26,767,701 2,543,837
LONG-TERM DEBT, net of current portion 376,454,677 27,498,535
DEFERRED CREDITS 442,385 1,833,817
STOCKHOLDER'S EQUITY:
Class A Common Stock, $.01 par value, 100,000,000
shares authorized and 71,250,000 shares issued
and outstanding 712,500 712,500
Paid-in capital 11,447,926 11,447,926
Retained earnings (deficit) (13,405,713) 7,916,741
------------ ------------
Total stockholder's equity (deficit) (1,245,287) 20,077,167
------------ ------------
Total liabilities and stockholder's equity $402,419,476 $ 51,953,356
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE 25,540,562 5,228,880 40,175,956 15,221,163
OPERATING EXPENSES:
Cost of service 16,191,098 780,498 22,454,796 2,117,462
Selling, general and
administrative 11,925,663 2,038,101 20,649,433 5,879,471
Depreciation and
amortization 4,556,220 1,185,358 7,685,706 3,531,136
------------ ----------- ------------ -----------
Total operating expenses 32,672,981 4,003,957 50,789,935 11,528,069
------------ ----------- ------------ -----------
OPERATING INCOME (LOSS): (7,132,419) 1,224,923 (10,613,979) 3,693,094
OTHER INCOME (EXPENSE):
Interest income 2,978,156 5,581 3,292,133 11,455
Interest expense (11,630,841) (611,135) (14,352,032) (1,849,116)
Other 71,680 31,987 153,677 93,817
------------ ----------- ------------ -----------
Total other expense, net (8,581,005) (573,567) (10,906,222) (1,743,844)
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (15,713,424) 651,356 (21,520,201) 1,949,250
INCOME TAX (PROVISION) BENEFIT 179,461 (247,515) 897,194 (740,715)
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (15,533,963) 403,841 (20,623,007) 1,208,535
EXTRAORDINARY EXPENSE, net of
income tax benefit of $133,300
in 1997 - - - (217,488)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of
income tax benefit of $429,000
in 1998 - - (699,447) -
------------ ----------- ------------ -----------
NET INCOME (LOSS) (15,533,963) 403,841 (21,322,454) 991,047
------------ ----------- ------------ -----------
BASIC NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDER PER
COMMON SHARE
Before extraordinary expense
and cumulative effect of
change in accounting
principle $ (.22) $ .01 $ (.29) $ .02
Extraordinary expense - - - (.01)
Cumulative effect of change
in accounting principle - - (.01) -
------------ ----------- ------------ -----------
BASIC NET INCOME (LOSS) APPLICABLE
TO COMMON STOCKHOLDER PER
COMMON SHARE $ (.22) $ .01 $ (.30) $ .01
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
BASIC WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 71,250,000 71,250,000 71,250,000 71,250,000
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (21,322,454) 991,047
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 7,685,706 3,531,136
Amortization of investment premium and financing cost 226,113 -
Deferred income taxes and investment tax
credits, net (1,391,432) 98,013
Loss on disposition of assets 3,400 -
Extraordinary loss on financing cost - 350,788
Cumulative effect of change in accounting
principle 1,128,447 -
Equity in income of unconsolidated partnership (105,319) (22,276)
Changes in current assets and liabilities-
Accounts receivable (2,173,824) 224,550
Other current assets 20,963 (562,573)
Accounts payable 3,114,649 (636,493)
Accrued expenses 11,668,967 (465,396)
Deferred revenue and customer deposits 200,718 (1,005)
------------- -----------
Net cash provided by (used in) operating
activities (944,066) 3,644,008
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,735,095) (4,762,394)
Acquisitions of businesses (137,550,094) -
Subscriber acquisitions (13,746) -
Deferred start-up cost - (1,047,394)
Decrease (increase) in receivables/payables -
Affiliates, net 8,759,308 2,569,405
Investments in unconsolidated subsidiaries and
Other (505,771) (3,425)
------------- -----------
Net cash used in investing activities (147,045,398) (3,380,025)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (871,688) (1,362,014)
Redemption of RTFC subordinated capital certificates - 1,051,057
Issuance of senior notes 350,000,000 -
Purchase of restricted investments (121,786,012) -
Interest on restricted investments (2,005,009) -
Deferred financing costs (11,323,821) -
------------- -----------
Net cash provided by (used in) financing
activities 214,013,470 (310,957)
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 66,024,006 (46,974)
------------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 254,269 628,650
------------- -----------
CASH AND CASH EQUIVALENTS, end of period 66,278,275 581,676
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-6-
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
The condensed consolidated balance sheets of Logix Communications Enterprises,
Inc. ("Logix") and subsidiaries (collectively with Logix, the "Company") as of
September 30, 1998 and December 31, 1997, the condensed consolidated statements
of operations for the three and nine months ended September 30, 1998 and 1997,
and the condensed consolidated statements of cash flows for the nine months
ended September 30, 1998 and 1997 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, 1997 was derived from audited
financial statements, but does 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, 1997 consolidated
financial statements.
1. ORGANIZATION
Logix was incorporated as an Oklahoma corporation under the name "Dobson
Wireline Company" in December, 1997 as part of a reorganization by its parent
company, Dobson Communications Corporation ("Dobson Communications"). Its name
was changed to Logix Communications Enterprises, Inc. in October 1998. Logix is
a wholly owned subsidiary of Dobson Communications that seeks to be the leading
provider of integrated local, long distance, data and other telecommunications
services to small and medium-sized business customers throughout its region. The
Company provides these services through two business segments: incumbent local
exchange carrier ("ILEC") operations and integrated communications provider
("ICP") operations. The consolidated financial statements of the Company include
the accounts of Logix Communications Enterprises, Inc., Dobson Telephone
Company, Inc. ("Dobson Telephone"), Logix Communications Corporation ("LCC"),
Inc. collectively referred to herein as the "Subsidiaries."
REORGANIZATION OF LOGIX
In October 1998, Logix transferred all of the common stock of Dobson Fiber
Company, Inc. ("Dobson Fiber"), Dobson Fiber/FORTE of Colorado, Inc., American
Telco, Inc. ("ATI") and Dobson Network Management, Inc. to LCC. The transaction
was considered a reorganization of entities under common control under which the
accounting treatment of the reorganization is similar to a pooling-of-interests.
The effects of all intercompany transactions, including the transactions prior
to the reorganization, have been eliminated.
RECAPITALIZATION
On September 30, 1998, the Company approved its Amended and Restated Certificate
of Incorporation, which increased the number of authorized shares of capital
stock to 100,000,000. The Company also approved a stock split on the same date
increasing the number of outstanding shares of common stock to 71,250,000. The
accompanying financial statements have been retroactively restated to reflect
this stock split. In addition, on September 30, 1998, the Company approved a
stock option plan covering 3,750,000 shares of common stock, of which the
Company granted options covering 1,417,500 shares of common stock to employees
at an option price of $2 per share.
-7-
<PAGE>
REORGANIZATION OF DOBSON COMMUNICATIONS
In January 1998, Dobson Communications transferred all of the common stock of
the Subsidiaries to Logix. The transaction was considered a reorganization of
entities under common control under which the accounting treatment of the
reorganization is similar to a pooling-of-interests. Concurrent with the
reorganization, the number of shares and par value of the Company's authorized
stock changed. All share and per share data are stated to reflect the common
stock changes. The effects of all intercompany transactions, including the
transactions prior to the reorganization, have been eliminated.
2. ACQUISITIONS
On June 15, 1998, the Company purchased the common stock of ATI for $131.5
million. ATI is based in Houston, TX and provides telecommunications services to
customers in five major Texas markets, including Houston, Dallas, Fort Worth,
San Antonio and Austin. The Company financed the purchase with the proceeds from
the debt offering described in Note 6.
The purchase price of the assets acquired and liabilities assumed is as follows,
subject to adjustment:
<TABLE>
<CAPTION>
($ IN MILLIONS)
<S> <C>
Acquisition price ................................... $131.5
------
------
Current assets ...................................... 9.5
Property, plant and equipment ....................... 5.1
Goodwill ............................................ 125.6
Other assets ........................................ .4
Current liabilities ................................. (9.1)
------
$131.5
------
------
</TABLE>
The acquisition transaction was accounted for as a purchase and, accordingly,
the results of operations have been included in the accompanying condensed
consolidated statements of operations from the date of acquisition. The
unaudited pro forma information set forth below includes the acquisition
accounted for as if the purchase occurred at the beginning of the respective
periods presented. The unaudited pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisition been
consummated at that time:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating revenue 25,541 19,050 72,614 54,316
Loss before extraordinary items
and cumulative effect of change
in accounting principle (15,713) (11,470) (40,896) (35,034)
Net loss applicable to
common stockholders (15,713) (11,470) (41,595) (35,252)
Net loss applicable to
common stockholders per common
share (.22) (.16) (.60) (.49)
</TABLE>
On June 22, 1998, Logix purchased certain long distance customers and related
assets of Zenex for approximately $4.7 million.
-8-
<PAGE>
3. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of an interest pledge deposit, net of
amortized premium, made by the Company of approximately $121 million to fund the
first six semi-annual interest payments which began on December 15, 1998.
Investments that will mature within the next year and will be used to satisfy
interest payments then due have been classified as a current asset on the
accompanying condensed consolidated balance sheet at September 30, 1998.
4. EARNINGS PER COMMON SHARE
Basic income (loss) per common share is computed by using the weighted average
number of shares of common stock outstanding during the year. Diluted net loss
per common share has been omitted because the effect of potentially dilutive
securities would have been anti-dilutive.
5. RECENT PRONOUNCEMENTS
In March, 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," effective for fiscal years
beginning after December 15, 1998. The Company adopted SOP 98-1 as of January 1,
1998. It requires capitalization of the development costs of software to be used
internally (e.g. administrative processes). The adoption of this SOP did not
materially impact the Company's net income.
In April, 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," effective for fiscal years beginning after December 15, 1998. The
Company adopted SOP 98-5 as of January 1, 1998. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company has recognized a pretax loss of approximately $1.1 million as a result
of adopting this SOP. This loss has been reflected as a cumulative effect of
change in accounting principle, net of tax, in the accompanying condensed
consolidated statement of operations.
6. SENIOR NOTES
On June 12, 1998, the Company sold $350 million of 12 1/4% senior notes due
2008. A portion of the proceeds were used to close the acquisition of ATI and
purchase approximately $121 million of securities to be held in escrow to pay
the first six scheduled semi-annual interest payments on the Company's Senior
Notes. See Note (3). On November 10, 1998, the Company's registration of these
notes was declared effective by the Securities and Exchange Commission.
7. REPORT OF BUSINESS SEGMENTS
The Company operates in two reportable segments; ILEC and ICP. As part of the
October 1998 reorganization discussed in Note 1, the Company merged its former
Fiber segment's operations into ICP. The two reportable segments are strategic
business units that offer different products and services. They are managed
separately because each business requires different technology and marketing
strategies. The accounting policies of the segments are the same as those of the
Company. The Company evaluates and measures performance of each segment based on
Adjusted EBITDA, which is defined in footnote (2) on p. 11 of this Form 10-Q,
and income (loss) before income taxes, extraordinary items and cumulative effect
of change in accounting principles. The Company accounts for intersegment sales
and transfers as if the sales or transfers were to third parties, that is, at
current market prices. The Company allocates corporate overhead, income taxes
and amortization of deferred financing cost to each segment. The segments do not
have significant non-cash items other than depreciation and amortization in
reported profit or loss. A summary of the Company's operations by segment is as
follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------
ILEC ICP TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External ........................................ $ 3,701,649 $ 21,838,913 $ 25,540,562
Intersegment .................................... - 262,654 262,654
Intersegment revenue(1) ......................... - - (262,654)
------------ ------------ ------------
Total operating revenue ................... 3,701,649 22,101,567 25,540,562
------------ ------------ ------------
Adjusted EBITDA(2) ................................ 1,615,805 (4,192,004) (2,576,199)
Depreciation and amortization ..................... (782,174) (3,774,046) (4,556,220)
Interest income (expense), net .................... (389,195) (8,263,490) (8,652,685)
Other Income, net ................................. 4,066 67,614 71,680
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
change in accounting principle ................ $ 448,502 $(16,161,926) $(15,713,424)
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------
ILEC ICP TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External ........................................ $ 4,028,551 $ 1,200,329 $ 5,228,880
Intersegment .................................... - 66,000 66,000
Intersegment revenue(1) ......................... - - (66,000)
------------ ------------ ------------
Total operating revenue ................... 4,028,551 1,266,329 5,228,880
------------ ------------ ------------
Adjusted EBITDA(2) ................................ 2,113,700 296,581 2,410,281
Depreciation and amortization ..................... (813,325) (372,033) (1,185,358)
Interest income (expense), net .................... (329,626) (275,928) (605,554)
Other Income, net ................................. 9,710 22,277 31,987
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
change in accounting principle ................ $ 980,459 $ (329,103) $ 651,356
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------
ILEC ICP TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External ........................................ $ 11,565,826 $ 28,610,130 $ 40,175,956
Intersegment .................................... - 521,506 521,506
Intersegment revenue(1) ......................... - - (521,506)
------------ ------------ ------------
Total operating revenue ................... 11,565,826 29,131,636 40,175,956
------------ ------------ ------------
Adjusted EBITDA(2) ................................ 5,939,710 (8,867,983) (2,928,273)
Depreciation and amortization ..................... (2,345,401) (5,340,305) (7,685,706)
Interest income (expense), net .................... (927,854) (10,132,045) (11,059,899)
Other Income, net ................................. 19,786 133,891 153,677
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
change in accounting principle ................ $ 2,686,241 $(24,206,442) $(21,520,201)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------
ILEC ICP TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External ........................................ $ 11,730,296 $ 3,490,867 $ 15,221,163
Intersegment .................................... - 206,000 206,000
Intersegment revenue(1) ......................... - - (206,000)
------------ ------------ ------------
Total operating revenue ................... 11,730,296 3,696,867 15,221,163
------------ ------------ ------------
Adjusted EBITDA(2) ................................ 5,579,470 1,644,760 7,224,230
Depreciation and amortization ..................... (2,431,076) (1,100,060) (3,531,136)
Interest income (expense), net .................... (993,738) (843,923) (1,837,661)
Other Income, net ................................. 29,129 64,688 93,817
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary items and cumulative effect
of change in accounting principle ........... $ 2,183,785 $ (234,535) $ 1,949,250
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
INVESTMENT INFORMATION:
Segment Assets
ILEC ............................................................... 45,611,362 $ 43,268,782
ICP ................................................................ 358,957,563 22,454,132
Intersegment receivables(1) ........................................ (2,149,449) (13,769,558)
------------ ------------
Total segment assets ........................................... $402,419,476 $ 51,953,356
------------ ------------
------------ ------------
</TABLE>
(1) The intersegment eliminations were included to reconcile reportable segment
activities to the Company's consolidated totals.
(2) Adjusted EBITDA, as defined by the Company, represents earnings before
interest expense, income taxes, depreciation and amortization, other income
(expense), extraordinary items and cumulative effect of changes in
accounting principles.
8. COMMITMENTS
In May 1998, the Company entered into a carrier service agreement with a minimum
commitment totaling $9.75 million for a period of 24 months. Under this
agreement, the Company agreed to purchase on a take-or-pay basis, $.25 million
of monthly services from October 1998 through December 1998. Beginning in
January 1999, the Company is obligated to purchase $.5 million of monthly
services through June 2000. Of this commitment, $9.5 million remained at
September 30, 1998.
In June 1998, the Company entered into a carrier service agreement with a
minimum commitment totaling $18 million for a period of 36 months. Under this
agreement, the Company agreed to purchase on a take-or-pay basis, $.5 million of
monthly services, beginning in January 1999. Additionally, the Company must
purchase at least 80 percent of its monthly services as defined in the agreement
from the carrier until the earlier of the purchasing cumulative monthly services
of $36 million or reaching the end of the agreement. Of this commitment, $17.5
million remained at September 30, 1998.
On June 30, 1998, the Company entered into an equipment supply agreement in
which the Company agreed to purchase $25.2 million of switching equipment
between June 30, 1998 and June 30, 2000 for the recently launched ICP
operations. Of this commitment, $22.8 million remained at September 30, 1998.
-11-
<PAGE>
On June 30, 1998, the Company entered into an agreement to purchase certain
customer support services for a period of 60 months together with related
equipment. Under this agreement, the Company has agreed to pay $13.7 million
from July 1998 through July 2003. Of this commitment, $11.7 million remained at
September 30, 1998.
Effective September 1, 1998, Dobson Communications entered into a consulting
agreement with Russell L. Dobson. Under the terms of the agreement, Mr. Dobson
will be retained by Dobson Communications from September 1, 1998 through August
31, 2008. In exchange for Mr. Dobson's services to the Company, the Company will
provide monthly compensation of $15,000 and insurance benefits commensurate with
the Company's employee plan. Mr. Dobson's responsibilities will include duties
consistent with the responsibilities of a former Chief Executive Officer of
Dobson Communications, including the development of goodwill for Dobson
Communications and the Company.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Logix seeks to be the leading provider of integrated local, long distance,
data and other telecommunications services to small and medium-sized business
customers throughout its region. Since 1936, the Company, through its
predecessor and subsidiaries, has provided ILEC services in Oklahoma through
its subsidiary Dobson Telephone Company. The Company offers facilities-based
ICP services in Oklahoma under its LOGIX brand name, and commenced offering
these services in several markets in Texas in 1998. In June, 1998 the Company
consummated its purchase of American Telco, a Texas-based ICP with operations
in Houston, Dallas, Fort Worth, San Antonio and Austin.
Revenue
ILEC Operations. The Company through its predecessors began providing ILEC
services in 1936, and the Company currently owns and operates nine contiguous
exchanges in western Oklahoma and three contiguous exchanges adjacent to and
east of the Oklahoma City metropolitan area. Logix's local exchange revenues
consist of (i) end user revenue, which includes charges for local service and
enhanced services such as call waiting and call forwarding; (ii) access
revenue, which is paid by IXCs for providing access from the IXCs point of
presence to the end user who makes or receives a long distance call; and
(iii) support revenue, which is paid by federal and state agencies to
companies, such as Logix, which operate in areas where, due to factors such
as geographic conditions or subscriber density, the cost to provide service
is higher than normal. As of September 30, 1998 and 1997, the ILEC operations
served 13,182 and 12,475 access lines, respectively.
Support revenue, which consists of high cost funds ("HCF") from state
agencies and universal service funds ("USF") from federal and state agencies,
accounted for approximately 32.8%, 34.0%, 31.5%, and 35.1% of Logix's revenue
from its ILEC operations, or $1.2 million, $1.4 million, $3.6 million, and
$4.1 million, for the three months ended September 30,1998 and 1997 and the
nine months ended September 30, 1998 and 1997, respectively.
The Telecommunications Act potentially impacts the Company's sources of
support revenue. Under previous regulation, access charges contained implicit
support for high cost areas. Regulations adopted pursuant to the
Telecommunications Act would remove implicit support from access charges and
place more emphasis for such support on HCF/USF. In May 1997, the FCC adopted
changes that may, over time, reduce or eliminate subsidies to telephone
companies in areas where the cost of connecting and maintaining phone lines
is demonstrated to be above the industry or area norm. The Company will
continue to pursue its strategy to lessen the impact of any future regulatory
changes by reducing its operating costs through consolidation of operational
functions at the Company level in order to achieve economies of scale.
ICP Operations. The Company began offering facilities-based ICP services in
October 1997 and currently provides these services to customers in several
major markets in Oklahoma and Texas. ICP revenue includes fiber long-haul
transport services and network management services provided to both third
parties and Company affiliates. For the three and the nine months ended
September 30, 1997 fiber and network management services accounted for all
ICP revenue and for the three and the nine months ended September 30, 1998,
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<PAGE>
accounted for $1.3 million and $3.5 million, respectively. The Company's ICP
services include local exchange, long distance, enhanced data, Internet,
intranet and extranet services, private line and integration services. As of
September 30, 1998, the Company's ICP operations served 31,200 access lines.
The Company typically obtains a one-year contract with minimum monthly usage
from its business ICP customers.
On June 15, 1998, the Company purchased the outstanding common stock of
American Telco for $131.5 million. American Telco is based in Houston, Texas
and operates in five major Texas markets; Houston, Dallas, Fort Worth, San
Antonio and Austin. In addition, on June 22, 1998, Logix purchased certain
long distance customers and related assets of Zenex for approximately $4.7
million.
Logix incurred operating losses and negative cash flows from operations and
EBITDA related to its ICP services in 1997 and the nine months ended
September 30, 1998. Such negative cash flows from operations and EBITDA are
expected to continue until Logix develops and expands its ICP operations and
subscriber base. These losses were primarily a result of selling, general and
administrative ("SG&A") expenses. As a result of the continued expansion of
its ICP operations the Company will continue to incur significant increases
in expenses associated with these activities. Also, the Company expects that
the addition of ICP services will have an adverse impact on its combined
gross margins, because the gross margins on the ICP services are expected to
be lower than the gross margins on its ILEC operations.
During the past several years the market prices for many telecommunications
services have been declining. The Company believes that this trend is likely
to continue and will have a negative effect on the Company's gross margins
that may not be offset completely by savings from the decrease in the
Company's cost of service.
Current industry statistics demonstrate that there is a significant churn for
customers within the industry. The Company believes that the churn is
especially high when customers are buying resold services or only long
distance services. The Company believes that by offering an integrated
package of telecommunications services, and by providing superior customer
care, it will be able to minimize customer churn.
Cost and Expenses
The Company's primary operating expense categories include cost of service,
SG&A, and depreciation and amortization.
Cost of service for Logix's ILEC and ICP operations consists primarily of
costs associated with operating and maintaining the Company's facilities and
for the ICP operations, the fixed costs for leased lines, the variable costs
of origination, termination and access services provided through ILECs and
other telecommunications companies, and internal costs associated with
operating and maintaining the Company's facilities. The Company intends to
deploy digital switching platforms with local and long distance capability
and initially lease fiber trunking capacity from ILECs and CLECs to connect
the Company's switches with its transmission equipment collocated in ILEC
central offices. The Company will lease unbundled loop and high capacity
digital lines from the ILECs to connect its customers and other carriers'
networks to the Company's network. These charges vary by ILEC and are
regulated by state authorities pursuant to the Telecommunications Act. ILECs
typically charge both a startup fee as well as a monthly recurring fee for
use of their central offices for collocation. The Company will use its own
fiber network, where available, to carry long distance traffic and will also
enter into resale
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agreements with long distance carriers for transmission services. Such
agreements typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. The Company may
be obligated to pay under-utilization charges in the event it over-estimates
its requirements; however, in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. Also, the Company will need to increase the capacity of
its switches and add additional ANP devices and switches as market demand
warrants.
SG&A includes all infrastructure costs such as selling, customer support,
corporate administration, personnel, and internal network maintenance.
Selling expenses include commissions for the Company's sales program.
Commissions are paid to direct sales persons for new business generated with
additional incentives for multiple service offerings and long-term contracts.
As the Company's customer base grows, and as the Company continues to expand
into new geographic markets, adds new sales offices and facilities and
enlarges its current product offerings, the cost of services and SG&A are
expected to increase substantially.
Depreciation and amortization relates primarily to switching equipment,
facilities, computers and software, and is expected to increase as the
Company incurs significant capital expenditures to install additional
switches. Depreciation and amortization includes amortization of goodwill
acquired in the American Telco Acquisition.
Results of Operations
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statements.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenue. For the three months ended September 30, 1998, total revenue
increased $20.3 million, or 388.5%, to $25.5 million from $5.2 million in the
first three months of 1997. The following table sets forth the components of
the Company's revenue for the three months ended September 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
ILEC ......................................... $ 3,702 $ 4,029
ICP........................................... 21,839 1,200
------- -------
Total.................................... $25,541 $ 5,229
------- -------
------- -------
</TABLE>
ILEC. ILEC revenue decreased $.3 million, or 8.1%, to $3.7 million for the
three months ended September 30, 1998 compared to $4.0 million for the three
months ended September 30, 1997 due primarily to a $.2 million decrease in
support revenue.
ICP. ICP revenue increased $20.6 million or 1,719.4%, to $21.8 million for
the three months ended September 30, 1998 from $1.2 million for the three
months ended September 30, 1997 due primarily to the acquisition of American
Telco. ICP revenue in the three months ended September 30, 1998 consists
primarily of charges for local and long-distance service and equipment sales.
ICP revenue includes fiber long-haul transport services and network
management services provided to both third parties and Company affiliates.
For the three months ended September 30, 1997, fiber and network management
services accounted for all ICP revenue and $1.3 million for the three months
ended September 30,
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<PAGE>
1998.
Cost of Service. For the three months ended September 30, 1998, the total
cost of service increased $15.4 million, or 1,974.5%, to $16.2 million from
$.8 million in comparable period in 1997. The following table sets forth the
components of the Company's cost of service for the three months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
($ IN THOUSANDS)
<S> <C> <C>
ILEC ......................................... $ 429 $467
ICP........................................... 15,762 313
------- ----
Total.................................... $16,191 $780
------- ----
------- ----
</TABLE>
ILEC. Cost of ILEC service decreased $38,000, or 8.1%, to $429,000 for the
three months ended September 30, 1998 from $467,000 for the three months
ended September 30, 1997. As a percentage of ILEC revenue, cost of ILEC
service remained consistent at 11.6% in the three months ended September 30,
1998 and 1997.
ICP. Cost of ICP service increased $15.4 million to $15.8 million for the
three months ended September 30, 1998 from $.3 million for the first three
months of 1997. These costs primarily consisted of costs associated with the
operations and maintenance of Company facilities and wholesale charges from
third party service providers. Included in ICP cost of service for the three
months ended September 30, 1998 is $.3 million of costs related to fiber
long-haul transport services and network management services.
Selling, General and Administrative. For the three months ended September 30,
1998, SG&A costs increased $9.9 million, or 485.1%, to $11.9 million compared
to $2.0 million in the first three months of 1997. The increase was primarily
due to increased salary costs resulting from additional sales, administrative
and marketing personnel in the Company's ICP operations.
Depreciation and Amortization Expense. For the three months ended September
30, 1998, depreciation and amortization expense increased $3.4 million, or
284.4%, to $4.6 million from $1.2 million in the first three months of 1997.
The ILEC segment's depreciation and amortization expense remained consistent
between periods at $.8 million. The ICP segment's depreciation and
amortization expense increased $3.4 million, to $3.8 million for the three
months ended September 30, 1998. This increase is primarily a result of
depreciation and amortization on assets purchased for its recently launched
Logix business and assets acquired in the American Telco Acquisition.
Operating Income (Loss). As a result of the items discussed above, operating
income for the three months ended September 30, 1998, decreased $8.4 million
to a loss of $7.1 million from income of $1.2 million in the first three
months of 1997.
Interest Income (Expense), net. Net interest expense for the three months
ended September 30, 1998 increased $8.1 million, or 1,328.9%, to $8.7 million
from $.6 million for the first three months of 1997. The ICP segment's net
interest expense increased $8.0 million, or 2,894.8%, to $8.3 million in the
first three months of 1998. Of the increase, $11.3 million related to
increased interest expense as a result of the issuance of the Notes in June
1998. The increase in interest expense was offset by $3.0 million of interest
income earned on the funds held in escrow and cash on hand from the issuance
of the Notes. The increase in interest expense was also offset by a decrease
in interest expense of $.3 million as a result of the December 31, 1997
Dobson
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<PAGE>
Communications capital contribution to the Company, which relieved the
outstanding portion of the Company's revolving credit facility and related
interest expense payable to Dobson Communications.
Other Income. For the three months ended September 30, 1998, total other
income (consisting of equity in income of unconsolidated partnership and
other income (expense)) increased $.04 million, or 124.1%, to $.07 million
from $.03 million for the first three months of 1997.
Income before Income Taxes, Extraordinary Items and Cumulative Effect of
Change in Accounting Principle. As a result of the items discussed above,
income before income taxes, extraordinary items and cumulative effect of
change in accounting principle for the three months ended September 30, 1998,
decreased $16.4 million to a loss of $15.7 million from an income of $.7
million in the first three months of 1997.
ILEC. Income before income taxes, extraordinary items and cumulative effect
of change in accounting principle from the Company's ILEC operations
decreased $.6 million to $.4 million for the three months ended September 30,
1998 from $1.0 million in the three months ended September 30, 1997. This is
primarily due to decreased SG&A costs applicable to the ILEC business, as a
result of increased management focus on the ICP operations.
ICP. Income before income taxes, extraordinary items and cumulative effect of
change in accounting principle from the Company's ICP operations decreased
$15.9 million to a loss of $16.2 million for the three months ended September
30, 1998 from a loss of $.3 million in the three months ended September 30,
1997. This is a result of increased SG&A from the start up of the ICP
operations and increased depreciation and interest expense from the American
Telco Acquisition.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenue. For the nine months ended September 30, 1998, total revenue
increased $25.0 million, or 164.0%, to $40.2 million from $15.2 million in
the first nine months of 1997. The following table sets forth the components
of the Company's revenue for the nine months ended September 30:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
($ IN THOUSANDS)
<S> <C> <C>
ILEC ......................................... $11,566 $11,730
ICP........................................... 28,610 3,491
------- -------
Total.................................... $40,176 $15,221
------- -------
------- -------
</TABLE>
ILEC. ILEC revenue decreased $.1 million, or 1.4%, to $11.6 million for the
nine months ended September 30, 1998 compared to $11.7 million for the nine
months ended September 30, 1997 primarily due to a $.5 million decrease in
support revenue offset by an increase in toll charges and an increase in the
number of access lines from 12,475 as of September 30, 1997 to 13,182 as of
September 30, 1998.
ICP. ICP revenue increased $25.1 million to $28.6 million for the nine months
ended September 30, 1998 from $3.5 million for the nine months ended
September 30, 1997 due primarily to the acquisition of American Telco. ICP
revenue in the first nine months of 1998 consists primarily of charges for
local and long-distance service and equipment sales. ICP revenue includes
fiber long-haul transport services and network management services provided
to both third parties and Company affiliates. For the nine months ended
September 30, 1997
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<PAGE>
fiber and network management services accounted for all ICP revenue and $3.5
million for the nine months ended September 30, 1998.
Cost of Service. For the nine months ended September 30, 1998, the total cost
of service increased $20.4 million, or 960.5%, to $22.5 million from $2.1
million in comparable period in 1997. The following table sets forth the
components of the Company's cost of service for the nine months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
($ IN THOUSANDS)
<S> <C> <C>
ILEC ......................................... $ 1,446 $ 1,447
ICP........................................... 21,009 670
------- -------
Total.................................... $22,455 $ 2,117
------- -------
------- -------
</TABLE>
ILEC. Cost of ILEC service remained consistent at $1.4 million for the nine
months ended September 30, 1998 and 1997. As a percentage of ILEC revenue,
cost of ILEC service increased slightly from 12.3% in the nine months ended
September 30, 1997 to 12.5% in the nine months ended September 30, 1998 as a
result of increased maintenance costs of plant and costs associated with
customer growth.
ICP. Cost of ICP service increased $20.3 million to $21.0 million for the
nine months ended September 30, 1998 from $.7 million for the first nine
months of 1997 due primarily to the acquisition of American Telco. These
costs primarily consisted of costs associated with the operations and
maintenance of Company facilities and wholesale charges from third party
service providers. Included in ICP cost of service for the nine months ended
September 30, 1998 is $1.0 million of costs related to fiber long-haul
transport services and network management services.
Selling, General and Administrative. For the nine months ended September 30,
1998, SG&A costs increased $14.7 million, or 251.2%, to $20.6 million
compared to $5.9 million in the first nine months of 1997. The increase was
primarily due to increased salary costs resulting from additional sales,
administrative and marketing personnel in the Company's ICP operations.
Depreciation and Amortization Expense. For the nine months ended September
30, 1998, depreciation and amortization expense increased $4.2 million, or
117.7%, to $7.7 million from $3.5 million in the first nine months of 1997.
The ILEC segment's depreciation and amortization expense remained consistent
between periods at $2.3 million and $2.4 million, respectively. The ICP
segment's depreciation and amortization expense increased $4.2 million, to
$5.3 million for the nine months ended September 30, 1998. This increase is
primarily a result of depreciation and amortization on assets purchased for
its recently launched Logix business and assets acquired in the American
Telco Acquisition.
Operating Income (Loss). As a result of the items discussed above, operating
income for the nine months ended September 30, 1998, decreased $14.3 million
to a loss of $10.6 million from an income of $3.7 million in the first nine
months of 1997.
Interest Income (Expense), net. Net interest expense for the nine months
ended September 30, 1998 increased $9.3 million, or 501.8%, to $11.1 million
from $1.8 million for the first nine months of 1997. The ILEC segment's net
interest expense decreased $.1 million, or 6.6%, to $.9 million for the nine
months ended September 30, 1998 from $1.0 million in the first nine months of
1997. The decrease is primarily the result of paying off individual mortgage
notes. The ICP segment's net interest expense increased $9.3 million, or
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<PAGE>
1,100.6%, to $10.1 million in the first nine months of 1998. Of the increase,
$13.4 million related to increased interest expense as a result of the
issuance of the Notes in June 1998. The increase in net interest expense was
offset by $3.3 million of interest income earned on the funds held in escrow
and cash on hand from the issuance of the Notes. The increase in net interest
expense was also offset by a decrease in interest expense of $.8 million as a
result of the December 31, 1997 Dobson Communications capital contribution to
the Company, which relieved the outstanding portion of the Company's
revolving credit facility and related interest expense payable to Dobson
Communications.
Other Income. For the nine months ended September 30, 1998, total other
income (consisting of equity in income of unconsolidated partnership and
other income (expense)) increased $.1 million, or 63.8%, to $.2 million from
$.1 million for the first nine months of 1997.
Income before Income Taxes, Extraordinary Items and Cumulative Effect of
Change in Accounting Principle. As a result of the items discussed above,
income before income taxes, extraordinary items and cumulative effect of
change in accounting principle for the nine months ended September 30, 1998,
decreased $23.4 million to a loss of $21.5 million from an income of $1.9
million in the first nine months of 1997.
ILEC. Income before income taxes, extraordinary items and cumulative effect
of change in accounting principle from the Company's ILEC operations
increased $.5 million to $2.7 million for the first nine months of 1998 from
$2.2 million in the first nine months of 1997. This is primarily due to
decreased SG&A costs applicable to the ILEC business, as a result of
increased management focus on the ICP operations.
ICP. Income before income taxes, extraordinary items and cumulative effect of
change in accounting principle from the Company's ICP operations decreased
$24.0 million to a loss of $24.2 million for the first nine months of 1998
from a loss of $.2 million in the first nine months of 1997. This is a result
of increased SG&A from the start up of the ICP operations and increased
depreciation and interest expense from the American Telco Acquisition.
Extraordinary Expense. Extraordinary expense in the first nine months of 1997
of $.2 million is due to the write-off of deferred debt costs associated with
the Company's fiber operations.
Cumulative Effect of Change in Accounting Principle. Cumulative effect of
change in accounting principle in the nine months ended September 30, 1998
reflects the charge taken as a result of implementation of AICPA Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities" on January 1,
1998.
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<PAGE>
Impact of Year 2000 Issue
In April of 1998, the Company established a multi-disciplined team to perform
a Year 2000 Impact Analysis for the corporation. The team consists of
representatives from each of the lines of business, as well as
representatives from key corporate departments and is headed by a full time
Year 2000 Compliance Manager. The team created a Year 2000 assessment
methodology which brought a structured approach to the assessment and
management reporting process.
To date, the Company has completed an inventory of its automated systems and
services and an Impact Analysis that identified significant risk areas by
line of business, identified specific compliance requirements, and estimated
costs and completion dates for affected systems.
The Company does not have large scale legacy applications used by many
telecommunications providers. From an information systems standpoint, the
Company has historically relied on outsourcing relationships for most of its
business and operational support applications. Those applications that have
not been outsourced to service providers have been deployed using packaged
software from outside vendors. Management has also focused on evaluating
software systems of acquired companies. Management has determined that
American Telco's OSS is not Year 2000 compliant; however, the Company
believes its new OSS which will replace American Telco's, will be Year 2000
compliant and will be in place by 2000. As a result, the remediation approach
is not focused on a large scale in-house effort, but on identifying those
systems and services that are not currently Year 2000 compliant and either
upgrading to a compliant version or replacing with an alternative compliant
product or service. The results of the Impact Analysis revealed that for most
of the Company's information systems, services and telecommunications
infrastructure, Year 2000 compliant releases will be included as a part of
existing maintenance and/or service agreements at no additional cost to the
Company and should be in place by the third quarter of 1999. The Company has
not identified any material cost to upgrade or replace those systems that are
not Year 2000 compliant and will not be upgraded through existing maintenance
or service agreements. These estimates could change substantially if the
third party vendors are not able to timely provide Year 2000 compliant
releases. Any such costs will be expensed as incurred, which will have an
adverse effect on the current operating results.
The Company will continue to analyze systems and services that utilize date
embedded codes that may experience operational problems when the Year 2000 is
reached. The Company will continue communicating with third party vendors of
systems software and equipment, suppliers of telecommunications capacity and
equipment, customers and others with which it does business to coordinate
Year 2000 compliance. To further mitigate risks, the Company will conduct its
own Year 2000 tests on mission critical systems as their Year 2000 compliant
versions are released by vendors.
Liquidity and Capital Resources
The Company has historically generated positive cash flow from operations and
positive Adjusted EBITDA from its ILEC business and historically financed its
ILEC business through government loans. The Company has experienced negative
cash flow from operations and negative Adjusted EBITDA in 1997 and through
the first nine months of 1998 in its ICP business. The magnitude of these
negative cash flows from operations and Adjusted EBITDA in the ICP business
will be mitigated with the acquisition of American Telco which has
historically generated positive cash flow from operations and Adjusted
EBITDA. The Company expects negative cash flow and Adjusted EBITDA on a
consolidated basis for the remainder of 1998 and to continue as the Company
expands its ICP operations.
The Company has historically generated positive cash flow from operations and
positive Adjusted EBITDA in its ILEC business. The Company's ILEC business
has
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<PAGE>
also historically generated income before income taxes, extraordinary items
and cumulative effect of change in accounting principle. The Company's ILEC
business receives support revenue from federal and state agencies that
accounted for approximately 32.8%, 34.0%, 31.5%, and 35.1% of its revenues
for the three months ended September 30, 1998 and 1997 and the nine months
ended September 30, 1997 and 1998, respectively. This support revenue
contributes significantly to the ILEC's positive cash flow from operations,
Adjusted EBITDA and income before income taxes, extraordinary items and
cumulative effect of change in accounting principle. The Company has
experienced negative cash flow from operations and Adjusted EBITDA and loss
before income taxes, extraordinary items and cumulative effect of change in
accounting principle in 1997 and the first nine months of 1998 in its ICP
business. These negative cash flows from operations and Adjusted EBITDA and
loss before income taxes, extraordinary items and cumulative effect of change
in accounting principle are primarily the result of selling, general and
administrative expenses incurred as the Company works to start and expand
this business. The magnitude of these negative cash flows from operations and
Adjusted EBITDA in the ICP business will be mitigated with the acquisition of
American Telco which has historically generated positive cash flow from
operations and Adjusted EBITDA. However, the positive impact on cash flow
from operations and Adjusted EBITDA will be offset by increased interest
incurred as a result of the Notes. The ICP businesses' income before income
taxes, extraordinary items and cumulative effect of change in accounting
principle have also been favorably impacted by the $11.5 million capital
contribution made to it by Dobson Communications in December 1997. This
capital contribution was made in the form of assumption of the ICP business'
debt, such that the fiber business currently does not incur any interest
expense. The Company will continue to incur losses before income taxes,
extraordinary items and cumulative effect of change in accounting principle
and will continue to generate negative cash flow from operations and Adjusted
EBITDA until it develops and expands its ICP operations and customer base.
The Company expects negative cash flow and loss before income taxes,
extraordinary items and cumulative effect of change in accounting principle
on a consolidated basis for the remainder of 1998 and to continue as the
Company expands its ICP operations.
Continued expansion of the Company's ICP business will require substantial
capital to purchase and install switches and other transmission equipment, to
replace the Company's OSS and other back office systems and to fund operating
requirements. The successful implementation of the Company's strategy,
including the expansion of its networks and customer base, and significant
and sustained growth in the Company's cash flows is necessary for the Company
to meet its debt service requirements, including its obligations on the Notes.
Net cash provided by (used in) operating activities was $(.9) million for the
nine months ended September 30, 1998 compared to $3.6 million for the same
period of 1997. The decrease of $4.5 was primarily due to the net loss for
the 1998 period, offset by net changes in current assets and liabilities,
depreciation and amortization and deferred income taxes and investment tax
credits.
Net cash used in investing activities totaled $147.0 million and $3.4 million
for the nine months ended September 30, 1998 and 1997, respectively. The 1998
investing activity primarily related to acquisitions (including American
Telco) and capital expenditures. In 1997, investing activities consisted
primarily of capital expenditures.
Net cash provided by (used in) financing activities was $214.0 million and
$(.3) million for the nine months ended September 30, 1998 and 1997,
respectively. The net cash provided by financing activities during the nine
months ended September 30, 1998 was primarily resulted from the issuance of
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<PAGE>
the Notes net of the funds used to purchase the restricted investments. The
net cash used in financing activities during the nine months ended September
30, 1997 primarily resulted from repayments of long-term debt.
On December 31, 1997 Dobson Communications made a capital contribution to the
Company in the form of assumption of the Company's ICP subsidiary's
obligation under a Dobson Communication's credit facility. The amount of such
capital contribution was $11.5 million.
Capital expenditures for the nine months ended September 30, 1998 and 1997
were $17.7 million and $4.8 million, respectively. The Company expects its
capital expenditures (excluding the purchase price and related costs incurred
to consummate the acquisitions) to total approximately $58.1 million for
1998 and approximately $23.5 million for 1999, of which $48.8 million and
$15.8 million, respectively, relate to the ICP operations. The capital
expenditures will be primarily for the purchase of switches and related
equipment and infrastructure enhancements, including the replacement of its
OSS and back office systems. The Company currently does not plan to add
additional fiber optic lines to its long-haul network, although it will seek
to expand to additional cities through interconnection agreements with other
carriers. Continued significant capital expenditures for the ICP operations
are expected to be made after 1999. The amount and timing of capital
expenditures may differ materially from the foregoing estimate depending on
numerous factors, including the rate at which the Company expands and
develops its networks and customer base, changes in the Company's marketing
and capital expenditure plans, the Company's ability to negotiate favorable
prices for purchases of equipment and to acquire and integrate necessary OSS
and other back office systems, whether the Company consummates additional
acquisitions and factors beyond the Company's control, such as economic
conditions, competition, market and regulatory developments and availability
of capital. In May 1998 the Company entered into a two year carrier service
agreement with Sprint for long distance capacity which provides for a minimum
commitment of $9.75 million, subject to upward adjustment depending on actual
use. In connection with the Zenex Acquisition, the Company entered into a an
agreement with WorldCom whereby the Company will lease long distance capacity
for thirty-six months with an aggregate minimum commitment during the term of
the lease of $36 million. On June 30, 1998, the Company agreed to purchase
$25.2 million of switching equipment prior to June 30, 2000 for the Company's
recently launched ICP operations. Also on June 30, 1998, the Company agreed
to purchase certain customer support services over a 60 month period ending
in July 2000 for $13.7 million.
Upon consummation of the American Telco Acquisition, the Company purchased
$121 million of Pledged Securities, consisting of U.S. government securities,
that will be held as security for the payment of the first six scheduled
payments of interest on the Notes. The Pledged Securities will be held by the
Trustee as security for the benefit of the holders of the Notes. Upon
consummation of the Exchange Offer, the Company will withdraw $4.3 million of
the Pledged Securities from the escrow account. The Trustee will hold the
Pledged Securities pursuant to an escrow and security agreement pending
disbursement.
As of September 30, 1998, the Company had $377.8 million of indebtedness
(including $27.8 million of secured indebtedness under the RUS/RTB Facility)
and stockholder's deficit of $1.2 million. The RUS/RTB loans have scheduled
maturities between 1998 and 2028. Although there can be no assurance,
management believes that cash on hand, cash flow from operations and
borrowings under the RUS/RTB Facility will be sufficient to fund the
replacement of its OSS and the expansion of its business as currently
planned, including its negative cash flow from its ICP operations. The
Company has and will continue to incur significant increases in expenses
associated with these
-22-
<PAGE>
activities which will significantly reduce its Adjusted EBITDA until it can
develop and expand its ICP service customer base. In the event that the
Company's plans or assumptions change or prove to be inaccurate, or its cash
resources prove to be insufficient to fund the Company's growth and
operations, or if the Company consummates additional acquisitions, the
Company may be required to seek additional sources of capital (or seek
additional sources of capital sooner than currently anticipated). The Company
may also seek to raise additional capital to take advantage of favorable
conditions in the capital markets. Sources of additional capital may include
public or private debt or equity financings, including vendor financing.
Because of the restrictions in the lending agreements and note indentures of
Dobson Communications, capital contributions to the Company will be
essentially prohibited. There can be no assurance that any additional
financing will be available to the Company, or if available, that it can be
obtained on terms acceptable to the Company or within the limitations
contained within the Company's financing arrangements, including the
Indenture. Failure to obtain such financing could result in the delay or
abandonment of some or all of the Company's development or expansion plans
and could have a material adverse effect on the Company's business. Such
failure could also limit the ability of the Company to make principal and
interest payments on its outstanding indebtedness, including the Notes. The
Company has no credit facility under which it may borrow for working capital
and other general corporate purposes. There can be no assurance that such a
facility will be available to the Company in the future or that if such a
facility were available, that it would be available on terms and conditions
acceptable to the Company.
Recent Accounting Pronouncements
In April 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," effective for fiscal years beginning after December 15, 1998.
The Company adopted this SOP as of January 1, 1998. SOP 98-5 requires costs
of start-up activities and organization costs to be expensed as incurred. The
Company recognized a pretax loss of approximately $1.1 million in the first
quarter of 1998 as cumulative effect of accounting change as a result of
adopting this SOP.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," effective for
fiscal years beginning after December 15, 1998. The Company adopted SOP 98-1
as of January 1, 1998. It requires capitalization of the development costs of
software to be used internally (e.g. administrative processes). The adoption
of this SOP did not materially impact the Company's net income.
Forward-Looking Statements
The description of the Company's plans set forth herein, including the
Company's plans and strategies, Year 2000 compliance, its anticipation of
revenues from designated markets, the markets for the Company's services and
products, planned capital expenditures and possible regulatory requirements,
and other statements which predict or forecast future events which are
dependent on future events for their accuracy, 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 the Company's performance to differ materially from plans
include, without limitation, the Company's ability to satisfy the financial
covenants of its existing debt instruments and to raise additional capital;
the Company's ability to integrate acquired operations with existing
operations, to manage its rapid growth successfully and to compete
effectively in its ILEC, fiber and ICP businesses against competitors with
greater financial, technical, marketing and other resources;
-23-
<PAGE>
changes in end-user requirements and preferences; the development of other
technologies and products that may gain more commercial acceptance than those
of the Company; the Company's ability to successfully market its services to
current and new customers, interconnect with ILECs, expand or replace its OSS
and other back office systems, provision new customers, access markets,
install facilities, including switching electronics, and obtain leased
trunking capacity, rights-of-way, building access rights and any required
governmental authorizations, franchises and permits, all in a timely manner,
at reasonable costs and on satisfactory terms and conditions; as well as
unexpected regulatory, legislative and judicial developments. No assurance
can be given that the future results will be achieved; actual events or
results may differ materially as a result of risks facing the Company.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no
obligation to update or revise these forward-looking statements to reflect
events or circumstances after the date hereof including, without limitation,
changes in the Company's business strategy or planned capital expenditures,
or to reflect the occurrence of unanticipated events.
-24-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - Not applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- - Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - Not applicable
ITEM 5. OTHER INFORMATION
- - Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit Number Description
27.1 Financial Data Schedule- Nine Months Ended
September 30, 1998
27.2 Financial Data Schedule- Nine Months Ended
September 30, 1997 (Restated)
(b) Reports on Form 8-K
- Not applicable
-25-
<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.
Date: December 23, 1998 Logix Communications Enterprises, Inc.
(registrant)
/s/ GEOFFREY M. BOYD
Geoffrey M. Boyd
Executive Vice President
Chief Financial Officer
(principal financial officer)
-26-
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