<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1998
REGISTRATION NO. 333-58693
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LOGIX COMMUNICATIONS ENTERPRISES, INC.*
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 4813 73-1533356
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
------------------------
13439 NORTH BROADWAY EXTENSION BRUCE R. KNOOIHUIZEN
SUITE 200 13439 NORTH BROADWAY EXTENSION
OKLAHOMA CITY, OKLAHOMA 73114 SUITE 200
(405) 391-8500 OKLAHOMA CITY, OKLAHOMA 73114
(Address, including Zip Code, and (405) 391-8500
telephone (Name, address, including Zip
number, including area code, of Code, and telephone number,
registrant's principal including area code, of
executive offices) agent for service)
------------------------
COPIES TO:
THEODORE M. ELAM, ESQ.
MCAFEE & TAFT A PROFESSIONAL CORPORATION
TENTH FLOOR, TWO LEADERSHIP SQUARE
OKLAHOMA CITY, OKLAHOMA 73102
(405) 235-9621
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement under the earlier effective registration statement for
the same offering. / /
------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8, may
determine.
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* Formerly named Dobson Wireline Company
<PAGE>
PRELIMINARY PROSPECTUS (SUBJECT TO COMPLETION)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ISSUED NOVEMBER 9, 1998
OFFER TO EXCHANGE
ALL OUTSTANDING
12 1/4% SENIOR NOTES DUE 2008
($350,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
12 1/4% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF
LOGIX COMMUNICATIONS ENTERPRISES, INC.
(FORMERLY NAMED DOBSON WIRELINE COMPANY)
---------------------
The Exchange Offer will expire at 5:00 p.m., New York City time, on December
10, 1998, unless extended (if and as extended, the "Expiration Date"). The
Company will accept for exchange any and all validly tendered Old Notes on or
prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange Offer."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
------------------------
Logix Communications Enterprises, Inc., an Oklahoma corporation (the
"Company" or "Logix"), hereby offers (the "Exchange Offer"), upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal to exchange $1,000 principal amount of its 12 1/4% Senior
Notes Due 2008 (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 12 1/4% Senior Notes Due 2008 (the "Old
Notes"), of which an aggregate of $350,000,000 in principal amount was
outstanding as of September 10, 1998.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Interest on the New Notes will be paid in cash at a rate of 12 1/4% per
annum on each June 15 and December 15, commencing December 15, 1998. The New
Notes may be redeemed at the option of the Company, in whole or in part, at any
time on or after June 15, 2003 at 106.125% of their principal amount, plus
accrued interest, declining ratably to 100% of their principal amount, plus
accrued interest, on or after June 15, 2006. In addition, at any time prior to
June 15, 2001, the Company may redeem up to 35% of the aggregate principal
amount of the New Notes with the net proceeds of one or more sales of capital
stock of the Company, at 112.250% of their principal amount, plus accrued
interest; provided that after any such redemption at least $227.5 million
aggregate principal amount of Notes remains outstanding. See "Description of the
Notes."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of November 6, 1998. As of such date, a
nominee for The Depository Trust Company was the only registered holder of the
Old Notes.
The Company will not receive any proceeds from this Exchange offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 9, 1998.
<PAGE>
CERTAIN TENDER OFFER MATTERS
The New Notes will be obligations of the Company entitled to the benefits of
the Indenture (as defined herein). The New Notes will be unsubordinated
indebtedness of the Company, ranking pari passu in right of payment with the Old
Notes and all other unsubordinated indebtedness of the Company and senior in
right of payment to all subordinated indebtedness of the Company. The Old Notes
and the New Notes (together, the "Notes") will be effectively subordinated to
all existing and future liabilities (including trade payables) of the Company's
subsidiaries. After giving effect to the offering and sale of the Old Notes (the
"Offering") and the American Telco Acquisition (as defined herein) (together,
the "Transactions"), on June 30, 1998, the Company had, on a consolidated basis,
$378.0 million of indebtedness outstanding and the Company's subsidiaries had
$43.4 million of liabilities in addition to the Notes (including $28.0 million
of indebtedness, all of which is secured), all of which effectively would rank
senior to the Notes, and the Company had no indebtedness ranking junior to the
Notes. The form and terms of the New Notes are identical in all material
respects to the form and terms of the Old Notes except that the New Notes have
been registered under the Securities Act. Any Old Notes not tendered and
accepted in the Exchange Offer will remain outstanding and will be entitled to
all the rights and preferences and will be subject to the limitations applicable
thereto under the Indenture. Following consummation of the Exchange Offer, the
holders of the Old Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Old Notes held by them. Following the completion of the Exchange
Offer, none of the Notes will be entitled to the contingent increase in interest
rate provided pursuant to the Old Notes. The Exchange Offer is being made
pursuant to the terms of the registration rights agreement (the "Registration
Rights Agreement") entered into between the Company and Morgan Stanley & Co.
Incorporated, and NationsBanc Montgomery Securities LLC (the "Placement Agents")
pursuant to the terms of the Placement Agreement dated June 10, 1998 between the
Company and the Placement Agents. See "The Exchange Offer--Purpose and Effect of
the Exchange Offer."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers, as set forth
below, and any holder that is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and that
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Notes. Any holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the New Notes or who is an affiliate of the Company may not
rely upon such interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company in the Letter of Transmittal that
such conditions have been met.
Each broker-dealer (other than an affiliate of the Company) that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the last
date Old Notes are accepted for exchange pursuant to the Exchange Offer (the
"Exchange Date"), it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution." Any
broker-dealer who is an affiliate of the Company may not rely on such no-action
letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Certain Tender Offer Matters............................................................................... ii
Periodic Reports........................................................................................... iv
Available Information...................................................................................... iv
Glossary................................................................................................... v
Summary.................................................................................................... 1
Risk Factors............................................................................................... 11
The Exchange Offer......................................................................................... 26
Selected Consolidated Financial and Other Data............................................................. 34
Pro Forma Condensed Consolidated Financial Data............................................................ 37
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 42
Business................................................................................................... 56
Management................................................................................................. 74
Principal Shareholders..................................................................................... 82
Description of Certain Indebtedness........................................................................ 83
Description of the Notes................................................................................... 84
Certain U.S. Federal Tax Consequences...................................................................... 112
Plan of Distribution....................................................................................... 116
Legal Matters.............................................................................................. 117
Experts.................................................................................................... 117
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY.
------------------------
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD SHARES IN ANY JURISDICTION IN WHICH
THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
iii
<PAGE>
PERIODIC REPORTS
The Company has agreed that, whether or not required by the rules and
regulations of the Commission, so long as any Old Notes or New Notes are
outstanding, the Company will file with the Commission all such reports and
other information as it would be required to file with the Commission by Section
13(a) or 15(d) under the Exchange Act as if it were subject thereto. The Company
will supply the Trustee and each holder of Old Notes or New Notes, without cost,
copies of such reports and other information.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement", which term includes all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules and
regulations promulgated thereunder, covering the New Notes being offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements made in this Prospectus
as to the contents of any contracts, agreement or other document referred to are
not necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
Upon effectiveness of the Registration Statement of which this Prospectus is
a part, the Company became subject to the informational requirements of the
Exchange Act, and in accordance therewith, will file reports and other
information with the Commission. Such reports and other information filed by the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the following regional offices of the Commission:
7 World Trade Center, New York, New York 10048; and 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, at precribed rates. Such material can also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS." ALL STATEMENTS
REGARDING THE COMPANY'S AND ITS SUBSIDIARIES' EXPECTED FINANCIAL POSITION,
BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
COMPANY AND ITS SUBSIDIARIES BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND
UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
iv
<PAGE>
GLOSSARY
ACCESS--telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
ACCESS CHARGE REFORM ORDER--An order released by the FCC on May 16, 1997
that revised its access charge structure.
ANP--Advanced network presence.
ACSI--American Communications Services, Inc.
ACCESS CHARGES--The fees paid by long distance carriers to local exchange
carriers for originating and terminating long distance calls on their local
network.
ADVANCED NETWORK PRESENCE UNIT ("ANP")--unit that links the Company's leased
lines to its switches and enables the Company to provide digital local and long
distance switch services and ATM-based data services in a market area.
ALLEGIANCE TELECOM--Allegiance Telecom, Inc.
AMERICAN TELCO--collectively, American Telco, Inc. and American Telco
Network Services, Inc.
AMERICAN TELCO ACQUISITION--pending acquisition of American Telco, Inc. and
American Telco Network Services, Inc. by Logix Communications Enterprises, Inc.
AMERITECH--Ameritech Corporation.
AT&T--AT&T Corp.
ATM (ASYNCHRONOUS TRANSFER MODE)--a switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard 53 bit-long
packet or cell. ATM-based packet transport was specifically developed to allow
switching and transmission of mixed voice, data and video (sometimes referred to
as "multimedia" information) at varying rates. The ATM format can be used by
many different information systems.
BELL ATLANTIC--Bell Atlantic Corporation.
BELLSOUTH--BellSouth Corporation.
CAPS--Competitive access providers.
CENTRAL OFFICES--the switching centers or central switching facilities for
the Company and other CLECs and/or ILECs.
CLASS V SWITCH(ES)--central office switching system operated by local
telephone companies.
CLEC--Competitive local exchange carrier.
COLLOCATION--the ability of a competitor carrier to connect its network to
the local exchange carrier's central offices. Physical collocation occurs when a
competitor carrier places its network connection equipment inside the local
exchange company's central offices. Virtual collocation is an alternative to
physical collocation pursuant to which the local exchange company permits a
competitor carrier to connect its network to the local exchange company's
central offices on comparable terms, even though the competitor carrier's
network connection equipment is not physically located inside the central
offices.
CTIA--Cellular Telecommunications Industry Association.
DEDICATED LINES--telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the ILEC's public switched networks).
v
<PAGE>
DIGITAL--a method of storing, processing and transmitting information
through the use of distance electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DIRECT T--Bundled services and integrated billing offered under its LOGIX
brand name.
DS3 OR DIGITAL SERVICES LEVEL 3--the equivalent of 28 T-1 fiber optic
channels, a standard unit of measurement in the industry.
EXCEL--Excel Communications, Inc.
FCC--Federal Communications Commission.
GTE--GTE Corporation.
HCF--High cost support funds.
IBM--International Business Machines Corporation.
ICG--ICG Communications, Inc.
ICP--Integrated communications provider.
ILEC--Incumbent local exchange carrier.
INTERCONNECTION--interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
INTERCONNECTION AGREEMENT--The Company's interconnection agreements with SBC
and GTE.
INTEREXCHANGE CARRIER, OR IXC--usually referred to as long distance
providers. Long distance carriers provide services between local exchanges on an
interstate or intrastate basis. A long distance carrier may offer services over
its own or another carrier's facilities. There are many facilities-based IXCs,
including, AT&T, MCI, WorldCom, Sprint and IXC Communications, Inc., as well as
many resellers that are authorized to provide IXC service.
INTERLATA--telecommunications services originating in one LATA and
terminating in another LATA.
INTERMEDIA COMMUNICATIONS--Intermedia Communications, Inc.
INTRALATA--telecommunications services originating and terminating in the
same LATA.
ISDN--integrated service digital network.
ISP (INTERNET SERVICE PROVIDER)--a company that provides subscribers basic
access to the Internet, along with additional services that may include E-Mail,
site hosting, web page development, and other Internet-related services, along
with technical support of these services.
LATA (LOCAL ACCESS AND TRANSPORT AREA)--a geographic area composed of
contiguous local exchanges, usually but not always within a single state. There
are approximately 200 LATAs in the United States.
LCI--LCI International Telecom Corp.
LOCAL COMPETITION ORDER--Adoption by the FCC on August 8, 1996 of rules and
policies which implemented the local competition provisions of the
Telecommunications Act.
LOGIX--The brand name under which the Company offers bundled services and
integrated billing.
vi
<PAGE>
LOCAL EXCHANGE--a geographic area determined by the local exchange carrier
in which calls generally are transmitted without toll charges to the calling or
called party.
LOCAL EXCHANGE CARRIER OR LEC--a company providing local telephone services,
including the RBOCs, GTE and independent companies such as the Company.
MCI--MCI Communications Corporation.
NYNEX--NYNEX Corporation.
OCC--Oklahoma Corporation Commission.
OKLAHOMA TELECOM ACT--Oklahoma Telecommunications Act of 1997.
OSS--Operations support systems.
OTA--Oklahoma Telephone Association.
OUSF--Oklahoma Universal Service Fund.
PIC-C CHARGES--pre-subscribed interexchange carrier charge.
POPS (POINTS OF PRESENCE)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PRICE CAP LECS--local exchange carriers subject to FCC's price cap rules.
"PUC" OR "PUBLIC UTILITIES COMMISSION"--a state regulatory body, established
in most states, which regulates utilities, including telephone companies
providing intrastate services.
QWEST--Qwest Communications International Inc.
RBOC(S)--the five remaining of the seven original Regional Bell Operating
Companies established by the Department of Justice's 1982 breakup of the Bell
System. The 1982 breakup created two distinct segments of telecommunication
service: local and long distance.
RECIPROCAL COMPENSATION--compensation paid by a local carrier for
termination of a local call on the network of a competing carrier which is
obligated to pay a comparable charge to terminate traffic on the network of the
first carrier. Reciprocal compensation is distinct from the one-way access
charges by which IXCs compensate LECs for originating and terminating traffic.
RESALE--Resale by a provider of telecommunications services (such as a local
exchange carrier) of such services to other providers or carriers on a wholesale
or a retail basis.
RUS/RTB FACILITY--loan agreements between and among Dobson Telephone, the
United States of America, Rural Utilities Services ("RUS") and the Rural
Telephone Bank ("RTB").
SBC--SBC Communications, Inc.
S/L--Schools and libraries and rural health care funds.
SPRINT--Sprint Corporation.
SWITCH--a sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers tell
the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
TELECOMMUNICATIONS ACT--the Telecommunications Act of 1996.
vii
<PAGE>
TELEPORT--Teleport Communications Group, Inc.
UNBUNDLED ACCESS--access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
UNBUNDLED NETWORK ELEMENTS--elements of a telecommunications services
provider's network, including network facilities, equipment, features, functions
and capabilities.
UNIVERSAL SERVICE ORDER--An order released by the FCC on May 8, 1997 which
established an expanded federal universal service subsidy regime.
US WEST--US WEST Communications, Inc.
USF--Universal service funds.
UUNET--UUNET Technologies, Inc., the largest ISP and subsidiary of WorldCom.
VSAT--very small aperture terminal with a low band width.
WILLRUSS--WillRuss Limited Liability Company, owner of the building from
which the Company leases its headquarters.
WORLDCOM--MCI WorldCom.
WRTA--Western Rural Telephone Association.
WTO--World Trade Organization.
ZENEX ACQUISITION--The Company's acquisition of certain long distance
customers and related assets of Zenex for approximately $4.7 million.
ZENEX--Zenex Communications, Inc., an Oklahoma City based reseller of long
distance and value-added services.
viii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL
DATA CONTAINED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
REFERENCES HEREIN TO "LOGIX" AND THE "COMPANY" REFER TO LOGIX COMMUNICATIONS
ENTERPRISES, INC. (FORMERLY NAMED DOBSON WIRELINE COMPANY) AND ITS SUBSIDIARIES,
INCLUDING AMERICAN TELCO FROM AND AFTER CONSUMMATION OF THE AMERICAN TELCO
ACQUISITION ON JUNE 15, 1998 AND REFERENCES HEREIN TO "AMERICAN TELCO" REFER
COLLECTIVELY TO AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
CERTAIN TECHNICAL TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY"
BEGINNING ON PAGE V AND CERTAIN TERMS USED IN THE INDENTURE RELATING TO THE
NOTES ARE DEFINED UNDER "DESCRIPTION OF THE NOTES--CERTAIN DEFINITIONS"
BEGINNING ON PAGE 86.
THE COMPANY
Logix Communications Enterprises, Inc. seeks to be the leading provider of
integrated local, long distance, data and other telecommunications services to
small and medium-sized business customers throughout the Southwest United
States. Since 1936, the Company, through its predecessors and subsidiaries, has
provided incumbent local exchange carrier ("ILEC") services in Oklahoma. In
addition, Logix Wireline operates long-haul fiber optic facilities in Oklahoma,
Texas and Colorado, providing wholesale long-haul services. Logix recently began
offering switch-based services as an integrated communications provider (an
"ICP") in Oklahoma City and Tulsa under its LOGIX-TM- brand name and expects to
commence offering these services in Amarillo in late 1998.
In order to accelerate the expansion of its ICP business, on June 15, 1998,
Logix acquired Houston-based American Telco for $131.5 million. American Telco
provides long distance and local telecommunications services to approximately
22,400 customers in Houston, Dallas, Fort Worth, San Antonio and Austin, of
which approximately 16,400 are business customers.
On June 12, 1998, the Company consummated the offering of the Old Notes (the
"Offering") and received net proceeds of approximately $338 million. Of these
proceeds approximately $122 million (including premiums of approximately $.8
million) were used to purchase securities which secure the first six interest
payments on the Notes, $126.5 million were used to finance the American Telco
Acquisition (together with a previous $5 million earnest money deposit) and the
balance will be used for general corporate purposes.
SERVICES STRATEGY
The Company's objective is to be the dominant alternative provider of
integrated local, long distance and data services packaged with wireless
offerings to small and medium-sized business customers in the Southwest. The
Company has developed customer focused strategies to build market share in
existing and new markets while utilizing innovative and efficient network
deployment techniques to maximize customer satisfaction and financial returns.
The principal elements of the Company's services strategy include:
DELIVERING INNOVATIVE TELECOMMUNICATIONS SOLUTIONS FOR BUSINESS
CUSTOMERS. The Company believes that there is substantial demand from small
and medium-sized businesses for bundled telecommunications services provided
on a single monthly bill and with a single point of contact for all sales
and service. Under its LOGIX-TM- brand name, the Company offers local, long
distance, enhanced data, Internet, wireless and systems integration services
to customers with convenient integrated billing through its "DIRECT T-SM-"
bundled service offering.
FOCUSING ON THE SOUTHWEST. In order to leverage its extensive
telecommunications networks and long-standing customer and business
relationships in the region, the Company intends to continue to focus on the
Southwest, initially targeting Oklahoma and Texas. The Company believes that
this regional
1
<PAGE>
focus will enable it to take advantage of economies of scale in management,
network operations, sales and marketing.
BUILDING MARKET SHARE THROUGH DIRECT SALES AND SUPERIOR CUSTOMER
SERVICE. The Company believes that the key to revenue growth in its target
markets is to acquire customers through direct sales efforts and retain
those customers by offering a high level of customer service. The Company
believes that, in servicing the small and medium-sized business market,
using a consultative, face-to-face sales and service strategy with a single
point of contact is a highly effective method of acquiring customers and
developing long-term customer relationships.
INCREASING PRODUCTIVITY AND EFFICIENCY THROUGH CONTINUED ENHANCEMENT OF
OSS. The Company believes that fully integrated and scalable operations
support systems ("OSS") will increase productivity and efficiency and
provide a competitive advantage. The Company currently deploys tailored
systems and procedures for its OSS and other back office systems and
customer service, and intends to replace its existing OSS with a fully
integrated, scalable system which can be expanded as the Company grows its
customer base.
NETWORK STRATEGY
The Company will seek to efficiently expand its network infrastructure to
offer facilities-based services in attractive markets while minimizing its up
front capital expenditures. The principal elements of the Company's network
strategy include:
MAXIMIZING OPERATING MARGINS WITH A TARGETED SERVICE AREA. The Company
targets customers within a specified geographic zone surrounding its network
infrastructure, thereby controlling the cost of services. By focusing its
sales efforts on customers within these zones and bypassing the ILEC's, the
Company believes it can generate higher gross margins than could be obtained
by reselling ILEC services.
EMPLOYING ADVANCED REMOTE SWITCHING TECHNOLOGY. In entering new markets the
Company intends to deploy an advanced network presence unit (an "ANP") which
utilizes minaturized switching technology. As customer telecommunications
traffic warrants, the Company will install a Class V switch and redeploy
ANPs to a new market area. By using ANP units and Class V switches, the
Company believes it will have lower operating costs than reselling.
CONTROLLING SERVICE QUALITY. The Company's strategy is to have direct
control of the quality of service and responsiveness to its customers by
utilizing the Company's own switches and providing a direct connection which
eliminates the reliance on other switching providers, in contrast to
reselling.
LEVERAGING EXISTING OPERATIONS AND PROVEN MANAGEMENT TEAM
The Company believes that its ability to leverage its existing local
exchange and fiber operations and to draw upon its senior management's extensive
experience and expertise in facilities-based telecommunications services will
provide it with a competitive advantage. Collectively, the executives of the
Company have in excess of 125 years of telecommunications experience.
RISK FACTORS
An investment in the Notes involves a high degree of risk. The risks that a
potential investor should consider before making an investment in the Notes
include, but are not limited to, risks associated with: (i) the Company's
leverage and its ability to meet required debt service; (ii) the Company's
significant capital requirement associated with its operations; (iii) covenant
restrictions contained in instruments governing the Company's indebtedness,
including the Notes; (iv) the negative impact on Adjusted EBITDA from CLEC
Services; (v) the Company's status as a holding company which may impair its
ability
2
<PAGE>
to incur additional secured indebtedness; (vi) the Company's acquisitions and
ability to manage growth; (vii) the dependence of the Company on ILECs; (viii)
the Company's local service strategies; (ix) the existence of pricing pressures
and risks relating to the Company's long-distance business; (x) the dependence
of the Company on leased trunk capacity and its need to obtain permits,
rights-of-way and other third-party agreements; (xi) the Company's dependence
upon billing, customer service and information systems; (xii) the year 2000
issue; (xiii) competition; (xiv) rapid technological changes; (xv) the
dependence of the Company on its key personnel; (xvi) regulation; (xvii)
fraudulent conveyance statutes; (xviii) the absence of a public market for the
notes and restrictions on the transferability of the Old Notes; and (xix) the
control of the Company by Dobson Communications Corporation. See "Risk Factors."
TERMS OF THE EXCHANGE OFFER
This Exchange Offer is being made pursuant to the terms of the registration
rights agreement dated as of July 12, 1998 (the "Registration Rights Agreement")
entered into between the Company and Morgan Stanley & Co. Incorporated, and
NationsBanc Montgomery Securities LLC (the "Placement Agents"). See "The
Exchange Offer--Purpose and Effect of the Exchange Offer."
<TABLE>
<S> <C>
The Exchange Offer................ Pursuant to the Exchange Offer, $1,000 principal amount
of New Notes will be issued in exchange for each $1,000
principal amount of Old Notes that are validly tendered
and not withdrawn. As of November 6, 1998, $350,000,000
aggregate principal amount of Old Notes were
outstanding. Holders of Old Notes whose Old Notes are
not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to
all the rights and preferences and will be subject to
the limitations applicable thereto under the Indenture
governing the Old Notes and the New Notes. Following
consummation of the Exchange Offer, the holders of Old
Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will
have no further obligation to such holders to provide
for the registration under the Securities Act of the Old
Notes held by them. Following the completion of the
Exchange Offer, none of the Notes will be entitled to
the contingent increase in interest rate provided with
respect to the Old Notes.
Resale............................ Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties,
the Company believes the New Notes issued pursuant to
the Exchange Offer may be offered for resale, resold and
otherwise transferred by any holder thereof (other than
broker-dealers, as set forth below, and any such holder
that is an affiliate of the Company within the meaning
of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Any holder who tenders
in the Exchange Offer with the intention to participate,
or for the purpose of participating, in a distribution
of the New Notes or who is an affiliate of the Company
may not rely upon such interpretations by the staff of
the Commission and, in the absence of an exemption
therefrom, must comply
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any secondary resale transaction. Failure to comply with
such requirements in such instance may result in such
holder incurring liabilities under the Securities Act
for which the holder is not indemnified by the Company.
Each broker-dealer (other than an affiliate of the
Company) that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such
New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act.
The Company has agreed that, for a period of 180 days
after the Exchange Date, it will make this Prospectus
available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on December 10, 1998, unless extended, in
which case the term Expiration Date shall mean the
latest date and time to which the Exchange Offer is
extended. Any extension, if made, will be publicly
announced through a release to the Dow Jones News
Service and as otherwise required by applicable law or
regulations.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain conditions,
which may be waived by the Company. See "The Exchange
Offer--Conditions of the Exchange Offer." The Exchange
Offer is not conditioned upon any minimum principal
amount of Old Notes being tendered.
Procedures for Tendering Old
Notes........................... Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or a
facsimile thereof, together with such Old Notes and any
other required documentation to United States Trust
Company of New York, the Exchange Agent, at the address
set forth herein and therein. By executing the Letter of
Transmittal, each holder will represent to the Company
that, among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder,
that neither the holder nor any such other person has an
arrangement or understanding with any person to
participate in the distribution of such New Notes and
that neither the holder nor any such other person is an
affiliate of the Company within the meaning of Rule 405
under the Securities Act. See "The Exchange Offer--Terms
of the Exchange Offer--Procedures for Tendering Old
Notes" and "The Exchange Offer--Terms of the Exchange
Offer--Guaranteed Delivery Procedures."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Special Procedures for Beneficial
Owners.......................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Old Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on its own
behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering its
Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name
or obtain a properly completed stock power from the
registered holder. The transfer of registered ownership
may take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer--Procedures
for Tendering Old Notes."
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Old Notes according
to the guaranteed delivery procedures set forth in "The
Exchange Offer--Terms of the Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes........... Subject to certain conditions (as described more fully
in "The Exchange Offer--Conditions of the Exchange
Offer"), the Company will accept for exchange any and
all Old Notes which are properly tendered in the
Exchange Offer and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be delivered
as promptly as practicable following the Expiration
Date.
Withdrawal Rights................. Except as otherwise provided herein, tenders of Old
Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer--Withdrawal
of Tenders of Old Notes."
Certain Federal Income Tax
Considerations.................. For a discussion of certain federal income tax
considerations relating to the exchange of New Notes for
Old Notes, see "Certain U.S. Federal Income Tax
Consequences."
Exchange Agent.................... United States Trust Company of New York is the Exchange
Agent. The address, telephone number and facsimile
number of the Exchange Agent are set forth in "The
Exchange Offer--Exchange Agent."
</TABLE>
5
<PAGE>
TERMS OF THE NEW NOTES
The Exchange Offer applies to $350,000,000 aggregate principal amount of Old
Notes. The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that the New Notes will
be registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes, will be entitled to the benefits of the Indenture and will be
treated as a single class thereunder with any Old Notes that remain outstanding.
Following the Exchange Offer, none of the Notes will be entitled to the
contingent increase in interest rate provided for in accordance with the terms
of the Registration Rights Agreement which rights will terminate upon
consummation of the Exchange Offer. See "Description of the Notes."
<TABLE>
<S> <C>
Issuer............................ Logix Communications Enterprises, Inc. (formerly named
Dobson Wireline Company).
Securities Offered................ $350 million aggregate principal amount of 12 1/4%
Senior Notes due 2008.
Maturity.......................... June 15, 2008.
Interest.......................... Interest on the Notes is payable semiannually in cash on
June 15 and December 15 of each year commencing December
15, 1998.
Optional Redemption............... The Notes are redeemable at the option of the Company,
in whole or in part, at any time or from time to time on
or after June 15, 2003, initially at 106.125% of their
principal amount, plus accrued interest, declining to
100% of their principal amount, plus accrued interest,
on or after June 15, 2006. In addition, at any time
prior to June 15, 2001, the Company may redeem up to 35%
of the aggregate principal amount of the Notes with the
proceeds of one or more sales of Capital Stock of the
Company (other than Disqualified Stock), at 112.250% of
their principal amount, plus accrued and unpaid
interest; PROVIDED, HOWEVER, that after any such
redemption at least 65% of the aggregate principal
amount of Notes originally issued remains outstanding.
See "Description of the Notes--Optional Redemption."
Security.......................... Of the net proceeds from the sale of the Old Notes, $121
million was invested in a portfolio of securities (the
"Pledged Securities"), consisting of U.S. government
securities, which secure the payment in full of the
first six scheduled interest payments due on the Notes.
After the first six interest payments, the Notes will be
unsecured. The Pledged Securities will be held by the
Trustee for the benefit of the holders of the Notes
under an escrow and security agreement pending
disbursement. See "Description of the Notes--Security."
Change of Control................. Upon a Change of Control (as defined herein), the
Company will be required to make an offer to purchase
the Notes at a purchase price equal to 101% of their
principal amount, plus accrued interest to the date of
purchase. There can be no assurance that the Company
will have sufficient funds available at the time of any
Change of Control to make any required debt repayment
(including repurchases of the Notes). See "Description
of the Notes--Repurchase of Notes upon a Change of
Control."
Ranking........................... The Notes are unsecured (except as described above under
"--Security"), unsubordinated indebtedness of Logix
ranking PARI
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
PASSU with Logix's unsecured, unsubordinated
indebtedness and senior in right of payment to all
subordinated indebtedness of Dobson Wireline Company.
The Notes are effectively subordinated to all
liabilities of the Company's subsidiaries, including
trade payables. At June 30, 1998, the Company had
approximately $378.0 million of indebtedness outstanding
and the Company's subsidiaries had approximately $43.4
million of liabilities, including approximately $28.0
million of indebtedness, all of which is secured. See
"Risk Factors--Leverage; Ability to Meet Required Debt
Service" and "--Holding Company Structure; Ability to
Incur Additional Secured Indebtedness."
Certain Covenants................. The Indenture contains certain covenants that, among
other things, limit the ability of the Company and its
Restricted Subsidiaries (as defined herein) to incur
indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make
investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and engage in
mergers and consolidations. However, these limitations
will be subject to a number of important qualifications
and exceptions. See "Description of the
Notes--Covenants."
Book-Entry; Delivery and Form..... Transfers of Notes between participants and The
Depository Trust Company ("DTC") will be effected in the
ordinary way in accordance with DTC rules and will be
settled in same-day funds. See "Description of the
Notes."
</TABLE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
pursuant to this Prospectus.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following tables set forth certain historical financial data for Logix.
The summary historical financial data as of and for the years ended December 31,
1995, 1996 and 1997 were derived from the Company's audited consolidated
financial statements. The summary historical financial data as of and for the
six months ended June 30, 1997 and 1998 were derived from the Company's
unaudited consolidated financial statements which, in the opinion of management,
have been prepared on the same basis as the Company's audited consolidated
financial statements and include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
results of operations and financial position for such periods and as of such
dates. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the full year. The
summary historical financial data should be read in conjunction with "Selected
Consolidated Financial and Other Data," "Pro Forma Condensed Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
ILEC.......................................................................... $13,697 $14,365 $15,361
Fiber......................................................................... 2,501 3,430 4,589
ICP (3)....................................................................... 67 113 227
------- ------- -------
Total revenue............................................................... 16,265 17,908 20,177
Operating expenses:
Cost of service............................................................... 2,471 2,823 3,269
Selling, general and administrative........................................... 6,532 7,815 8,735
Depreciation and amortization................................................. 4,124 4,479 4,931
------- ------- -------
Total operating expenses.................................................... 13,127 15,117 16,935
------- ------- -------
Operating income (loss)......................................................... 3,138 2,791 3,242
Interest expense................................................................ (1,980) (2,194) (2,459)
Other income (expense), net..................................................... (267) (83) 103
------- ------- -------
Income (loss) before income taxes, extraordinary items and cumulative effect of
change in accounting principle................................................ 891 514 886
Income tax (provision) benefit.................................................. (391) (183) (337)
------- ------- -------
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle.......................................................... 500 331 549
Extraordinary item (1).......................................................... -- -- (217)
------- ------- -------
Income (loss) before cumulative effect of change in accounting principle........ 500 331 332
Cumulative effect of change in accounting principle (2)......................... -- -- --
------- ------- -------
Net income (loss)............................................................... $ 500 $ 331 $ 332
------- ------- -------
------- ------- -------
Basic net income (loss) per common share........................................ $ .007 $ .005 $ .005
------- ------- -------
------- ------- -------
Basic weighted average common shares outstanding................................ 71,250,000 71,250,000 71,250,000
------- ------- -------
------- ------- -------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1998
------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
ILEC.......................................................................... $ 7,702 $ 7,864
Fiber......................................................................... 2,214 2,400
ICP (3)....................................................................... 76 4,371
------- --------
Total revenue............................................................... 9,992 14,635
Operating expenses:
Cost of service............................................................... 1,337 6,264
Selling, general and administrative........................................... 3,841 8,724
Depreciation and amortization................................................. 2,346 3,129
------- --------
Total operating expenses.................................................... 7,524 18,117
------- --------
Operating income (loss)......................................................... 2,468 (3,482)
Interest expense................................................................ (1,238) (2,721)
Other income (expense), net..................................................... 67 396
------- --------
Income (loss) before income taxes, extraordinary items and cumulative effect of
change in accounting principle................................................ 1,297 (5,807)
Income tax (provision) benefit.................................................. (493) 718
------- --------
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle.......................................................... 804 (5,089)
Extraordinary item (1).......................................................... (217) --
------- --------
Income (loss) before cumulative effect of change in accounting principle........ 587 (5,089)
Cumulative effect of change in accounting principle (2)......................... -- (699)
------- --------
Net income (loss)............................................................... $ 587 $ (5,788)
------- --------
------- --------
Basic net income (loss) per common share........................................ $ .008 $ (.081)
------- --------
------- --------
Basic weighted average common shares outstanding................................ 71,250,000 71,250,000
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
(IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents......................................................................................... $ 81,726
Property, plant and equipment, net................................................................................ 44,681
Total assets...................................................................................................... 407,654
Total debt........................................................................................................ 378,004
Stockholder's equity.............................................................................................. 14,289
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA (4):
ILEC.......................................................................... $ 5,550 $ 5,532 $ 7,031
Fiber......................................................................... 1,733 2,013 3,104
ICP........................................................................... (21) (275) (1,962)
------- ------- -------
Total..................................................................... $ 7,262 $ 7,270 $ 8,173
------- ------- -------
------- ------- -------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1998
------- --------
<S> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA (4):
ILEC.......................................................................... $ 3,466 $ 4,324
Fiber......................................................................... 1,544 1,407
ICP........................................................................... (196) (6,083)
------- --------
Total..................................................................... $ 4,814 $ (352)
------- --------
------- --------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Depreciation and amortization:
ILEC.......................................................................... (3,185) (3,248) (3,260)
Fiber......................................................................... (925) (1,212) (1,421)
ICP........................................................................... (14) (19) (250)
Total..................................................................... (4,124) (4,479) (4,931)
------- ------- -------
------- ------- -------
Interest Expense, net:
ILEC.......................................................................... (1,368) (1,341) (1,283)
Fiber......................................................................... (608) (853) (1,161)
ICP........................................................................... -- -- --
Total..................................................................... (1,976) (2,194) (2,444)
------- ------- -------
------- ------- -------
Other Income (Expense), net:
ILEC.......................................................................... (103) (18) (13)
Fiber......................................................................... (168) (65) 101
ICP........................................................................... -- -- --
Total..................................................................... (271) (83) 88
------- ------- -------
------- ------- -------
Income (loss) before income taxes, extraordinary items and cumulative effect of
change in accounting principle:
ILEC.......................................................................... 894 925 2,475
Fiber......................................................................... 32 (117) 623
ICP........................................................................... (35) (294) (2,212)
Total..................................................................... 891 514 886
------- ------- -------
------- ------- -------
Cash flow provided by (used in):
Operating activities.......................................................... $ 3,659 $ 6,349 $ 3,704
Investing activities.......................................................... (4,191) (5,485) (3,460)
Financing activities.......................................................... (239) (619) (619)
Ratio of earnings to fixed charges (5).......................................... 1.45x 1.23x 1.36x
Capital expenditures............................................................ $ 2,357 $ 3,902 $ 5,442
OTHER DATA (AT PERIOD END):
Access lines.................................................................... 11,806 11,959 12,724
Route miles (6)................................................................. 516 545 545
Fiber miles (7)................................................................. 11,189 11,537 11,554
Switches........................................................................ 12 12 13
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1998
------- --------
<S> <C> <C>
Depreciation and amortization:
ILEC.......................................................................... (1,618) (1,563)
Fiber......................................................................... (718) (680)
ICP........................................................................... (10) (886)
Total..................................................................... (2,346) (3,129)
------- --------
------- --------
Interest Expense, net:
ILEC.......................................................................... (664) (539)
Fiber......................................................................... (568) --
ICP........................................................................... -- (1,869)
Total..................................................................... (1,232) (2,408)
------- --------
------- --------
Other Income (Expense), net:
ILEC.......................................................................... 19 16
Fiber......................................................................... 42 66
ICP........................................................................... -- 1
Total..................................................................... 61 83
------- --------
------- --------
Income (loss) before income taxes, extraordinary items and cumulative effect of
change in accounting principle:
ILEC.......................................................................... 1,203 2,238
Fiber......................................................................... 301 792
ICP........................................................................... (207) (8,837)
Total..................................................................... 1,297 (5,807)
------- --------
------- --------
Cash flow provided by (used in):
Operating activities.......................................................... $ 1,869 $ 1,390
Investing activities.......................................................... (1,246) (136,932)
Financing activities.......................................................... (770) 217,014
Ratio of earnings to fixed charges (5).......................................... 1.88x --
Capital expenditures............................................................ $ 1,017 $ 6,140
OTHER DATA (AT PERIOD END):
Access lines.................................................................... 12,446 35,667
Route miles (6)................................................................. 545 545
Fiber miles (7)................................................................. 11,554 11,554
Switches........................................................................ 12 16
</TABLE>
- ------------------------------
(1) Extraordinary items reflect expense associated with early extinguishment of
debt, net of income tax benefit.
(2) Cumulative effect of change in accounting principle reflects the charge
taken, net of income tax benefit, as a result of the implementation of AICPA
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities,"
effective January 1, 1998.
(3) ICP revenue includes network management services provided to affiliates of
Logix. For 1995 and 1996 and the three months ended June 30, 1997, the
network management services account for all of the ICP revenue and for 1997
and the six months ended June, 1998, for $124,000 and $35,200 of the ICP
revenue, respectively.
(4) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, other income, extraordinary items, and
changes in accounting principles. Adjusted EBITDA is provided because it is
a measure commonly used in the industry and by the Company to assess a
company's operating performance and its ability to incur or service debt. In
addition, the Indenture governing the Notes contains certain covenant
requirements that are based on Adjusted EBITDA. See "Description of the
Notes--Covenants." Adjusted EBITDA is not derived pursuant to generally
accepted accounting principles and should not be construed as an alternative
to net income, as a measure of performance, or to cash flows, as a measure
of liquidity. Adjusted EBITDA, as measured by the Company, may differ
significantly from similarly named measurements of other companies and, as a
consequence, may not provide any degree of reliable comparability. The
calculation of Adjusted EBITDA does not include the Company's commitments
for capital expenditures or payments of debts and should not be deemed to
represent funds available to the Company.
(5) For the six months ended June 30, 1998, earnings were insufficient to cover
fixed charges by $5.8 million. "Earnings" is defined as earnings before
extraordinary items, accounting changes and fixed charges. Fixed charges
consist of interest expense, amortization of deferred financing costs,
income taxes and a portion of rent expense under operating leases
representative of interest.
(6) Route miles refers to the number of miles over which fiber optic cables are
installed.
(7) Fiber miles refers to the number of route miles multiplied by the number of
fibers installed along that path.
9
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary unaudited pro forma consolidated statements of
operations were derived from the pro forma condensed consolidated statements of
operations included elsewhere in this Prospectus. The pro forma statement of
operations data give effect to the Offering and the American Telco Acquisition
as if they occurred on January 1, 1997. The summary unaudited pro forma
consolidated financial data are based on certain assumptions that management
believes are reasonable. The pro forma financial information does not purport to
represent what the Company's results of operations would have been if the
Offering and the American Telco Acquisition had been completed on such date, nor
does it purport to indicate the future financial position or results of future
operations of the Company. The pro forma consolidated financial data should be
read in conjunction with "Selected Consolidated Financial and Other Data," "Pro
Forma Condensed Consolidated Financial Data," "Management's Discussion Analysis
of Financial Condition and Results of Operations" and the financial statements
and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
1997 JUNE 30, 1998
--------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
ILEC......................................................... $ 15,361 $ 7,864
Fiber........................................................ 4,589 2,400
ICP.......................................................... 52,268 33,899
--------------- -----------------
Total...................................................... $ 72,218 $ 44,163
Operating expenses:
Cost of service.............................................. 32,723 23,854
Selling, general and administrative.......................... 27,275 16,596
Depreciation and amortization................................ 17,210 8,882
--------------- -----------------
Total operating expenses................................... 77,208 49,332
--------------- -----------------
Operating loss................................................. (4,990) (5,169)
Interest expense............................................... (46,534) (22,979)
Other income, net.............................................. 335 428
Income tax benefit............................................. 1,245 --
--------------- -----------------
Loss before extraordinary items and cumulative effect of change
in accounting principle...................................... $ (49,944) $ (27,720)
--------------- -----------------
--------------- -----------------
Basic net loss per common share................................ $ (.701) $ (.389)
--------------- -----------------
--------------- -----------------
Basic weighted average common shares outstanding............... 71,250,000 71,250,000
--------------- -----------------
--------------- -----------------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges (1)......................... -- --
Capital expenditures........................................... $ 9,524 $ 6,140
OTHER DATA (AT PERIOD END):
Access lines................................................. 20,674 35,667
Route miles (2).............................................. 545 545
Fiber miles (3).............................................. 11,554 11,554
Switches..................................................... 16 16
</TABLE>
- ------------------------------
(1) On a pro forma basis for the year ended December 31, 1997, and the six
months ended June 30, 1998, the Company's earnings would have been
insufficient to cover its fixed charges by $51.2 million and $27.7 million,
respectively. "Earnings" is defined as earnings before extraordinary items,
accounting changes and fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing costs, income taxes and a
portion of rent expense under operating leases representative of interest.
(2) Route miles refers to the number of miles over which fiber optic cables are
installed.
(3) Fiber miles refers to the number of route miles multiplied by the number of
fibers installed along that path.
10
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS
IN EVALUATING THE COMPANY AND ITS BUSINESS.
LEVERAGE; ABILITY TO MEET REQUIRED DEBT SERVICE
The Company is highly leveraged. At June 30, 1998, the Company had $378.0
million of indebtedness and stockholder's equity of $14.3 million. On a pro
forma basis, after giving effect to the American Telco Acquisition and the
Offering as if they had occurred on January 1, 1997, for the year ended December
31, 1997, and the six months ended June 30, 1998, the Company's Adjusted EBITDA
minus interest expense and capital expenditures other than acquisition costs
incurred in the American Telco Acquisition would have been $(43.8) million and
$(26.8) million, respectively. For the year ended December 31, 1997, and the six
months ended June 30, 1998, on a pro forma basis, after giving effect to the
American Telco Acquisition and the Offering, the Company's earnings would have
been insufficient to cover fixed charges by $51.2 million and $27.7 million,
respectively, and Adjusted EBITDA would have been insufficient to cover interest
expense by $34.3 million and $19.3 million, respectively. See Note 4 of the
Notes to Selected Consolidated Financial and Other Data and "Description of
Certain Indebtedness."
The Company experienced a substantial increase in total indebtedness and
debt service requirements as a result of the American Telco Acquisition and the
Offering. The successful implementation of the Company's strategies, including
the expansion of its network, operations and systems, and sustained growth in
its cash flow will be necessary for the Company to meet its debt service
requirements, including those under the Notes. There can be no assurance that
the Company will successfully implement its strategies or that the Company will
be able to generate sufficient cash flow from operating activities to meet its
debt service and working capital requirements.
If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if the Company otherwise
fails to comply with the various covenants in its existing or future debt
obligations, it would be in default under the terms thereof, which would permit
the holders of such indebtedness to accelerate the maturity of such indebtedness
and could cause defaults under other indebtedness of the Company. Such defaults
could result in a default on the Notes and could delay or preclude payment of
interest on or principal of the Notes. The Company's ability to meet its
obligations will depend upon the future performance of the Company, which will
be subject to prevailing economic conditions and to financial, business and
other factors.
The level of the Company's indebtedness could adversely affect the Company
in a number of ways. For example, (i) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (ii) the level of
its indebtedness could limit the Company's flexibility in planning for, or
reacting to, changes in its business; (iii) the Company will be more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage; (iv) the Company's degree of indebtedness may make it more
vulnerable to a downturn in its business or the economy generally; (v) the debt
service requirements of any additional indebtedness could make it more difficult
for the Company to make payments required by the Notes; and (vi) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness and will not be available
for other purposes.
SIGNIFICANT CAPITAL REQUIREMENTS
Expansion of the Company's network, operations and services will require
significant capital. The Company has budgeted total capital expenditures,
excluding acquisitions, of approximately $58.1 million for 1998 and
approximately $23.5 million in 1999, and anticipates substantial capital
expenditures thereafter. Budgeted capital expenditures will be primarily for:
(i) the expansion of the Company's facilities-based ICP services including
acquisition and installation of switches; (ii) market expansion; and (iii)
infrastructure enhancements, principally for OSS. The Company believes that cash
on hand, cash flow
11
<PAGE>
from operations and borrowings under the RUS/RTB Facility (as defined herein),
will provide sufficient funds to enable the Company to fund the replacement of
its OSS and the expansion of its business as currently planned, including its
negative cash flows from its ICP services. The actual amount and timing of the
Company's future capital requirements may differ materially from the Company's
estimate depending on the demand for the Company's services and as a result of
regulatory, technological and competitive developments (including new market
developments and new opportunities) in the Company's industry. The Company may
also require additional capital in the future (or sooner than currently
anticipated) for new business activities related to its current and planned
businesses, or in the event it decides to make additional acquisitions or enter
into joint ventures and strategic alliances. Sources of additional capital may
include cash flow from operations and public and private equity and debt
financings, including vendor financing. There can be no assurance, however, that
the Company will be successful in producing sufficient cash flows or raising
sufficient debt or equity capital to meet its strategic objectives or that such
funds, if available at all, will be available on a timely basis and within the
limitations contained in the Indenture and the terms of the Company's other
existing or future indebtedness or on terms that are acceptable to the Company.
Failure to generate or raise sufficient funds would require the Company to delay
or abandon some or all of its future expansion plans or expenditures, which
could limit the ability of the Company to meet its debt service obligations
(including obligations under the Notes) and could have a material adverse effect
on the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description of
Certain Indebtedness."
COVENANT RESTRICTIONS
The existing and future instruments governing the indebtedness of the
Company and its subsidiaries impose or may impose significant operating and
financial restrictions on the Company and its subsidiaries. Such restrictions
will affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, repay indebtedness prior to stated maturities, sell
assets, make investments, engage in transactions with stockholders and
affiliates, issue capital stock, create liens or engage in mergers or
acquisitions. In addition, the indebtedness of Dobson Telephone Company ("Dobson
Telephone") under the RUS/RTB Facility is secured by liens upon substantially
all of Dobson Telephone's assets, and requires the maintenance of certain
financial ratios. See "Description of Certain Indebtedness." These restrictions
could also limit the ability of the Company and its subsidiaries to effect
future financings. A failure by the Company or its subsidiaries to comply with
these restrictions could lead to a default under the terms of such indebtedness
notwithstanding the ability of the Company to meet its debt service and dividend
obligations. In the event of a default, the holders of such indebtedness could
elect to declare all such indebtedness to be due and payable together with
accrued and unpaid interest. In such event, a significant portion of the
Company's other indebtedness may become immediately due and payable and there
can be no assurance that the Company and its subsidiaries would be able to make
such payments or borrow sufficient funds from alternative sources to make any
such payment. Even if additional financing could be obtained, there can be no
assurance that it would be on terms that are acceptable to the Company.
NEGATIVE IMPACT ON EBITDA FROM ICP SERVICES
On a pro forma basis, after giving effect to the American Telco Acquisition
and the Offering, the Company would have incurred operating losses of
approximately $5.0 million and $5.2 million and have had Adjusted EBITDA of
approximately $12.2 million and $3.7 million for the year ended December 31,
1997 and for the six months ended June 30, 1998, respectively. As a result of
the continued expansion of its ICP services, the Company has and will continue
to incur significant increases in expenses associated with these activities
which will significantly reduce its Adjusted EBITDA until it can develop and
expand its ICP service customer base. There can be no assurance that an adequate
customer base will be achieved or sustained or that the Company will be able to
achieve positive cash flow or positive Adjusted EBITDA with respect to its ICP
services. The Company does not expect to achieve a significant market share for
its services.
12
<PAGE>
HOLDING COMPANY STRUCTURE; ABILITY TO INCUR ADDITIONAL SECURED INDEBTEDNESS
Logix Communications Enterprises, Inc. is a holding company with no direct
operations and no significant assets other than the stock of its subsidiaries.
Logix is dependent on the cash flows of its subsidiaries to meet its
obligations, including the payment of interest on and principal of the Notes.
Receipt of funds from its subsidiaries will be restricted by the terms of
existing and future indebtedness including the loan agreements with the United
States of America--Rural Utilities Service ("RUS") and the Rural Telephone Bank
("RTB") (the "RUS/RTB Facility"). See "Description of Certain Indebtedness."
Logix's subsidiaries are separate legal entities that have no obligation to pay
any amounts due with respect to the Notes or to make any funds available
therefor, whether by dividends, loans or other payments. Because Logix's
subsidiaries have not guaranteed Logix's obligations on the Notes, any right of
Logix to receive assets of any of its subsidiaries upon its liquidation or
reorganization (and the right of the holders of the Notes to participate in the
distribution or realize proceeds from those assets) will be effectively
subordinated to the claims of the creditors of such subsidiary (including trade
creditors and holders of indebtedness of such subsidiary), except if and to the
extent the Company is itself a creditor of such subsidiary, in which case the
claims of the Company would still be effectively subordinated to any security
interest in the assets of such subsidiary senior to that held by the Company.
The indebtedness of Dobson Telephone, the Company's subsidiary that conducts it
ILEC business, under the RUS/RTB Facility is secured by substantially all of
Dobson Telephone's assets. Accordingly, the Notes will be effectively
subordinated to the liabilities (including trade payables and indebtedness under
the RUS/RTB Facility) of the subsidiaries of the Company. See "Description of
Certain Indebtedness."
The Notes will be general unsecured, unsubordinated indebtedness of the
Company. At June 30, 1998, the Company and its subsidiaries had outstanding
approximately $378.0 million aggregate principal amount of indebtedness. In the
event the Company obtains additional funds through the incurrence of secured
indebtedness and a default were to occur with respect to any such indebtedness,
the holders of such indebtedness would be entitled to payment out of the
proceeds of their collateral prior to the holders of general unsecured
indebtedness, including the Notes, notwithstanding the existence of an event of
default with respect to the Notes. In the event of a bankruptcy, liquidation or
reorganization of the Company, holders of secured indebtedness would have a
claim, prior to the holders of the Notes, on the assets of the Company securing
such indebtedness. In addition, to the extent that the value of the collateral
is insufficient to satisfy such secured indebtedness, holders of amounts
remaining outstanding on such secured indebtedness would be entitled to share
with respect to any other assets of the Company on a pro rata basis with the
Notes. Assets remaining after satisfaction of the claims of holders of secured
indebtedness may not be sufficient to pay amounts due on any or all of the Notes
then outstanding. The Indenture will permit the Company to incur additional
indebtedness and to secure such indebtedness.
RISKS ASSOCIATED WITH ACQUISITIONS; ABILITY TO MANAGE GROWTH
The Company is subject to risks that acquired businesses, including American
Telco, will not perform as expected and that the returns from such acquisitions
will not support indebtedness incurred to effect such acquisition or the capital
expenditures needed to develop and expand the systems acquired in the
acquisitions. Expansion of the Company's operations may also place a significant
strain on the Company's management, financial and other resources, and in the
case of acquisitions, divert the resources and management time of the Company.
In addition, the integration of acquired systems with existing operations may
cause the Company to incur considerable expense in advance of anticipated
revenues and may cause substantial fluctuations in the Company's operating
results. This integration will involve, among other things, integration of
switching, transmission, technical, sales, marketing, billing, accounting,
quality control, management, personnel, payroll, regulatory compliance and other
systems and operating hardware and software, some of which may be incompatible
with the Company's existing systems. Other integration risks include the
difficulty in assimilating the acquired operations and personnel, the potential
disruption of the Company's ongoing business, the possible inability of
management to maintain uniform standards,
13
<PAGE>
controls, procedures and policies and the potential impairment of relationships
with employees or customers as a result of changes in management.
The expansion and development of the Company's business will depend on,
among other things, the Company's ability to successfully implement its sales
and marketing strategy, evaluate markets, secure financing, obtain required
government authorizations, implement interconnection to, and collocation with,
facilities owned by ILECs, obtain appropriately priced unbundled network
elements and wholesale services from the ILECs, purchase and install switches in
new markets, provision new customers, and implement efficient operating support
systems and other back office systems, all in a timely manner, at reasonable
cost, and on satisfactory terms and conditions. The Company's ability to
continue to successfully manage its growth will require the Company to enhance
its operational, management, financial and information systems and controls and
to hire and retain qualified sales, marketing, administrative, operating and
technical personnel, all of which will result in higher operating expenses. In
addition, as the Company increases its service offerings and expands its
targeted markets, there will be additional demands on customer support, sales
and marketing, administrative resources and network infrastructure. Any failure
to expand these areas and to implement and improve the acquired and existing
systems, procedures and controls in an efficient manner at a pace consistent
with the growth of the Company's business could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to successfully integrate the
American Telco Acquisition or any other businesses it may acquire, that any
acquired business will perform as expected or that any such acquired business
will not experience high employee or customer turnover rates after the
acquisition. The Company's inability to manage its growth effectively or
implement its expansion and growth strategy successfully could have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON ILECS
The Company is dependent on ILECs to provide access service for the
origination and termination of its toll long distance traffic and interexchange
private lines. Historically, charges for such access service have represented a
significant percentage of the overall cost of providing long distance service.
In May 1997, the FCC adopted changes to its interstate access rules that, among
other things, will reduce per-minute access charges and substitute new per-line,
flat rate monthly charges. The FCC also approved reductions in overall access
rates, and established new rules to recover subsidies to support universal
service and other public policies. The impact of these changes on the Company or
its competitors is not yet clear. The Company could be adversely affected if it
does not experience access cost reductions or is not charged per-line monthly
charges in a manner proportionally equivalent to those of its competitors.
The Company, generally, will be dependent on ILECs for provision of
competitive local telephone service through access to local loops and
origination and termination service and, in some markets, central office
switches of such carriers. Any successful effort by the ILECs to deny, delay or
substantially limit the Company's access to these unbundled network elements or
wholesale services would have a material adverse effect on the Company's ability
to provide local telephone services. Although the Telecommunications Act of 1996
(the "Telecommunications Act") imposes interconnection obligations on ILECs,
there can be no assurance that the Company will be able to obtain access to such
network elements or services at rates, and on terms and conditions, that permit
the Company to offer local services at rates that are both profitable and
competitive. The Eighth Circuit Court of Appeals recently struck down certain
FCC rules intended to govern such rates, terms and conditions. See
"--Regulation." One result of this decision is to give state utility commissions
a principal role in implementing ILEC's interconnection obligations under the
Telecommunications Act. It is uncertain whether such commissions will adopt and
enforce rules or take other actions that will permit new carriers to have
economical use of incumbent local exchange carrier networks and facilities. The
Company's interconnection agreements with SBC and GTE (the "Interconnection
Agreements") allow the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on a
facilities basis. The terms of the
14
<PAGE>
Interconnection Agreements, including interim pricing terms agreed to by the
Company and SBC and GTE, have been approved by state regulatory authorities in
Oklahoma and Texas, although they remain subject to review and modification by
such authorities. In addition, the Interconnection Agreements do not resolve all
operational issues which issues the Company and SBC and GTE continue to
negotiate to resolve. Also, many issues relevant to the terms and conditions by
which competitors may use the ILEC network and wholesale services remain to be
resolved. For example, SBC and certain other ILECs have taken the position that
when a carrier seeking to provide local service obtains all necessary elements
(loops and switches) from the ILEC, the ILEC retains the right to receive the
access revenues associated with the access service to the customers served on
that basis. Although the FCC has rejected this position, further legal
challenges are in progress and other important issues related to this form of
interconnection remain open. Many new carriers, including the Company, have
experienced problems with respect to provisioning, interconnection and the
operational support systems used by new carriers to order and receive network
elements and wholesale services from the ILECs. These systems are necessary for
new carriers like the Company to provide local service to customers on a timely
and competitive basis. The FCC has created a task force to examine problems that
have slowed the development of local telephone competition. The
Telecommunications Act creates incentives for the Regional Bell Operating
Companies ("RBOCs") such as SBC to permit access to their facilities by denying
such carriers the ability to provide long distance services until there is
adequate competition at the local level. However, the U.S. District Court for
the Northern District of Texas has found these provisions unconstitutional (the
"SBC Decision"), but this order has been stayed pending appeal. SBC is not yet
permitted to offer long distance services in any state in its region. There can
be no assurance, however, that SBC or other RBOCs will be accommodating to the
Company once they are permitted to offer in-region long distance service. Should
the Company be unable to obtain the cooperation of an ILEC in a region, whether
or not such ILEC has been authorized to offer long distance service, the
Company's ability to offer local services in such region on a timely and cost-
effective basis would be adversely affected. See "Business--Services" and
"--Regulation."
RISKS RELATED TO LOCAL SERVICES STRATEGY
The Company has recently entered the competitive local telecommunications
services industry. The local telephone services market has only recently been
opened to competition through the passage of the Telecommunications Act and
subsequent state and federal regulatory actions designed to implement the
Telecommunications Act. Regulatory bodies, including state commissions and the
FCC, have not completed all actions needed to implement the local service
competition provisions of the Telecommunications Act, and there is little
experience under those decisions that have been made to date. The Company must
continue to make significant operating and capital investments and marketing and
advertising expenditures in order to implement its local exchange services
strategy. There are numerous operating complexities associated with providing
these services. The Company will be required to develop new products, services
and systems, and new marketing initiatives, and to train its sales force in
connection with selling these services. The Company is replacing its existing
OSS with a scalable OSS to manage the expanding business as well as to stay
competitive. The Company will face significant competition from ILECs, whose
core business is providing local dial tone service. The ILECs, who currently are
the dominant providers of services in their markets, are expected to mount a
significant competitive response to new entrants in their markets such as the
Company. The Company also will face significant competitive product and pricing
pressures from other ILECs and from other firms seeking to compete in the local
services market outside of their respective regions and historical markets.
The Company expects that the continued roll-out of its ICP services will
have an adverse impact on its gross margin because the gross margin on its ICP
services is lower than the gross margin on its fiber and ILEC services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Revenue."
15
<PAGE>
PRICING PRESSURES AND RISKS RELATING TO LONG DISTANCE BUSINESS
The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The long distance business is extremely competitive, and prices have
declined substantially in recent years and are expected to continue to decline.
The Company is aware that certain long distance carriers are expanding their
capacity and believes that other long distance carriers, as well as potential
new entrants to the industry, are constructing new fiber optic and other long
distance transmission networks in the southern and southwestern United States.
In addition, the long distance industry has historically had a high average
churn rate, as customers frequently change long distance providers in response
to the offering of lower rates or promotional incentives by competitors. Since
the cost of the actual fiber (as opposed to construction costs) is a relatively
small portion of the cost of building new transmission lines, persons building
such lines are likely to install fiber that provides substantially more
transmission capacity than will be needed over the short or medium term.
Further, recent technological advances may greatly expand the capacity of
existing and new fiber optic cable. Although such technological advances may
enable the Company to increase its capacity, an increase in the capacity of the
Company's competitors could adversely affect the Company's long-haul fiber
business. If industry capacity expansion results in capacity that exceeds
overall demand along any of the Company's long-haul fiber routes, severe
additional pricing pressure could develop. In addition, strategic alliances or
similar transactions, such as the long distance capacity purchasing alliance
among certain RBOCs announced in the spring of 1996, could result in additional
pricing pressure on long distance carriers. Furthermore, the marginal cost of
carrying an additional call over existing fiber optic cable is extremely low. As
a result, within a few years, there may be dramatic and substantial price
reductions. See "--Competition."
In addition to supplying long-haul fiber capacity, the Company relies on
other carriers to provide transmission and termination services for its long
distance traffic. The Company has resale agreements with long distance carriers
to provide it with transmission services. Such agreements typically provide for
the resale of long distance services on a per minute basis, with some agreements
containing minimum volume commitments. Negotiation of these agreements involves
estimates of future supply and demand for transmission capacity as well as
estimates of the calling pattern and traffic levels of the Company's future
customers. In the event the Company fails to meet its minimum volume
commitments, it may be obligated to pay underutilization charges, and in the
event it underestimates its need for transmission capacity, the Company may be
required to obtain capacity through more expensive means. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Costs
and Expenses."
DEPENDENCE ON LEASED TRUNKING CAPACITY; FUTURE NEED TO OBTAIN PERMITS,
RIGHTS-OF-WAY, AND OTHER THIRD-PARTY AGREEMENTS
Under its competitive local services strategy, the Company will initially
lease from ILECs and other ICPs local fiber trunking capacity connecting the
Company switch to particular ILEC central offices. In some instances, the
Company may replace this leased trunk capacity in the future with its own fiber
if warranted by traffic volume growth. There can be no assurance that all such
required trunking capacity will be available to the Company on a timely basis or
on terms acceptable to the Company. The failure to obtain such leased fiber
could delay the Company's ability to penetrate certain market areas or require
it to make additional, unexpected up-front capital expenditures to install its
own fiber and could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. If and when the Company seeks to
install its own fiber, the Company must obtain local franchises and other
permits, as well as rights-of-way to utilize underground conduit and aerial pole
space and other rights-of-way from entities such as ILECs and other utilities,
railroads, long distance companies, state highway authorities, local government
and transit authorities. There can be no assurance that the Company will be able
to obtain and maintain the franchises, permits and rights needed to implement
its network buildout on acceptable terms. The failure to enter into and maintain
any such required arrangements for a particular network may affect the Company's
ability to develop that network and may have a material adverse effect on the
Company.
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<PAGE>
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and customer service and
information systems for Logix's ILEC and ICP services are provided by third
party vendors. The inability of the Company to obtain these services from third
parties or the failure of these third parties to provide adequate services could
have a material adverse effect on the Company. As the Company expands its ICP
operations and integrates the operations of American Telco with existing
operations, the need for enhanced billing, customer service and information
systems will increase significantly. The Company's plans for the replacement of
its OSS, for the most part, depend on the Company's retention of appropriate
third party vendors that can provide products and services that meet the
Company's needs and deliver such products and services. Integrating American
Telco's customers into a new billing system and implementing any new OSS
involves inherent risks and often there are delays and errors. For example, in
connection with the commencement of its ICP services, American Telco initially
experienced problems with its billing systems resulting in customer billings
which were less than 100% of charges. Errors or delays in integrating and
implementing a new billing program or OSS, failure of the Company's vendors to
deliver proposed products and services in a timely and effective manner and at
acceptable costs or the inability of the Company to identify adequately all of
its information and processing needs, or to upgrade systems as necessary, could
have a material adverse impact on the ability of the Company to reach its
objectives and on its financial condition and results of operations and on its
ability to pay interest and principal on the Notes.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
To date, the Company has completed an inventory of its automated systems and
services and an analysis that identified significant risk areas by line of
business, identified specific compliance requirements, and identified costs and
estimated 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 Company's 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 second quarter of 1999. The total costs
identified to upgrade or replace those systems that are not Year 2000 compliant
and will not be upgraded through existing maintenance or service agreements are
approximately $.1 million. Additionally, 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
17
<PAGE>
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.
COMPETITION
The Company operates in a highly competitive environment, and the level of
competition, particularly with respect to pricing, is increasing. Local
telephone and telecommunications services originating and terminating in the
same local access and transport area ("intraLATA") substantially similar to
those offered by the Company are also offered by the ILECs serving the markets
that the Company currently serves and plans to serve. SBC Communications, Inc.
("SBC") is the ILEC and a particularly strong competitor in most of the markets
currently served by the Company. SBC and other ILECs already have long standing
relationships with their customers and can marshall greater technical and
financial resources. SBC and other ILECs have the potential to subsidize
services of the type offered by the Company from service revenues not subject to
effective competition, which could result in even more intense price
competition. The Company also faces, and expects to continue to face,
competition from other current and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into the local
exchange marketplace (such as AT&T, MCI, Sprint and WorldCom), from RBOCs
operating outside their current local service regions, other ICPs, resellers,
competitive access providers ("CAPs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. In addition, the development of new
technologies could give rise to significant new competitors to the Company. See
"--Dependence on ILECs."
The Company competes with long distance carriers in the provision of
interLATA long distance retail and wholesale carriers' carrier services. The
long distance market for telecommunications services orginating in one local
access and transport area ("LATA") and ending in another LATA ("interLATA")
consists of numerous competitors including AT&T, Sprint Corporation ("Sprint"),
MCI WorldCom ("WorldCom"), IXC Communications, Inc., Qwest Communications
International Inc. ("Qwest") and Excel Communications, Inc. ("Excel"). Other
competitors of the Company in the retail and carrier services markets are likely
to include RBOCs providing out-of-region (and, with the future removal of
regulatory barriers, in-region) long distance services, other competitive local
exchange carriers, microwave and satellite carriers, and private networks owned
by large end-users. The Company also may increasingly face competition from
firms offering long distance data and voice services over the Internet. Such
firms could enjoy a significant cost advantage because at this time they are not
required to pay carrier access charges or universal service fees. In addition,
the Company competes with direct marketers, equipment vendors and installers,
and telecommunications management companies with respect to certain portions of
its business. Many of the Company's existing and potential competitors have
financial, technical and other resources and customer bases and name recognition
far greater than those of the Company. The long distance business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline, which will adversely affect the Company's gross
margins as a percentage of revenues. In 1997, the FCC announced changes to its
interstate access rules that will reduce per-minute access charges and
substitute new per-line flat-rate monthly charges. These actions are expected to
reduce access rates. AT&T has committed to reducing its long distance rates to
reflect access cost reductions, and other competitors of the Company are likely
to make similar reductions. In such event, the Company may need to reduce its
rates to respond to competitive pressures. See "Business--Regulation."
The Telecommunications Act, other recent state legislative actions, and
current federal and state regulatory initiatives provide increased business
opportunities for the Company by removing or substantially reducing barriers to
local exchange competition. However, these new competitive opportunities are
expected to be accompanied by new competitive opportunities for the ILECs. It is
also expected that increased local competition will result in increased pricing
flexibility for, and relaxation of regulatory oversight of, the ILECs. If the
ILECs are permitted to engage in increased volume and discount pricing practices
or charge competitive local exchange carriers increased fees for interconnection
to their networks, or if the ILECs seek to delay implementation of
interconnection by competitors to their networks,
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the Company's results of operations and financial condition could be adversely
affected. For example, the FCC recently provided that pre-subscribed interchange
carrier charges (or "PIC-C charges") would be required to be paid by long
distance carriers to the local exchange carriers which are intended to partially
offset lowered interstate access rates. There can be no assurance that the
Company will be able to achieve or maintain adequate market share or revenues,
or compete effectively in any of its markets.
The Company believes that the principal competitive factors affecting its
business operations are price, quality, reliability, billing and customer
service and responsiveness, and service features. The ability of the Company to
compete effectively will depend upon its continued ability to maintain high
quality, market-driven services at prices generally equal to or below those
charged by its competitors. To maintain its competitive posture, the Company
believes that it must be in a position to reduce its prices in order to meet
reductions in rates, if any, offered by others. Any such reductions could
adversely affect the Company.
In addition, the recent trend toward mergers and strategic alliances among
RBOCs and larger telecommunications carriers since passage of the
Telecommunications Act raises serious questions about the adverse effect of
these mergers and alliances upon the development of competition in the
telecommunications industry. On June 24, 1998, AT&T announced its proposed
acquisition of Tele-Communications, Inc. On May 11, 1998, SBC and Ameritech
announced their merger which, if approved, would reduce the seven original RBOCs
to four. If approved, this merger would leave one RBOC, SBC, with control of a
significant portion of local exchange and business access lines in the U.S. It
also will significantly reduce competition between RBOCs, such as Ameritech's
previously announced plans to launch local service in Texas and St. Louis,
Missouri in 1998 and in other markets within SBC's region. At the same time,
SBC's competitors have won less than two percent of SBC's market share in its
local markets as a whole. SBC already has merged with Pacific Bell, and a merger
with Southern New England Telecommunications in Connecticut is pending. Two
other RBOCs, Bell Atlantic and NYNEX, have also merged. Worldcom has acquired
MFS Communications Co., Inc., Brooks Fiber Properties, Inc. and MCI. In January
1998, AT&T announced plans to acquire another ICP, Teleport Communications Group
Inc. ("Teleport"). In June 1998, Qwest acquired LCI. On May 6, 1998 US WEST
Communications, Inc. ("US WEST") announced that it had entered into a marketing
arrangement with Qwest whereby US WEST would market Qwest long distance services
to US WEST's in-region customers. One week later, Ameritech announced a similar
marketing arrangement with Qwest to market long distance services to Ameritech's
in-region customers. On May 14 and 15, 1998 a coalition of ICPs and
interexchange carriers filed suits in federal district courts in Seattle and
Chicago seeking a declaratory ruling that US WEST and Ameritech are providing
long distance services in violation of the Telecommunications Act. The
plaintiffs are seeking a preliminary and final injunction prohibiting US WEST
and Ameritech from marketing in their regions the long distance services of
Qwest or any other long distance carrier. On June 4, 1998, the federal district
court in Seattle granted the coalition's request for a preliminary injunction
preventing US WEST from marketing to additional customers under its Qwest
teaming agreement. On June 10, 1998, the federal district court in Chicago
denied a preliminary injunction of the Ameritech/Qwest joint marketing
agreement; however, on June 30, 1998, the FCC ordered Ameritech to cease
marketing Qwest long distance service for 90 days while the FCC rules on the
legality of the joint marketing agreement. In March 1997 BellSouth and
International Business Machines Corporation ("IBM") also announced an alliance
to provide Internet and intranet services to businesses in the southern United
States.
To complement its telecommunications services offerings, the Company offers
data transmission services. The data transmission business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline. The Company's competitors in this market
include Internet service providers ("ISPs"), other telecommunications companies,
online service providers and Internet software providers. Many of the Company's
competitors have greater financial, technological, marketing, personnel and
other resources than those available to the Company. The profitability of the
Company's Internet access services may be adversely affected by its ability to
obtain "peering" arrangements with ISPs. In recent years, major ISPs routinely
exchanged traffic with other ISPs that met certain
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technical criteria on a "peering" basis, meaning that each ISP accepted traffic
routed to Internet addresses on its system from its "peers" on a reciprocal
basis, without payment of compensation. In 1997, however, UUNET Technologies,
Inc. ("UUNET"), the largest ISP, announced that it intends to greatly restrict
its use of peering arrangements with other providers, and would impose charges
for accepting traffic from providers other than its "peers." Other major ISPs
have reportedly adopted similar policies. There can be no assurance that the
Company will be able to negotiate "peer" status with any of the major nationwide
ISPs, or that it will be able to terminate traffic on ISPs' networks at
favorable prices. In addition, the merger between WorldCom (UUNET's parent) and
MCI (another major ISP) is expected to increase the concentration of market
power to ISP backbone services, and may adversely affect the Company's ability
to obtain favorable peering terms.
In February 1998, US WEST, Bell Atlantic and Ameritech, petitioned the FCC
under Section 706 of the Telecommunications Act to allow them to build and
operate packet- and cell-switched data networks across LATA boundaries, to
permit them to carry interLATA data traffic incident to their provision of
digital subscriber line services, to not require them to make those data
services available on a discounted resale basis, and to not require them to make
the non-bottleneck elements of such services available on an unbundled basis.
The Company provides or may provide certain services with which these proposed
services (or similar services offered by other RBOCs) would compete if these
petitions are granted by the FCC.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. Under this agreement, the United States and 72 other members of the WTO
committed themselves to opening their telecommunications markets to competition
and foreign ownership and to adopting regulatory measures to protect against
anticompetitive behavior by dominant telephone companies effective in some cases
as early as January 1, 1998.
The Company also believes that providers of wireless services increasingly
will offer, in addition to products that supplement a customer's wireline
communications (similar to cellular telephone services in use today), wireline
replacement products that may result in wireless services becoming the
customer's primary mode of communications. Competition with providers of
wireless telecommunications services may be intense. Many of the Company's
potential wireless competitors have substantially greater financial, technical,
marketing, sales, manufacturing and distribution resources than those of the
Company. Furthermore, the FCC has made spectrum available through public auction
over the past several years and most recently in early 1998 for use in wireless
communications. This additional spectrum is intended by the FCC to be used for
broadband, data and video and transmission but its use in wireless local loop is
also possible.
In connection with the Company's fiber business, its competitors may build
additional fiber capacity in the geographic areas served by the Company's fiber
optic operations. The Company believes that other companies are building new
nationwide long-haul fiber optic networks. In addition, many telecommunications
companies are acquiring switches, and users of switches will have an increasing
number of alternative providers of switched long-distance services. The Company
competes primarily on the basis of price, availability, transmission quality,
customer service and a variety of other services. The ability of the Company to
compete effectively in the fiber business will depend on its ability to maintain
high-quality services at prices generally equal to or below those charged by its
competitors.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. The effect of technological changes on the business of the
Company, such as changes relating to emerging wireline and wireless transmission
technologies and the use of the Internet for traditional voice, data or
broadband technology cannot be predicted, and there can be no assurance that
technological developments will not have a material adverse effect on the
Company. In addition, the Company may be required to select in advance one
technology over another, but it will be impossible to predict with any
certainty, at the time the Company is required to make its investment, which
technology will prove to be the most economic,
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efficient or capable of attracting customer usage. There can be no assurance
that the Company will be able to obtain access to new technology on a timely
basis or on satisfactory terms. Any failure by the Company to obtain new
technology could have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. The Company believes that its ability to manage its
planned growth successfully will depend in large part on its continued ability
to attract and retain highly skilled and qualified operating, marketing,
financial, sales and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and there can be no
assurance that the Company will be able to hire or retain necessary personnel.
See "--Risks Associated with Acquisitions; Ability to Manage Growth."
REGULATION
The Company is required to obtain certain authorizations from the FCC and
state public utility commissions ("PUCs") to offer certain of its
telecommunications services, as well as file tariffs for many of its services.
In October 1996, the FCC approved an order that eliminated the tariff filing
requirements for interstate domestic long distance provided by non-dominant
carriers, such as the Company. In February 1997, the U.S. Court of Appeals for
the District of Columbia Circuit stayed the FCC order pending appeal on the
merits. If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer interstate
services. To date the Company has not experienced significant difficulties in
receiving certification, maintaining tariffs or otherwise complying with its
regulatory obligations. The Company will face new regulatory obligations as it
enters new local telephone markets. It also is likely that state PUCs will
regulate the local telephone services offered by the Company and other
competitive local exchange carriers more heavily than competitive long distance
services have been regulated in the past. Because the FCC and the states have
yet to adopt many of the rules and policies necessary to fully implement local
telephone competition, or to respond to other related issues, it is uncertain
how burdensome these requirements will be for the Company. There can be no
assurance that the FCC or state commissions will continue to grant required
authority as the Company expands its business. If authority is not obtained or
if tariffs are not filed, or are not updated, or otherwise do not fully comply
with the tariff filing rules of the FCC or state regulatory agencies, third
parties or regulators could challenge these actions. Such challenges could cause
the Company to incur substantial legal and administrative expenses. In addition,
the Company must obtain prior FCC authorization for the provision of
international long distance services.
In addition, the Company's ability to provide local telephone service is
heavily dependent upon implementation of the provisions of the
Telecommunications Act. The Telecommunications Act preempted state and local
laws to the extent that they prohibited local telephone competition, and imposed
a variety of new duties on ILECs intended to advance such competition, including
the duty to negotiate in good faith with competitors requesting interconnection
to the incumbent local exchange carrier's network. However, negotiations with
ILECs have sometimes involved considerable delays and the resulting negotiated
agreements may not necessarily be obtained on terms and conditions that are
acceptable to the Company. In such instances, the Company may petition the
proper state commission to arbitrate disputed issues. There can be no assurance
that the Company will be able to negotiate acceptable new interconnection
agreements with ILECs or that commission-arbitrated terms and conditions on the
parties in arbitration will be acceptable to the Company. Interconnection
agreements are also subject to approval by state commissions, often before the
Company can begin to utilize such agreements in that state. The Company also
faces issues related to implementation of the Interconnection Agreements.
On August 8, 1996, the FCC adopted rules and policies implementing the local
competition provisions of the Telecommunications Act, including interconnection
obligations of all telecommunications carriers,
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including obligations of ICPs and LECs, and ILEC pricing of interconnection,
unbundled elements and resold services ("Local Competition Order"). These rules,
in general, were considered favorable to new competitive entrants, but these
rules have not been fully implemented. The FCC's rules were challenged in the
federal courts by the RBOCs, GTE, large independent ILECs and state regulatory
commissions. In October 1996, the U.S. Court of Appeals for the Eighth Circuit
("Eighth Circuit") issued a stay of the implementation of certain of the FCC's
rules, and on July 18 and October 14, 1997, the Eighth Circuit issued decisions
finding that the FCC lacked statutory authority under the Telecommunications Act
for a major portion of its rules. In particular, the Eighth Circuit found that
the FCC was not empowered to establish national pricing standards governing
unbundled local network elements or wholesale local services of the ILECs, or to
require such carriers to provide network elements in a combined form. The Eighth
Circuit also struck down an FCC rule that would have enabled new entrants to
"pick and choose" from provisions of established interconnection agreements
between the ILECs and other carriers. The overall impact of the Eighth Circuit's
decision is to limit the obligations of ILECs as originally interpreted by the
FCC, materially reduce the jurisdictional role of the FCC in fostering local
competition, including its ability to take enforcement action if the
Telecommunications Act is violated, and increase the role of state utility
commissions. On January 26, 1998, the Supreme Court granted petitions by the FCC
and other parties to review the Eighth Circuit decisions. A decision from the
Supreme Court is not expected until early 1999. Meanwhile, certain state
commissions have asserted that they will be active in promoting local telephone
competition using the authority they have under the Eighth Circuit decisions,
lessening the significance of the reduced FCC role. At this time it is premature
to assess the impact of the Eighth Circuit decisions and there can be no
assurance that those decisions and related developments will not have a material
adverse effect on the Company. Indeed, a number of state commissions have set
prices for unbundled network elements that are substantially higher and
wholesale discount rates lower for resale services than the Local Competition
Orders provided on an interim basis. Furthermore, other FCC rules related to
local telephone competition remain the subject of legal challenges, and there
can be no assurance that decisions affecting those rules will not be adverse to
companies seeking to enter the local telephone market.
In a related development, the FCC is considering proposed new policies and
rules that would grant the ILECs additional flexibility in the pricing of
interstate access services, and states are considering or are expected to
consider incumbent local exchange carrier requests for similar regulatory relief
with respect to intrastate services. Such flexibility is likely to come first
for services offered in the business market. Any pricing flexibility or other
significant deregulation of the ILECs could have a material adverse effect on
the Company. The Company also could be adversely affected by FCC or state
regulatory decisions affecting access charges and universal service. See
"Business--Regulation."
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime (the "Universal Service
Order"). For example, the FCC established new subsidies for telecommunications
and information services provided to qualifying schools and libraries with an
annual cap of $2.3 billion and for services provided to rural health care
providers with an annual cap of $400.0 million. The FCC also expanded the
federal subsidies for local exchange telephone service provided to low-income
consumers. Providers of interstate telecommunications services, such as the
Company, as well as certain other entities, must pay for these programs. The
Company's share of these federal subsidy funds will be based on intrastate,
interstate and international "end user" gross telecommunications revenues
effective January 1, 1998. For the first two quarters of 1998, the assessment
for the rural, high cost and low income fund has been 3.19% and 3.14% of
interstate and international end user telecommunications revenues. For the same
period, the assessment for schools and libraries and rural health care funds
("S/L") was 0.76% of intrastate, interstate, and international end user
telecommunications services. However, while the FCC has proposed a slightly
lower assessment for the rural, high cost and low income fund for the third
quarter of 1998 (3.08%), the proposed S/L factor of 1.54% is more than double
the comparable rate for the second quarter. In the May 8th order, the FCC also
announced that it will soon revise its rules for subsidizing service provided to
consumers in high cost areas, which may result in further
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substantial increases in the overall cost of the subsidy program. Several
parties have appealed the May 8th order. Such appeals have been consolidated and
transferred to the United States Court of Appeals for the Fifth Circuit where
they are currently pending. In addition, on July 3, 1997, several ILECs filed a
petition for a stay of the May 8th order with the FCC. That petition is pending,
as well as several other petitions for administrative reconsideration.
On May 16, 1997, the FCC released an order revising its access charge rate
structure (the "Access Charge Reform Order"). The Access Charge Reform Order
substantially increases the costs that local exchange carriers which are subject
to the FCC's price cap rules ("price cap LECs"), recover through monthly,
non-traffic sensitive access charges and substantially decrease the costs that
price cap LECs recover through traffic sensitive access charges. In the order,
the FCC also announced its plan to bring interstate access rate levels more in
line with cost. The FCC has stated that this plan will grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets. The manner in which the FCC further
implements this approach to the lowering access charge levels could have a
material effect on the Company's ability to compete in providing interstate
access services and on the Company's ILEC operations. An October 1997 FCC access
charge decision, for example, requires local exchange carriers to provide
interexchange carriers with certain information about the number and types of
charges they impose on interexchange carriers' presubscribed customers. Several
parties have appealed the Access Charge Reform Order. Those appeals have been
consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
The Telecommunications Act potentially impacts the Company's ILEC
operations. Under previous regulations access charges contained implicit support
for high-cost areas. The FCC has initiated proceedings to overhaul the
contribution mechanism for federal support revenue. On May 16, 1997, the FCC
issued the Access Charge Reform Order that would remove implicit universal
service support from access revenues and place more emphasis for such support on
high cost support funds ("HCF") from state jurisdictions and federal universal
service funds ("USF"). To the extent reductions in access charges are not offset
by explicit universal service subsidies, this could have a material adverse
effect upon the Company's operations. Until such time as the appeals of the
Universal Service Order and/or Access Charge Reform Order are decided, there can
be no assurance of how either of these Orders will be implemented or enforced or
what effect the Orders will have on competition within the telecommunications
industry generally, or on the competitive position of the Company, in
particular.
The Company's rural ILEC operations are regulated in large part by the
Oklahoma Corporation Commission (the "OCC"). The OCC sets rates, terms and
conditions of service and mandates minimum service and quality of service
requirements. Changes in the regulation of its rural local exchanges could have
a material adverse effect on the Company. Dobson Telephone, like other companies
which operate in areas where, due to factors such as geographical conditions or
subscriber density, the cost to provide service is higher than normal, receives
support revenue from federal and state agencies. For the years ended December
31, 1995, 1996 and 1997, and six months ended June 30, 1997 and 1998, support
revenue accounted for, $4.3 million (30.9%), $5.2 million (36.1%), $5.5 million
(35.6%), $2.7 million (35.7%) and $2.4 million (30.9%), respectively, of the
Company's ILEC revenue.
In July 1997 the Oklahoma Telecommunications Act of 1997 (the "Oklahoma
Telecom Act") became effective. The Oklahoma Telecom Act created the Oklahoma
Universal Service Fund ("OUSF") with one of its stated purposes to promote and
ensure the availability of both primary universal services, at rates that are
reasonable and affordable, and special universal services, and to provide for
reasonably comparable services at affordable rates in rural areas as well as in
urban areas. The OUSF has been implemented so that funds can be made available
to eligible local exchange telecommunications service providers. The Company's
local exchange operations have been determined by the OCC to be eligible to
receive both federal universal funds and OUSF funds. The Oklahoma Telecom Act
specifically provides that eligible local exchange telecommunications service
providers are to receive OUSF funding to reimburse them for
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their reasonable investment and expenses incurred in providing universal
services which are not recovered from the federal universal service fund or any
other state or federal fund, for infrastructure expenditures or costs incurred
in response to facility or service requirements established by governmental
mandate and for other purposes deemed necessary by the OCC to preserve and
advance universal service. The OCC is promulgating rules to implement the
Oklahoma Telecom Act. The interpretation of the Oklahoma Telecom Act and
application of the OCC rules implementing the OUSF could have a material effect
on Company's wireline operations. With respect to federal support revenue, the
FCC has 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 higher than the norm. Such changes could have a material adverse effect
on the Company's rural local exchange operations.
FRAUDULENT CONVEYANCE STATUTES
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness and other obligations in connection with
the American Telco Acquisition, including the issuance of the Notes. If a court
were to find in a lawsuit by an unpaid creditor or representative of creditors
of the Company that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company: (i) was insolvent; (ii) was rendered insolvent
by reason of such incurrence; (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small
capital; or (iv) intended to incur or believed it would incur obligations beyond
its ability to pay such obligations as they mature, such court, subject to
applicable statutes of limitation, could determine to invalidate, in whole or in
part, such indebtedness and obligations as fraudulent conveyances or subordinate
such indebtedness and obligations to existing or future creditors of the
Company.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
became absolute and matured. On the basis of its historical financial
information, its recent operating history and other factors, the Company's
management believes that, after giving effect to indebtedness incurred in
connection with the American Telco Acquisition, the Company was not be rendered
insolvent, will have sufficient capital for the business in which it will be
engaged and will be able to pay its debts as they mature; however, management
has not obtained any independent opinion regarding such issues. In addition,
there can be no assurance as to what standard a court would apply in making such
determination. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
LACK OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFERABILITY OF OLD
NOTES
The Notes are a new issue of securities for which there is currently no
active trading market. The Notes may trade at a discount from their initial
offering price depending upon prevailing interest rates, the market for similar
securities, the financial condition and prospects of the Company and other
factors beyond the control of the Company, including general economic
conditions. The Company does not intend to apply for a listing or quotation of
the Notes. Although the Placement Agents have informed the Company that they
currently intend to make a market in the Notes, they are not obligated to do so,
and any such market making may be discontinued at any time without notice.
Accordingly, no assurance can be given as to the development or liquidity of any
trading market for the Notes.
The Old Notes have not been registered under the Securities Act or any state
securities laws and may not be offered or sold, except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws, or pursuant to an effective
registration statement. The Company has registered the New Notes under the
Securities Act and is obligated to use its best efforts to complete an exchange
offer for the Old Notes, but no assurance can be
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given as to the development of or liquidity of the trading market of the Notes
thereafter. See "Description of the Notes--Registration Rights."
CONTROL BY DOBSON COMMUNICATIONS CORPORATION
Dobson Communications is the ultimate parent of the Company. Substantially
all of Dobson Communications' outstanding Class A Common Stock is beneficially
owned by Everett R. Dobson, Dobson Communications' Chairman of the Board,
President and Chief Executive Officer, and his affiliates. Certain decisions
concerning the operations and financial structure of the Company may present a
conflict of interest between the holders of the capital stock of Dobson
Communications and the holders of the Notes. For example, if the Company
encounters financial difficulty or is unable to pay its debts as they mature,
the interests of the holders of the capital stock of Dobson Communications might
conflict with those of holders of the Notes. In addition, equity investors may
have an interest in the Company pursuing acquisitions, divestitures, financings
or other transactions that, in their judgment, could enhance their equity
investment in the Company, even though such transactions might involve risk to
the holders of the Notes.
FORWARD-LOOKING STATEMENTS
The description of the Company's plans set forth herein, including the
Company's plans and strategies, 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 or which are dependent on future events for
their accuracy, are forward-looking statements. 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 such 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; 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.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on June 12, 1998 to Morgan Stanley &
Co. Incorporated and NationsBanc Montgomery Securities LLC (together, the
"Placement Agents") in reliance on Section 4(2) of the Securities Act. The
Placement Agents offered and sold the Old Notes only (i) to "qualified
institutional buyers" (as defined in Rule 144A) in compliance with Rule 144A and
(ii) outside the United States to persons other than U.S. Persons, which term
includes dealers or other professional fiduciaries in the United States acting
on a discretionary basis for foreign beneficial owners (other than an estate or
trust), in reliance upon Regulation S under the Securities Act.
In connection with the sale of the Old Notes, the Company and the Placement
Agents entered into a Registration Rights Agreement dated as of June 12, 1998,
which required the Company to file with the Commission a registration statement
under the Securities Act with respect to the New Notes and use its best efforts
to cause such registration statement to become effective under the Securities
Act and, upon the effectiveness of that registration statement, to offer to the
holders of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and which may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is being made pursuant to the
Registration Rights Agreement to satisfy the Company's obligations thereunder.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the Company's books or any other person who has
obtained a properly completed stock power from the registered holder, or any
person whose Old Notes are held of record by The Depository Trust Company
("DTC") who desires to deliver such Old Notes by book-entry transfer at DTC.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. Each broker-dealer (other than an
affiliate of the Company) that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. The Company has
agreed that, for a period of 180 days after the Exchange Date, it will make the
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
26
<PAGE>
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is the holder, (ii)
neither the holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, (iii) if the holder is not a broker-dealer, or is a broker-dealer but
will not receive New Notes for its own account in exchange for Old Notes,
neither the holder nor any such other person is engaged in or intends to
participate in the distribution of such New Notes, and (iv) neither the holder
nor any such other person is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act or, if such holder is an "affiliate," that
such holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
Following the completion of the Exchange Offer, none of the Old Notes will
be entitled to the contingent increase in interest rate applicable to the Old
Notes. Following the consummation of the Exchange Offer, holders of Old Notes
will not have any further registration rights, and the Old Notes will continue
to be subject to certain restrictions on transfer. See "--Consequences of
Failure to Exchange." Accordingly, the liquidity of the market for the Old Notes
could be adversely affected. See "Risk Factors-- Consequences of the Exchange
Offer on Non-Tendering holders of the Old Notes."
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes may wish to
consult their own financial advisors and tax advisors with respect to their
particular tax situation in making their own decisions on whether to participate
in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
New Notes in exchange for each $1,000 principal amount of Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in amounts that
are integral multiples of $1,000 principal amount.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that the New Notes will
be registered under the Securities Act and, therefore, certificates representing
New Notes will not bear legends restricting the transfer thereof. The New Notes
will evidence the same debt as the Old Notes, will be entitled to the benefits
of the Indenture and will be treated as a single class thereunder with any Old
Notes that remain outstanding. The Exchange Offer is not conditioned upon any
minimum number of Old Notes being tendered for exchange.
As of November 6, 1998, $350,000,000 aggregate principal amount of the Old
Notes were outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Oklahoma General Corporation Act or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue, but such Old Notes will not be entitled to any rights or benefits under
the Registration Rights Agreement.
27
<PAGE>
The Company will be deemed to have accepted validly tendered Old Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purposes of receiving the New Notes from the Company. If any tendered Old Notes
are not accepted for exchange because of an invalid tender, the occurrence of
certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on December 10, 1998, unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although the Company has no current intention to extend the
Exchange Offer, the Company reserves the right to extend the Exchange Offer at
any time and from time to time by giving oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service. During any extension of the Exchange Offer, all Old Notes previously
tendered pursuant to the Exchange Offer and not withdrawn will remain subject to
the Exchange Offer. The date of the exchange of the New Notes for Old Notes will
be as soon as practicable following the Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions of
the Exchange Offer" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders. If the
Exchange Offer is amended in any manner determined by the Company to constitute
a material change, the Company will promptly disclose such amendment by means of
a prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of time, depending upon
the significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
In all cases, issuance of the New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a properly completed and duly executed Letter of
Transmittal and all other required documents; provided, however, that the
Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Old Notes. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes or substitute Old Notes evidencing the unaccepted portion, as appropriate,
will be returned without expense to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as promptly as practicable after the
expiration or termination of the Exchange Offer.
INTEREST ON THE NEW NOTES. Holders of Old Notes that are accepted for
exchange will not receive accrued interest thereon at the time of exchange.
However, each New Note will bear interest from the most recent date to which
interest has been paid on the Old Notes or New Notes, or if no interest has been
paid on the Old Notes or the New Notes, from June 12, 1998.
28
<PAGE>
PROCEDURES FOR TENDERING OLD NOTES. The tender to the Company of Old Notes
by a holder thereof pursuant to one of the procedures set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below), or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC (also referred to as a book-entry facility) whose name
appears on a security listing as the owner of Old Notes), the signature of such
signer need not be guaranteed. In any other case, the tendered Old Notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered holder and the signature on
the endorsement or instrument of transfer must be guaranteed by an eligible
guarantor institution which is a member of one of the following recognized
signature guarantee programs (an "Eligible Institution"): (i) The Securities
Transfer Agents Medallion Program (STAMP), (ii) The New York Stock Exchange
Medallion Signature Program (MSF), or (iii) The Stock Exchange Medallion Program
(SEMP). If the New Notes or Old Notes not exchanged are to be delivered to an
address other than that of the registered holder appearing on the note register
for the Old Notes, the signature in the Letter of Transmittal must be guaranteed
by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences, that DTC establish an account
with respect to the Old Notes for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes
so tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Old Notes which are the
subject of such Book-Entry Confirmation and that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
29
<PAGE>
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided below) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided below) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the Company, the Exchange Agent or any
other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. Any Old Notes received by the Exchange Agent that are not validly
tendered and as to which the defects or irregularities have not been cured or
waived, or if Old Notes are submitted in principal amount greater than the
principal amount of Old Notes being tendered by such tendering holder, such
unaccepted or non-exchanged Old Notes will be returned by the Exchange Agent to
the tendering holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (a) to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date, and (b) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES. If the holder desires to accept the
Exchange Offer and time will not permit a Letter of Transmittal or Old Notes to
reach the Exchange Agent before the Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Exchange Agent has received at its office, on or prior to the
Expiration Date, a letter, telegram or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Notes are registered and the certificate number(s) of
the Old Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days after
the date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, such Old Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at DTC), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by the above-described
method are deposited with the Exchange Agent within the time period set forth
above (accompanied or preceded by a properly competed Letter of Transmittal and
any other required documents), the Company may, at its option, reject the
tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
Exchange Agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor") exchanges,
assigns and transfers the Old Notes to the Company and irrevocably constitutes
and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact
to cause the Old Notes to be assigned, transferred and exchanged. The Transferor
represents and warrants that it has full power and authority to tender,
exchange, assign and
30
<PAGE>
transfer the Old Notes and to acquire New Notes issuable upon the exchange of
such tendered Old Notes, and that, when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Old Notes, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Notes or to transfer ownership of such Old Notes on the account
books maintained by DTC. All authority conferred by the Transferor will survive
the death, bankruptcy or incapacity of the Transferor and every obligation of
the Transferor shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and other
legal representatives of such Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
the representations set forth above under the heading "--Purpose and Effect of
the Exchange Offer."
WITHDRAWAL OF TENDERS OF OLD NOTES. Except as otherwise provided herein,
tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (iii) contain a statement that
such holder is withdrawing its election to have such Old Notes exchanged, (iv)
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes in the name of the person withdrawing the tender, and
(v) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at the book-entry transfer facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under
"--Procedures for Tendering Old Notes" at any time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company shall not be required to accept for exchange, or
exchange New Notes for, any Old Notes, and may terminate the Exchange Offer as
provided herein on or before the Expiration Date, if:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the reasonable judgment of the Company, would prohibit, restrict or
otherwise render illegal consummation of the Exchange Offer; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the reasonable judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or materially impair the contemplated benefits of the Exchange Offer
to the Company; or
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<PAGE>
(c) there shall occur a change in the current interpretations by the
staff of the Commission which, in the Company's reasonable judgment, might
materially impair the Company's ability to proceed with the Exchange Offer
and the Company does not wave such event or change.
If the Company determines in its sole discretion that any of the above
conditions have not been satisfied on or prior to the Expiration Date, the
Company may (i) refuse to accept any Old Notes and return all tendered Old Notes
to the tendering holders, (ii) extend the Exchange Offer and retain all Old
Notes tendered prior to the Expiration Date, subject, however, to the right of
holders to withdraw such Old Notes (see "--Terms of the Exchange
Offer--Withdrawal of Tenders of Old Notes"), or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all validly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer for a period of time,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during such
period.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
United States Trust Company United States Trust Company United States Trust Company
of New York of New York of New York
P. O. Box 844 Corporate Trust Operations 111 Broadway
Cooper Station Department Lower Level
New York, NY 10276-0844 770 Broadway - 13th Floor New York, NY 10006
Attn: Corporate Trust New York, NY 10003 Attn: Corporate Trust
Services (registered or Services
certified mail recommended)
</TABLE>
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by Telephone:
(800) 548-6565
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable
32
<PAGE>
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
the Letter of Transmittal and related documents to the beneficial owners of the
Old Notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and transfer agent and registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, New Notes, or Old
Notes for principal amounts not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered or if a transfer tax is imposed for
any reason other than the exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities within the meaning of Rule 144 of the
Securities Act. Accordingly, such Old Notes may be resold only (i) to the
Company or any subsidiary thereof, (ii) to a qualified institutional buyer in
compliance with Rule 144A, (iii) to an institutional accredited investor that,
prior to such transfer, furnishes to the Trustee a signed letter containing
certain representations and agreements relating to the restrictions on transfer
of the Old Notes (the form of which letter can be obtained from the Trustee)
and, if such transfer is in respect of an aggregate principal amount of Old
Notes at the time of transfer of less than $100,000, an opinion of counsel
acceptable to the Company that such transfer is in compliance with the
Securities Act, (iv) outside the United States in compliance with Rule 904 under
the Securities Act, (v) pursuant to the exemption from registration provided by
Section 4(2) of under the Securities Act, and Rule 144 adopted thereunder (if
available), or (vi) pursuant to an effective registration statement under the
Securities Act. The liquidity of the Old Notes could be adversely affected by
the Exchange Offer. Following the consummation of the Exchange Offer, holders of
the Senior Preferred Stock will have no further registration rights under the
Registration Rights Agreement and will not be entitled to the contingent
increase in the dividend rate applicable to the Old Notes.
33
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain historical consolidated financial
data for Logix. The selected consolidated financial data as of and for the years
ended December 31, 1993, 1994, 1995, 1996 and 1997 were derived from the
Company's audited consolidated financial statements which have been audited by
Arthur Andersen LLP, independent public accountants. The selected consolidated
financial data as of and for the six months ended June 30, 1997 and 1998 were
derived from unaudited consolidated financial statements, which in the opinion
of management, have been prepared on the same basis as the Company's audited
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
Company's result of operations and financial position for such periods and as of
such dates. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the full year. The
pro forma consolidated statements of operations data give effect to the American
Telco Acquisition and the offering of the Old Notes as if they occurred on
January 1, 1997 and the pro forma consolidated balance sheet data give effect to
the American Telco Acquisition and the offering of the Old Notes as if they
occured on June 30, 1998. The unaudited selected pro forma consolidated
financial data are based on currently available information and certain
assumptions that management believes are reasonable. The pro forma consolidated
financial information does note purport to represent what the Company's results
of operations would have been if the American Telco acquisition and the offering
of the Old Notes had been completed on such dates, nor does it purport to
indicate the future financial position or results of future operations of the
Company. The information set forth below financial data should be read in
conjunction with "Use of Proceeds," "Pro Forma Condensed Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue:
ILEC............. $ 11,182 $ 12,316 $ 13,697 $ 14,365 $ 15,361 $ 15,361 $ 7,702 $ 7,864 $ 7,864
Fiber............ 1,065 1,455 2,501 3,430 4,589 4,589 2,214 2,400 2,400
ICP (3).......... -- 100 67 113 227 52,268 76 4,371 33,899
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.......... 12,247 13,871 16,265 17,908 20,177 72,218 9,992 14,635 44,163
Operating expenses:
Cost of
service........ 1,970 2,195 2,471 2,823 3,269 32,723 1,337 6,264 23,854
Selling, general
and
administrative... 5,119 6,158 6,532 7,815 8,735 27,275 3,841 8,724 16,596
Depreciation and
amortization... 2,926 3,649 4,124 4,479 4,931 17,210 2,346 3,129 8,882
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses..... 10,015 12,002 13,127 15,117 16,935 77,208 7,524 18,117 49,332
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)........... 2,232 1,869 3,138 2,791 3,242 (4,990) 2,468 (3,482) (5,169)
Interest expense... (1,554) (1,775) (1,980) (2,194) (2,459) (46,534) (1,238) (2,721) (22,979)
Other income
(expense), net... (53) (253) (267) (83) 103 335 67 396 428
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before income
taxes,
extraordinary
items and
cumulative effect
of change in
accounting
principle........ 625 (159) 891 514 886 (51,189) 1,297 (5,807) (27,720)
Income tax
(provision)
benefit.......... (232) 49 (391) (183) (337) 1,245 (493) 718 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss)
before
extraordinary
items and
cumulative effect
of change in
accounting
principle........ 393 (110) 500 331 549 (49,944) 804 (5,089) (27,720)
Extraordinary item
(1).............. -- -- -- -- (217) -- (217) -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before cumulative
effect of change
in accounting
principle........ 393 (110) 500 331 332 (49,944) 587 (5,089) (27,720
Cumulative effect
of change in
accounting
principle (2).... 873 -- -- -- -- -- -- (699) --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)........... $ 1,266 $ (110) $ 500 $ 331 $ 332 $ (49,944) $ 587 $ (5,788) $ (27,720)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic net income
(loss) per common
share............ $ .018 $ (.002) $ .007 $ .005 $ .005 $ (.701) $ .008 $ (.081) $ (.389)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic weighted
average common
shares
outstanding...... 71,250,000 71,250,000 71,250,000 71,250,000 71,250,000 71,250,000 71,250,000 71,250,000 71,250,000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
-------------
<S> <C>
(IN
THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................................................................ $ 81,726
Property, plant and equipment, net............................................................... 44,681
Total assets..................................................................................... 407,654
Total debt....................................................................................... 378,004
Stockholder's equity............................................................................. 14,289
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA:
ILEC................................... $ 4,772 $ 4,791 $ 5,550 $ 5,532 $ 7,031 $ 7,031 $ 3,466 $ 4,324
Fiber.................................. 386 773 1,733 2,013 3,104 3,104 1,544 1,407
ICP.................................... -- (46) (21) (275) (1,962) 2,085 (196) (6,083)
--------- --------- --------- --------- --------- ----------- --------- ---------
Total................................ $ 5,158 $ 5,518 $ 7,262 $ 7,270 $ 8,173 $ 12,220 $ 4,814 $ (352)
--------- --------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- --------- ----------- --------- ---------
Depreciation and amortization:
ILEC................................... $ (2,259) $ (2,952) $ (3,185) $ (3,248) $ (3,260) $ (1,618) $ (1,563)
Fiber.................................. (667) (697) (925) (1,212) (1,421) (718) (680)
ICP.................................... -- -- (14) (19) (250) (10) (886)
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ (2,926) $ (3,649) $ (4,124) $ (4,479) $ (4,931) $ (2,346) $ (3,129)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Interest expense, net....................
ILEC................................... $ (1,092) $ (1,263) $ (1,368) $ (1,341) $ (1,283) $ (664) $ (539)
Fiber.................................. (438) (508) (608) (853) (1,161) (568) --
ICP.................................... -- -- -- -- -- -- (1,869)
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ (1,530) $ (1,771) $ (1,976) $ (2,194) $ (2,444) $ (1,232) $ (2,408)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
PRO FORMA
1998
-----------
<S> <C>
OTHER FINANCIAL DATA:
Adjusted EBITDA:
ILEC................................... $ 4,324
Fiber.................................. 1,407
ICP.................................... (2,018)
-----------
Total................................ $ 3,713
-----------
-----------
Depreciation and amortization:
ILEC...................................
Fiber..................................
ICP....................................
Total................................
Interest expense, net....................
ILEC...................................
Fiber..................................
ICP....................................
Total................................
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ --------------------
PRO FORMA
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other income, net........................
ILEC................................... $ 45 $ (95) $ (103) $ (18) $ (13) $ 19 $ 16
Fiber.................................. (122) (162) (168) (65) 101 42 66
ICP.................................... -- -- -- -- -- -- 1
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ (77) $ (257) $ (271) $ (83) $ 88 $ 61 $ 83
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
extraordinary items and cumulative
effect of change in accounting
principle
ILEC................................... $ 1,466 $ 481 $ 894 $ 925 $ 2,475 $ 1,203 $ 2,238
Fiber.................................. (841) (594) 32 (117) 623 300 793
ICP.................................... -- (46) (35) (294) (2,212) (206) (8,837)
--------- --------- --------- --------- --------- --------- ---------
Total................................ $ 625 $ (159) $ 891 $ 514 $ 886 $ 1,297 $ (5,806)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Cash flow provided by (used in):
Operating activities................... $ 5,382 $ 2,459 $ 3,659 $ 6,349 $ 3,704 $ 1,869 $ 1,390
Investing activities................... (5,530) (5,337) (4,191) (5,485) (3,460) (1,246) (136,932)
Financing activities................... 477 3,299 (239) (619) (619) (770) 217,014
Ratio of earnings to fixed charges (5)... 1.41x -- 1.45x 1.23x 1.36x -- 1.88x --
Capital expenditures..................... $ 4,569 $ 2,648 $ 2,357 $ 3,902 $ 5,442 9,529 $ 1,017 $ 6,140
OTHER DATA (AT PERIOD END):
Access lines............................. 10,899 11,322 11,806 11,959 12,724 20,674 12,446 35,667
Route miles (6).......................... 485 485 516 545 545 545 545 545
Fiber miles (7).......................... 10,817 10,817 11,189 11,537 11,554 11,559 11,554 11,554
Switches................................. 12 12 12 12 13 16 12 16
<CAPTION>
PRO FORMA
1998
-----------
<S> <C>
Other income, net........................
ILEC...................................
Fiber..................................
ICP....................................
Total................................
Income (loss) before income taxes
extraordinary items and cumulative
effect of change in accounting
principle
ILEC...................................
Fiber..................................
ICP....................................
Total................................
Cash flow provided by (used in):
Operating activities...................
Investing activities...................
Financing activities...................
Ratio of earnings to fixed charges (5)... --
Capital expenditures..................... 6,100
OTHER DATA (AT PERIOD END):
Access lines............................. 35,667
Route miles (6).......................... 595
Fiber miles (7).......................... 11,554
Switches................................. 16
</TABLE>
- ------------------------
(1) Extraordinary items reflect expense associated with early extinguishment of
debt, net of income tax benefit.
(2) Cumulative effect of change in accounting principle reflects the charge
taken, net of income tax benefit, as a result of the implementation of AICPA
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities,"
effective January 1, 1998, and the benefit, net of income tax expense, from
implementation of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," in 1993.
(3) ICP revenue includes network management services provided to affiliates of
Logix. For 1994, 1995 and 1996 and the six months ended June, 1997, network
management services account for all of the ICP revenue and for 1997 and the
six months ended June 30, 1998, for $124,000 and $35,200 of ICP revenue,
respectively.
(4) Adjusted EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, other income, extraordinary items, and
changes in accounting principles. Adjusted EBITDA is provided because it is
a measure commonly used in the industry and by the Company to assess a
company's operating performance and its ability to incur or service debt. In
addition, the Indenture governing the Notes contains certain covenant
requirements that are based on Adjusted EBITDA. See "Description of the
Notes-- Covenants." Adjusted EBITDA is not derived pursuant to generally
accepted accounting principles and should not be construed as an alternative
to net income, as a measure of performance, or to cash flows, as a measure
of liquidity. Adjusted EBITDA, as measured by the Company, may differ
significantly from similarly named measurements of other companies and, as a
consequence, may not provide any degree of reliable comparability. The
calculation of Adjusted EBITDA does not include the Company's commitments
for capital expenditures or payments of debts and should not be deemed to
represent funds available to the Company.
(5) For the year ended December 31, 1994 and six months ended June 30, 1998,
earnings were insufficient to cover fixed charges by $.2 million and $5.8
million, respectively. On a pro forma basis for the year ended December 31,
1997, and the six months ended June 30, 1998, earnings would have been
insufficient to cover fixed charges by $51.2 million and $27.7 million,
respectively. "Earnings" is defined as earnings before extraordinary items,
accounting changes and fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing costs, income taxes and a
portion of rent expense under operating leases representative of interest.
(6) Route miles refers to the number of miles over which fiber optic cables are
installed.
(7) Fiber miles refers to the number of route miles multiplied by the number of
fibers installed along that path.
36
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations have been prepared to give effect to the American Telco Acquisition
and the Offering. The accompanying unaudited pro forma condensed consolidated
statements of operations of the Company for the year ended December 31, 1997 and
for the six months ended June 30, 1998 give effect to the American Telco
Acquisition and the Offering as if they occurred on January 1, 1997. The
American Telco Acquisition and the Offering occurred in the second quarter of
1998, and thus are reflected in the historical June 30, 1998 balance sheet. The
American Telco Acquisition has been accounted for using the purchase method of
accounting.
The unaudited pro forma condensed consolidated statements of operations have
been prepared on the basis of certain assumptions that Logix believes are
reasonable. Management of the Company believes there will be no variations from
the information and assumptions applied which will have a material effect on the
pro forma financial statements presented, based on estimates of fair value using
available information provided by the management of American Telco.
The unaudited pro forma condensed consolidated statements of of operations
and notes thereto are provided for informational purposes only and do not
purport to be indicative of the results that would have actually been obtained
had the American Telco Acquisition and Offering been completed on the dates
indicated or that may be expected to occur in the future. The unaudited pro
forma condensed consolidated statements of operations and notes thereto should
be read in conjunction with "Selected Consolidated Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the historical financial statements and notes
thereto included elsewhere in this Prospectus.
37
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN
LOGIX TELCO (1) ADJUSTMENTS PRO FORMA
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
ILEC revenue................................................ $ 7,864 $ -- $ -- $ 7,864
Fiber revenue............................................... 2,400 -- -- 2,400
ICP revenue................................................. 4,371 29,528 -- 33,899
------------- ----------- -------------- -------------
Total revenue............................................. 14,635 29,528 -- 44,163
------------- ----------- -------------- -------------
Operating expenses:
Cost of service............................................. 6,264 17,590 -- 23,854
Selling, general and administrative......................... 8,724 7,872 -- 16,596
Depreciation and amortization............................... 3,129 1,317 4,436(2) 8,882
------------- ----------- -------------- -------------
Total operating expenses.................................. 18,117 26,779 4,436 49,332
------------- ----------- -------------- -------------
Operating income (loss)....................................... (3,482) 2,749 (4,436) (5,169)
Interest expense.............................................. (2,721) (86) (20,172)(3) (22,979)
Other income (expense), net................................... 396 32 -- 428
------------- ----------- -------------- -------------
Income (loss) before income taxes............................. (5,807) 2,695 (24,608) (27,720)
Income tax (provision) benefit................................ 718 -- (718)(4) --
------------- ----------- -------------- -------------
Income (loss) before extraordinary items and cumulative effect
of change in accounting principle........................... $ (5,089) $ 2,695 $ (25,326) $ (27,720)
------------- ----------- -------------- -------------
------------- ----------- -------------- -------------
Basic income (loss) before extraordinary items and cumulative
effect of change in accounting principles per share......... $ (.071) $ (.389)
------------- -------------
------------- -------------
Basic weighted average common shares outstanding.............. 71,250,000 71,250,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated statement of operations.
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(1) To reflect the results of operations for American Telco from January 1, 1998
to the date of closing.
(2) To reflect the adjustment to depreciation and amortization resulting from
the allocation of the purchase price to the fixed and intangible assets of
American Telco. The amount of historical depreciation and amortization for
American Telco was $1.3 million. The amount of depreciation and amortization
resulting from the allocation of purchase price is $5.7 million, which
increase is primarily the result of the amortization of goodwill. American
Telco had historically depreciated fixed assets over periods from one to
seven years. The Company has assessed the remaining useful lives of the
fixed assets acquired from American Telco and will utilize lives similar to
those utilized by American Telco. Goodwill will be amortized over a 15 year
period.
(3) To reflect (i) the elimination of $.1 million of interest expense associated
with indebtedness of American Telco, which was repaid by the sellers of
American Telco upon consummation of the American Telco Acquisition, (ii)
$19.7 million of interest expense relating to the Notes and (iii) $.6
million of amortization expense relating to amortization of the deferred
financing costs incurred in connection with the Offering.
(4) To reflect an adjustment to income tax expense for effects of the American
Telco Acquisition. Net operating loss carryforwards generated have been
recognized as an income tax benefit, assuming a 38% statutory tax rate.
Recognition of tax benefit has been limited to the extent that the Company
had a previously recorded deferred tax liability since it is more likely
than not that any excess tax benefit would not be recognized. For the six
months ended June 30, 1998, no benefit is recognized, as the previously
recorded deferred tax liability is assumed to be fully utilized in 1997.
39
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN
LOGIX TELCO ADJUSTMENTS PRO FORMA
------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
ILEC revenue................................................ $ 15,361 $ -- $ -- $ 15,361
Fiber revenue............................................... 4,589 -- -- 4,589
ICP revenue................................................. 227 52,041 -- 52,268
------------- ----------- -------------- -------------
Total revenue............................................. 20,177 52,041 -- 72,218
------------- ----------- -------------- -------------
Operating expenses:
Cost of service............................................. 3,269 29,454 -- 32,723
Selling, general and administrative......................... 8,735 18,540 -- 27,275
Depreciation and amortization............................... 4,931 2,601 9,678 (1) 17,210
------------- ----------- -------------- -------------
Total operating expenses.................................. 16,935 50,595 9,678 77,208
------------- ----------- -------------- -------------
Operating income (loss)....................................... 3,242 1,446 (9,678) (4,990)
Interest expense.............................................. (2,459) (200) (43,875)(2) (46,534)
Other income (expense), net................................... 103 232 -- 335
------------- ----------- -------------- -------------
Income (loss) before income taxes............................. 886 1,478 (53,553) (51,189)
Income tax (provision) benefit................................ (337) -- 1,582 (3) 1,245
------------- ----------- -------------- -------------
Income (loss) before extraordinary items...................... $ 549 $ 1,478 $ (51,971) $ (49,944)
------------- ----------- -------------- -------------
------------- ----------- -------------- -------------
Basic income (loss) before extraordinary items
per share................................................... $ .008 $ (.701)
------------- -------------
------------- -------------
Basic weighted average common shares outstanding.............. 71,250,000 71,250,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to the unaudited pro forma
condensed consolidated financial statement of operations.
40
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(1) To reflect the adjustment to depreciation and amortization resulting from
the allocation of the purchase price to the fixed and intangible assets of
American Telco. The amount of historical depreciation and amortization for
American Telco was $2.6 million. The amount of depreciation and amortization
resulting from the allocation of purchase price is $12.3 million, which
increase is primarily the result of the amortization of goodwill. American
Telco had historically depreciated fixed assets over periods from one to
seven years. The Company has assessed the remaining useful lives of the
fixed assets acquired from American Telco and will utilize lives similar to
those utilized by American Telco. Goodwill will be amortized over a 15 year
period.
(2) To reflect (i) the elimination of $.2 million of interest expense associated
with indebtedness of American Telco, which was repaid by the sellers of
American Telco upon consummation of the American Telco Acquisition, (ii)
$42.9 million of interest expense relating to the Notes, and (iii) $1.2
million of amortization expense relating to amortization of the deferred
financing costs incurred in connection with the Offering.
(3) To reflect an adjustment to income tax expense for effects of the American
Telco Acquisition. Net operating loss carryforwards generated have been
recognized as an income tax benefit, assuming a 38% statutory tax rate.
Recognition of tax benefit has been limited to the extent that the Company
had a previously recorded deferred tax liability since it is more likely
than not that any excess tax benefit would not be recognized.
41
<PAGE>
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 the Southwest United States. Since 1936, the Company,
through its predecessor and subsidiaries, has provided ILEC services in Oklahoma
through its subsidiary Dobson Telephone Company. In addition, the Company
operates long-haul fiber optic facilities in Oklahoma, Texas and Colorado. In
1997, the Company began offering facilities-based ICP services in Oklahoma under
its LOGIX-TM- 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
LOGIX
ILEC OPERATIONS. The Company's 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 December 31, 1995, 1996
and 1997 and June 30, 1997 and 1998, the ILEC operations served 11,806, 11,959,
12,633, 12,446 and 12,932 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 30.9%, 36.1%, 35.6%, 35.7% and 30.9% of Logix's
revenue from its ILEC operations, or $4.3 million, $5.2 million, $5.5 million,
$2.7 million and $2.4 million, for the years ended December 31, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998, 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. See "Risk
Factors--Regulation."
FIBER OPERATIONS. Logix's revenues from its fiber services are generated
from three different sources of long-haul transport services: (1) as a
"carrier's carrier," (2) to private businesses and government agencies requiring
network services, and (3) for Dobson Communications' other subsidiaries. For the
year ended December 31, 1997 and the six months ended June 30, 1998,
approximately 41% and 46%, respectively, of Logix's gross fiber revenue was
attributable to NTS Communication, Inc. and Vyvx, Inc. and approximately 25% and
30%, respectively, of its fiber revenue was attributable to Dobson
Communications' other subsidiaries. The total number of DS3 equivalent fiber
lines leased as of December 31, 1995, 1996, and 1997 and as of June 30, 1997 and
1998 were 20, 46, 53, 48, and 73, respectively.
42
<PAGE>
Although the Company currently has excess capacity and does not currently
plan to add more fiber optic lines, the Company will seek to expand its network
through interconnect agreements to access other major population centers
(including routes which may be attractive to major carriers). The Company
believes that the pricing of fiber will remain relatively constant in the near
future. While the pricing of the Company's fiber services has remained
relatively constant, the Company is entering into more long term contracts which
give discounts to the customer and the Company may be required to give discounts
to high volume customers.
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 network management services
provided to Company affiliates. For 1995 and 1996 and the six months ended June
30, 1997 network management services accounted for all ICP revenue and for 1997
and the six months ended June 30, 1998, for $124,000 and $35,200, 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 June 30, 1998, the Company's ICP operations served 22,735 access lines
(including those acquired in the American Telco Acquisition). 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.
Dobson Wireline incurred operating losses and negative cash flows from
operations and EBITDA related to its ICP services in 1997 and the six months
ended June 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 and fiber operations.
The Company offers ICP services at prices that are competitive to the ILECs.
The Company believes that while pricing is an important element in the marketing
of their services, small and medium-sized businesses are also focused on the
benefits from customer care, bundled telecommunications services with one point
of contact for sales and service, and consistent quality of service when making
their purchase decisions.
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.
AMERICAN TELCO
American Telco derived most of its revenue from the sale of long distance
service to small and medium-sized businesses and residential customers in Texas.
American Telco launched the sale of local service in March 1997, but only on a
limited basis until August 1997, while developing its back office
43
<PAGE>
systems and infrastructure to support local service. As of March 31, 1998,
American Telco had approximately 16,400 business customers and approximately
6,000 residential customers and served 13,410 local access lines. Business
customers represented approximately 95% of revenues for the year ended December
31, 1997 and six months ended June 30, 1998. The business customers are
diversified and no one customer accounted for more than .7% of total revenues
and substantially all of American Telco's revenue is derived from providing long
distance services. In addition, the Company believes that American Telco's
average revenue per minute of use will continue to decline as the Company adds a
higher proportion of business customers who generally have a higher volume of
usage and are therefore charged lower rates per minute than residential
customers. American Telco's customer base has been shifting as American Telco
has deemphasized its residential services.
American Telco's contracts for long distance services generally provide for
payment in arrears based on minutes of use. American Telco offers flat rate
plans with incentives for customers who commit to a term of one or two years.
Discounts are provided to customers based on the volume of usage.
COST AND EXPENSES
The Company's primary expense categories include cost of service, SG&A, and
depreciation and amortization.
Cost of service for Logix's ILEC and fiber operations consists primarily of
costs associated with operating and maintaining the Company's facilities and for
the fiber operations, costs associated with leasing lines from third party
providers.
Cost of service for the ICP operations (including American Telco's) consists
of 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 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 underutilization 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 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. Independent sales agents
receive commissions for generating new sales and ongoing sales to existing
customers. 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
44
<PAGE>
additional switches. Depreciation and amortization will include 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.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE. For the six months ended June 30, 1998, total revenue increased
$4.6 million, or 46.5%, to $14.6 million from $10.0 million in the first six
months of 1997. The following table sets forth the components of the Company's
revenue for the six months ended June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC....................................................... $ 7,702 $ 7,864
Fiber...................................................... 2,214 2,400
ICP........................................................ 76 4,371
--------- ---------
$ 9,992 $ 14,635
--------- ---------
--------- ---------
</TABLE>
ILEC. ILEC revenue increased $.2 million, or 2.1%, to $7.9 million for the
six months ended June 30, 1998 compared to $7.7 million for the six months ended
June 30, 1997 due primarily to an increase in toll charges and an increase in
the number of access lines from 12,446 as of June 30, 1997 to 12,932 as of June
30, 1998 offset by a $.3 million decrease in support revenue.
FIBER. The Company's revenue from its fiber operations increased $.2
million, or 8.4%, to $2.4 million in the six months ended June 30, 1998 from
$2.2 million in the first six months of 1997 due primarily to increased revenue
from new customers.
ICP. ICP revenue increased $4.3 million to $4.4 million for the six months
ended June 30, 1998 from $.1 million for the six months ended June 30, 1997. ICP
revenue in the first six months of 1998 consists primarily of charges for local
and long-distance service and equipment sales. ICP revenue includes network
management services provided to Company affiliates. For the six months ended
June 30, 1997 network management services accounted for all ICP revenue and
$35,200 for the six months ended June 30, 1998.
COST OF SERVICE. For the six months ended June 30, 1998, the total cost of
service increased $5.0 million, or 368.5%, to $6.3 million from $1.3 million in
comparable period in 1997.
The following table sets forth the components of the the Company's cost of
service for the six months ended June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC........................................................ $ 980 $ 1,017
Fiber....................................................... 261 577
ICP......................................................... 96 4,670
--------- ---------
Total................................................. $ 1,337 $ 6,264
--------- ---------
--------- ---------
</TABLE>
ILEC. Cost of ILEC service increased $37,000, or 3.8%, to $1.017 million
for the six months ended June 30, 1998 from $.98 million for the six months
ended June 30, 1997. As a percentage of ILEC revenue, cost of ILEC service
increased slightly from 12.7% in the six months ended June 30, 1997 to 12.9% in
the
45
<PAGE>
six months ended June 30, 1998 as a result of increased maintenance costs of
plant and costs associated with customer growth.
FIBER. Cost of fiber service increased $.3 million, or 121.1%, to $.6
million in the first six months of 1998 from $.3 million in the first six months
of 1997. The increase was primarily the result of service provided by certain
third party carriers incurred as a result of the addition of new customers.
ICP. Cost of ICP service increased $4.6 million to $4.7 million for the six
months ended June 30, 1998 from $.1 million for the first six 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 six months ended June 30,
1998 is $.1 million of costs related to network management services provided to
affiliates of Dobson Communications.
SELLING, GENERAL AND ADMINISTRATIVE. For the six months ended June 30,
1998, SG&A costs increased $4.9 million, or 127.1%, to $8.7 million compared to
$3.8 million in the first six 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 six months ended June 30,
1998, depreciation and amortization expense increased $.8 million, or 33.4%, to
$3.1 million from $2.3 million in the first six months of 1997. The ILEC and
Fiber segments' depreciation and amortization expense remained consistent
between periods at $1.6 million and $.7 million, respectively. The ICP segment's
depreciation and amortization expense increased $.9 million, to $.9 million for
the six months ended June 30, 1998. This increase is primarily a result of
depreciation and amortization on assets purchase 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 six months ended June 30, 1998, decreased $6.0 million
to a loss of $3.5 million from an income of $2.5 million in the first six months
of 1997.
INTEREST EXPENSE. Net interest expense for the six months ended June 30,
1998 increased $1.2 million, or 95.4%, to $2.4 million from $1.2 million for the
first six months of 1997. The ILEC segment's net interest expense decreased $.2
million, or 18.9%, to $.5 million in the first six months of 1998 from $.7
million in the first six months of 1997. The decrease is primarily the result of
paying off individual mortgage notes with higher interest rates. The Fiber
segment's net interest expense decreased $.6 million, or 100.0%, in the first
six months of 1998 from $.6 million in the first six months of 1997. The
decrease is a result of the December 31, 1997 Dobson Communications capital
contribution to the Company, which relieved the Fiber segment's outstanding
portion of the revolving credit facility and related interest expense payable to
Dobson Communications. The ICP segment's net interest expense increased $1.9
million, or 100.0%, to $1.9 million in the first six months of 1998. Of the
increase, $2.2 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 million of interest income earned on the funds held in escrow and cash on
hand from the issuance of the Notes.
OTHER INCOME. For the six months ended June 30, 1998, total other income
(consisting of equity in income of unconsolidated partnership and other income
(expense)) remained consistent at $.1 million compared to the first six months
of 1997.
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS. As a result of the
items discussed above, income before income taxes and extraordinary items for
the six months ended June 30, 1998, income before income taxes and extraordinary
items decreased $7.1 million to a loss of $5.8 million from an income of $1.3
million in the first six months of 1997.
46
<PAGE>
ILEC. Income before income taxes and extraordinary items from the Company's
ILEC operations increased $1.0 million to $2.2 million for the first six months
of 1998 from $1.2 million in the first six 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.
FIBER. Income before income taxes and extraordinary items from the
Company's fiber operations increased $.5 million to $.8 million for the first
six months of 1998 from $.3 million in the first six months of 1997. This is
primarily due to a decrease in interest expense in 1988, as a result of the
extinguishment of debt on December 31, 1997.
ICP. Income before income taxes and extraordinary items from the Company's
ICP operations decreased $8.9 million to a loss of $8.8 million for the first
six months of 1998 from a loss of $.2 million in the first six 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 six months of
1997 of $.2 million is due to the write-off of deferred debt costs associated
with the the Company's fiber operations.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of
change in accounting principle in the six months ended June 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. For the year ended December 31, 1997, total revenue increased $2.3
million, or 12.7%, to $20.2 million from $17.9 million in 1996. The following
table sets forth the components of Logix's revenue for the years ended December
31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC...................................................... $ 14,365 $ 15,361
Fiber..................................................... 3,430 4,589
ICP....................................................... 113 227
--------- ---------
$ 17,908 $ 20,177
--------- ---------
--------- ---------
</TABLE>
ILEC. ILEC revenue increased $1.0 million, or 6.9%, to $15.4 million for
1997 compared to $14.4 million for 1996 due primarily to a $.3 million increase
in support revenue, an increase in toll charges and an increase in the number of
access lines from 11,959 as of December 31, 1996 to 12,633 as of December 31,
1997.
FIBER. The Company's revenue from its fiber operations increased $1.2
million, or 33.8%, to $4.6 million in 1997 from $3.4 million in 1996 due
primarily to the addition of a new customer that generated $.7 million of
revenue and additional revenue of $.5 million from existing customers in 1997.
At December 31, 1997, the number of leased fiber lines was equivalent to a total
of 53 DS3s compared to 46 at December 31, 1996.
ICP. The Company launched its LOGIX operations in October 1997, generating
$.1 million of service revenue primarily related to equipment, local and long
distance sales. The remaining $.1 million in ICP revenue in 1997, relates to
network management services provided to affiliates of Dobson Communications.
COST OF SERVICE. For the year ended December 31, 1997, the total cost of
service increased $.5 million, or 15.8%, to $3.3 million from $2.8 million in
1996.
47
<PAGE>
The following table sets forth the components of the Company's cost of
service for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC........................................................ $ 1,877 $ 1,868
Fiber....................................................... 578 650
ICP......................................................... 368 750
--------- ---------
Total................................................. $ 2,823 $ 3,268
--------- ---------
--------- ---------
</TABLE>
ILEC. Cost of ILEC service remained consistent at $1.9 million for both
1997 and 1996. As a percentage of ILEC revenue, cost of ILEC service decreased
slightly from 13.1% in 1996 to 12.2% in 1997.
FIBER. Cost of fiber service increased $.1 million to $.7 million in 1997
from $.6 million in 1996. The increase was the result of costs associated with
networking, including service provided by certain third party carriers, incurred
as a result of the customers added during 1997.
ICP. Cost of ICP service increased $.4 million or 104.0%, to $.8 million in
1997 from $.4 million in 1996. Cost of CLEC service associated with the the
Company's October 1997 launch of its LOGIX operations totaled $.4 million. These
costs primarily consisted of wholesale charges from third party services
providers and salaries for technical personnel. Included in the cost of services
for the CLEC operations is $.4 million for both 1996 and 1997, respectively,
relating to network management services provided to affiliates of Dobson
Communications.
SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1997,
SG&A costs increased $.9 million, or 11.8%, to $8.7 million in 1997 from $7.8
million in 1996. The increase was primarily due to increased salary costs
resulting from additional administrative and marketing personnel in the
Company's ICP operations. As a percentage of total revenue, SG&A costs decreased
to 43.3% in 1997 from 43.6% in 1996.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1997, depreciation and amortization expense increased $.4 million, or 10.1%, to
$4.9 million from $4.5 million in 1996. The ILEC segment's depreciation and
amortization expense remained consistent between periods at $3.3 million. The
Fiber segment's depreciation and amortization expense increased $.2 million, or
17.3%, to $1.4 million in 1997 from $1.2 million in 1996. This was primarily the
result of fixed asset additions. The ICP segment's depreciation and amortization
expense increased $.2 million, to $.2 million as of December 31, 1997. This
increase was primarily a result of depreciation and amortization on assets
purchased for its recently launched Logix business.
OPERATING INCOME (LOSS). As a result of the items discussed above,
operating income for the year ended December 31, 1997, increased $.4 million to
$3.2 million from $2.8 million in 1996.
INTEREST EXPENSE. Net interest expense for the year ended December 31, 1997
increased $.2 million, or 11.4%, to $2.4 million from $2.2 million for 1996. The
ILEC segment's net interest expense remained consistent between periods at $1.3
million. The Fiber segment's net interest expense increased $.3 million, or
36.2%, to $1.2 million in 1997 from $.9 million in 1996. The increase was a
result of the increased outstanding portion of the revolving credit facility and
related interest expense payable to Dobson Communications. The ICP segment's did
not incur any net interest expense in 1997 or 1996.
OTHER INCOME (EXPENSE). For the year ended December 31, 1997, total other
income (consisting of equity in income (loss) of unconsolidated partnership and
other income (expense)) was $.1 million compared to a net expense of $.1 million
in 1996. The change was primarily due to the unconsolidated subsidiary
generating net income in 1997 versus a net loss in 1996.
48
<PAGE>
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS. As a result of the
items discussed above, income before income taxes and extraordinary items for
the year ended December 31, 1997, increased $.4 million to $.9 million from $.5
million in 1996.
ILEC. Income before income taxes and extraordinary items from the Company's
ILEC operations increased $1.6 million to $2.5 million for the year ended
December 31, 1997 from $.9 million in 1996. The majority of this increase is
from increased revenues of approximately $1.0 million. The remainder of the
increase in income before taxes and extraordinary items is a result of a
decrease in SG&A costs applicable to the ILEC operations.
FIBER. Income before income taxes and extraordinary items from the
Company's fiber operations increased $.7 million to income of $.6 million for
the year ended December 31, 1997 from loss of $.1 million in 1996. This increase
is primarily a result of increased revenues offset by an increase in SG&A costs.
ICP. Income before income taxes and extraordinary items from the Company's
ICP operations decreased $1.9 million to a loss of $2.2 million for the year
ended December 31, 1997 from a loss of $.3 million in 1996. This is a result of
increased SG&A from the start up of the ICP operations.
EXTRAORDINARY EXPENSE. Extraordinary expense in 1997 of $.2 million is due
to the write-off of deferred debt costs associated with the Company's fiber
operations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
REVENUE. For the year ended December 31, 1996, total revenue increased $1.6
million, or 10.1%, to $17.9 million from $16.3 million in 1995. The following
table sets forth the components of the Company's revenue for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC...................................................... $ 13,697 $ 14,365
Fiber..................................................... 2,501 3,430
ICP....................................................... 67 113
--------- ---------
Total............................................... $ 16,265 $ 17,908
--------- ---------
--------- ---------
</TABLE>
ILEC. ILEC revenue increased $.7 million, or 4.9%, to $14.4 million for the
year ended December 31, 1996 from $13.7 million in 1995. The increase is
primarily due to reimbursement received from a new state fund created in 1996
designed to provide additional support revenue to high cost providers of local
telephone service.
FIBER. The Company's revenue from its fiber operations increased $.9
million, or 37.2%, to $3.4 million in 1996 from $2.5 million in 1995 primarily
as a result of additional revenue of $.8 million from an existing customer in
1996. The number of fiber lines leased increased by an equivalent of 26 DS3
lines, bringing the total lines leased to an equivalent of 46 DS3s at December
31, 1996.
ICP. ICP revenue increased $46,000 to $113,000 for the year ended December
31, 1996 from $67,000 in 1995 due to increases in services provided to the
Company's wireless operations. ICP revenue for 1995 and 1996 is attributable to
network management services provided to Company affiliates.
COST OF SERVICE. For the year ended December 31, 1996, the total cost of
service increased $.3 million, or 14.2%, to $2.8 million from $2.5 million in
1995.
49
<PAGE>
The following table sets forth the components of the Company's cost of
service for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ILEC........................................................ $ 1,730 $ 1,877
Fiber....................................................... 422 578
ICP......................................................... 319 368
--------- ---------
Total................................................. $ 2,471 $ 2,823
--------- ---------
--------- ---------
</TABLE>
ILEC. Cost of ILEC service increased $.2 million, or 8.5%, to $1.9 million
in 1996 from $1.7 million in 1995. Cost of ILEC service in 1996 increased as a
percentage of ILEC revenue to 13.1% from 12.6% in 1995 as a result of increased
maintenance costs of plant and costs associated with customer growth.
FIBER. Cost of fiber service increased $.2 million, or 36.8%, to $.6
million in 1996, from $.4 million in 1995. The increase was the result of
increased costs for technical personnel for maintenance and operations of
Company facilities.
ICP. Cost of ICP service increased $.1 million, or 15.3%, to $.4 million in
1996 from $.3 million in 1995. The increase is primarily related to increased
personnel costs related to network management services.
SELLING, GENERAL AND ADMINISTRATIVE. For the year ended December 31, 1996,
SG&A costs increased $1.3 million, or 19.7%, to $7.8 million in 1996 from $6.5
million in 1995. As a percentage of total revenue, SG&A costs increased to 43.6%
in 1996 from 40.2% in 1995. The increase was primarily due to increased
personnel charges attributable to increased sales and administrative staff, as
well as additional corporate overhead expenses.
DEPRECIATION AND AMORTIZATION EXPENSE. For the year ended December 31,
1996, depreciation and amortization expense increased $.4 million, or 8.6%, to
$4.5 million compared to $4.1 million in 1995. The ILEC segment's depreciation
and amortization expense remained consistent between periods at $3.2 million.
The Fiber segment's depreciation and amortization expense increased $.3 million,
or 31.0%, to $1.2 million in 1996 compared to $.9 million in 1995. The increase
was primarily due to fixed asset additions. The ICP segment incurred minimal
amounts of depreciation and amortization expense in 1996 and 1995.
OPERATING INCOME (LOSS). As a result of the items discussed above,
operating income for the year ended December 31, 1996, decreased $.3 million to
$2.8 million from $3.1 million in 1995.
INTEREST EXPENSE. Net interest expense for the year ended December 31, 1996
increased $.2 million, or 11.1%, to $2.2 million from $2.0 million for 1995. The
ILEC segment's net interest expense remained consistent between periods at $1.3
million. The Fiber segment's net interest expense increased $.3 million, or
40.4%, to $.9 million in 1996 from $.6 million in 1995. The increase was a
result of the increased outstanding portion of the revolving credit facility and
related interest expense payable to Dobson Communications. The ICP segment's did
not incur any net interest expense in 1996 or 1995.
OTHER EXPENSE. For the year ended December 31, 1996, total other expense
(consisting of equity in income (loss) of unconsolidated partnership and other
income (expense)) was $.1 million compared to $.3 million in 1995. The change
was primarily due to the unconsolidated subsidiary generating decreased losses
in 1996 compared to 1995 and an other expense of $.1 million in 1995 relating to
a one-time charge incurred by the ILEC segment.
50
<PAGE>
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS. As a result of the
items discussed above, income before income taxes and extraordinary items for
the year ended December 31, 1996, decreased $.4 million to $.5 million from $.9
million in 1995.
ILEC. Income before income taxes and extraordinary items from the Company's
ILEC operations for the year ended December 31, 1996 of $.9 million was
unchanged from 1995.
FIBER. Income before income taxes and extraordinary items from the
Company's fiber operations decreased $.1 million to a loss of $.1 million for
the year ended December 31, 1996 from 1995. The decrease in income before taxes
and extraordinary items is a result of increased interest and depreciation due
the addition of fixed assets necessary to support the growth in the fiber
operations.
ICP. Loss before income taxes and extraordinary items from the Company's
ICP operations decreased $.3 million to $.3 million for the year ended December
31, 1996 from 1995. In 1995 and 1996 the ICP operations consisted of network
management services provided to Company affiliates. The decrease in income
before income taxes and extraordinary items is a result of increased cost of
service and related SG&A.
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 second quarter
of 1999. The total costs identified to upgrade or replace those systems that are
not Year 2000 compliant and will not be upgraded through existing maintenance or
service agreements are approximately $.1 million. Additionally, 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.
51
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow and Adjusted
EBITDA from its ILEC and fiber businesses and historically financed its ILEC
business through government loans. The Company has experienced negative cash
flow from operations and Adjusted EBITDA in 1997 and through the first six
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 Adjusted EBITDA in its ILEC and fiber businesses. The Company's ILEC
business has 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 30.9%, 36.1%, 35.6%, 35.7% and 30.9% of its
revenues for the years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998. 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. See "Risk Factors--Regulation." Positive cash flow, Adjusted EBITDA
and income before income taxes, extraordinary items and cumulative effect of
change in accounting principle generated by the Company's fiber business has
grown steadily over the past several years as the Company's fiber revenues have
grown. The Company expects that its fiber revenue level will continue to grow as
more customers are added and additional capacity is sold to existing customers.
The fiber 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 fiber business' debt, such that the fiber business
currently does not incur any interest expense. 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 six 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 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.
The Company's net cash provided by operating activities was $1.9 million,
$1.4 million, $3.7 million, $6.3 million and $3.7 million for the six months
ended June 30, 1997 and 1998, and the years ended December 31, 1995, 1996 and
1997, respectively. The Company's net cash used in investing activities was
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$1.2 million, $136.9 million, $4.2 million, $5.5 million and $3.5 million for
the six months ended June 30, 1997 and 1998, and the years ended December 31,
1995, 1996 and 1997, respectively, primarily related to capital expenditures,
and more recently, the funding of American Telco Acquisition. Net cash provided
by (used in) financing activities was $(.8) million, $217.0 million, $(.2)
million, $(.6) million and $(.6) million for the six months ended June 30, 1997
and 1998, and the years ended December 31, 1995, 1996 and 1997, respectively.
The net cash provided by financing activities during the six months ended June
30, 1998 was primarily resulted from the issuance of the Notes. The net cash
used in financing activities during the six months ended June 30, 1997 and the
years ended December 31, 1995, 1996 and 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 fiber subsidiary's
obligation under a Dobson Communication's credit facility. The amount of such
capital contribution was $11.5 million.
Capital expenditures for the six months ended June 30, 1997 and 1998 and the
years ended December 31, 1996 and 1997 were $1 million, $6.1 million, $3.9
million and $5.4 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, 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, 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. See "Description of the
Notes--Security." The Trustee will hold the Pledged Securities pursuant to an
escrow and security agreement pending disbursement.
As of June 30, 1998, the Company had $378.0 million of indebtedness
(including $28.0 million of secured indebtedness under the RUS/RTB Facility) and
stockholder's equity of $14.3 million. See "Description of Certain
Indebtedness." The RUS/RTB loans have scheduled maturities between 1998 and
2028. Although there can be no assurance, management believes that 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 activities
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which will significantly reduce its Adjusted EBITDA until it can develop and
expand its ICP service customer base. Thereafter, the Company expects to require
additional financing. 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. See "Risk
Factors--Leverage; Ability to Meet Required Debt Service."
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 Company does not
believe that the adoption of this SOP will materially impact its net income.
FORWARD-LOOKING STATEMENTS
The description of the Company's plans set forth herein, including the
Company's plans and strategies, 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; 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
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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.
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BUSINESS
OVERVIEW
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 the Southwest United States. Since 1936, the Company has
provided ILEC services in Oklahoma. In addition, Logix operates long-haul fiber
optic facilities in Oklahoma, Texas and Colorado, providing wholesale long-haul
services. Logix recently began offering switch-based ICP services in Oklahoma
City and Tulsa under its LOGIX-TM- brand name and expects to commence offering
these services in Amarillo in late 1998. Logix's management team is led by
Everett R. Dobson, the Chairman of the Board, President and Chief Executive
Officr of Dobson Communications.
In order to accelerate the expansion of its ICP business, the Company
acquired Houston-based American Telco on June 15, 1998 for $131.5 million.
American Telco provides long distance and local telecommunications services to
approximately 22,400 customers in Houston, Dallas, Fort Worth, San Antonio and
Austin, of which approximately 16,400 are business customers. Management
believes there is a significant opportunity to market the Company's integrated
LOGIX-TM- product line to the existing American Telco customers and to other
small and medium-sized business customers in Texas. With over 100 direct sales
professionals, American Telco has one of the largest direct sales forces of
alternative communications services in Texas.
SERVICES STRATEGY
The Company's objective is to be the dominant alternative provider of
integrated local, long distance and data services packaged with wireless
offerings to small and medium-sized business customers in the Southwest. The
Company has developed customer focused strategies to build market share in
existing and new markets while utilizing innovative and efficient network
deployment techniques to maximize customer satisfaction and financial returns.
The principal elements of the Company's services strategy include:
DELIVERING INNOVATIVE TELECOMMUNICATIONS SOLUTIONS FOR BUSINESS
CUSTOMERS. The Company believes that there is substantial demand from small and
medium-sized businesses for bundled telecommunications services provided on a
single monthly bill and with a single point of contact for all sales and
service. The Company offers under its LOGIX-TM- brand name local, long distance,
enhanced data, Internet, wireless and systems integration services to customers
with convenient integrated billing through its "DIRECT T-TM-" bundled service
offering. The Company believes that its DIRECT T-TM- products allow the Company
to improve customer retention, increase sales force productivity and rapidly
increase penetration in its target markets. The Company's sales professional are
trained to provide customers with sales and customer service relating to all of
the Company's DIRECT T-TM- products. Once a customer contracts with LOGIX-TM-
for services, the Company assigns a single account relations manager who has the
responsibility of proactively contacting the customer to confirm satisfaction
with existing products and to promote new services and programs.
FOCUSING ON THE SOUTHWEST. In order to leverage its extensive
telecommunications networks and long-standing customer and business
relationships in the region, the Company intends to continue to focus on the
Southwest, initially targeting Oklahoma and Texas. The Company believes that
this regional focus will enable it to take advantage of economies of scale in
management, network operations, sales and marketing. This regional concentration
of the Company's network is also expected to result in improved profit margins
based on management's belief that a significant percentage of the Company's
customers' telecommunications traffic will originate and terminate within the
region. The Company expects to expand primarily through internal growth, though
it will consider acquisitions to extend either its product line or geographic
footprint or expand its customer base. The Company recently acquired certain
long distance customers and related assets of Zenex, an Oklahoma City based
reseller of long distance and value added
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services, for approximately $4.7 million. In connection with the Zenex
Acquisition, the Company entered into a long term contract with WorldCom for the
resale of long distance services. This contract with WorldCom provides for a
minimum volume commitment of $18.0 million over its 36 month term.
BUILDING MARKET SHARE THROUGH DIRECT SALES AND SUPERIOR CUSTOMER
SERVICE. The Company believes that the key to revenue growth in its target
markets is to acquire customers through direct sales efforts and retain those
customers by offering a high level of customer service. The Company believes
that, in servicing the small and medium-sized business market using, a
consultative, face-to-face sales and service strategy with a single point of
contact is a highly effective method of acquiring customers and developing
long-term customer relationships. The Company's branch offices provide
comprehensive support to the Company's customers. Following the American Telco
Acquisition, the Company has 18 branch offices with approximately 190 direct
sales professionals in markets in Oklahoma City, Tulsa, Houston, Dallas, Austin,
Ft. Worth and San Antonio, which will accelerate the Company's direct sales
strategy. In the future, the Company expects to significantly expand its direct
sales force and open additional branch offices in the Southwest. The Company
also seeks to build market share by installing its own telecommunications
networks in new real estate projects so that it can become the local phone
company for the tenants of that project.
INCREASING PRODUCTIVITY AND EFFICIENCY THROUGH CONTINUED ENHANCEMENT OF
OSS. The Company believes that fully integrated and scalable OSS will increase
productivity and efficiency and provide a competitive advantage. An integrated
approach to OSS will allow the Company to synchronize multiple tasks such as
provisioning, order taking, customer service and billing and provide management
with timely operating and financial data to allow it to efficiently direct
network, sales and customer service resources. The Company currently deploys
tailored systems and procedures for its OSS and other back office systems and
customer service, and intends to replace its existing OSS with a fully
integrated, scalable system which can be expanded as the Company grows its
customer base.
NETWORK STRATEGY
The Company will seek to efficiently expand its network infrastructure to
offer facilities-based services in attractive markets while minimizing its up
front capital expenditures. The Company believes that its facilities-based
services will enable it to achieve higher gross network margins than could be
obtained by reselling such services, accelerate provisioning and to maintain
better control over the quality of the services provided to its customers. The
principal elements of the Company's network strategy include:
MAXIMIZING OPERATING MARGINS WITH A TARGETED SERVICE AREA. The Company
targets customers within a specified geographic zone surrounding its network
infrastructure, thereby controlling the cost of services. By focusing its sales
efforts on customers within these zones and bypassing the ILEC's switch and
directly connecting these customers to a LOGIX switch using unbundled loops or
high capacity circuits, the Company believes it can generate higher gross
margins than could be obtained by reselling ILEC services.
EMPLOYING ADVANCED REMOTE SWITCHING TECHNOLOGY. In entering new markets the
Company intends to deploy an ANP unit (i.e., a smaller switch) that is linked
via leased lines to the Company's switches. The ANP unit enables the Company to
provide digital local and long distance switched services and ATM-based data
services to customers in the market area at significantly lower initial capital
costs than is required for a Class V switch. As customer telecommunications
traffic warrants, the Company will install a Class V switch and redeploy the ANP
to a new market area. By using ANP units and Class V switches, the Company
believes it will have lower operating costs than reselling. This strategy
enables the Company to optimize its capital expenditure, rapidly expand into new
markets, and generate the operating margins and quality of service provided by
dedicated facilities.
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CONTROLLING SERVICE QUALITY. The Company's strategy is to have direct
control of the quality of service and responsiveness to its customers by
utilizing the Company's own switches and providing a direct connection which
eliminates the reliance on other switching providers, in contrast to reselling.
LEVERAGING EXISTING OPERATIONS AND PROVEN MANAGEMENT TEAM
The Company believes that its ability to leverage its existing local
exchange and fiber operations and to draw upon its senior management's extensive
experience and expertise in facilities-based telecommunications services will
provide it with a competitive advantage. Everett R. Dobson, the Company's
Chairman of the Board and Chief Executive Officer, and Chairman, President and
Chief Executive Officer of Dobson Communications, the Company's parent, directed
Dobson Communications' rural cellular expansion. Stephen T. Dobson, President of
Logix, has operated Logix's ILEC business since 1990 and initiated the Company's
expansion into ICP services. William J. Hoffman, Jr., the Company's Chief
Operating Officer, joined Dobson Communications in October 1997 from Intermedia
Communications, where he was Division Vice President of its Florida markets.
Collectively, the executives of the Company have in excess of 125 years of
telecommunications experience.
MARKET OPPORTUNITIES
The Company seeks to be the leading provider of integrated local, long
distance, data and wireless telecommunications services to small and
medium-sized businesses in the Southwest United States, initially focusing on
Texas and Oklahoma. The FCC estimates that the total United States interstate
and intrastate telephone revenues (including wireless revenues) in 1996 were
over $220 billion, of which Texas and Oklahoma accounted for $15.1 billion and
$2.3 billion, respectively. Texas was the third highest state by total revenue,
behind California and New York. Texas' revenue was split $9.5 billion intrastate
and $5.6 billion interstate, while Oklahoma's revenue was split $1.3 billion
intrastate and $1.0 billion interstate.
Historically, businesses throughout the United States have purchased their
telecommunication services from different vendors: local services from RBOCs,
long distance and wide area data services from IXCs, internet services from
internet service providers, and wireless services from a wireless service
providers. The use of multiple vendors and the lack of availability of bundled
services have resulted in customers receiving multiple invoices for these
services.
The Company believes that small and medium-sized businesses desire a fully
integrated package of services, with one monthly invoice and a single point of
contact for all sales and service. The Company further believes that regulatory
changes introduced by the Telecommunications Act, advances in technology, and
its experience and expertise in providing facilities-based communications
services place it in a unique position to take advantage of the large
telecommunications market in the Southwest United States.
THE AMERICAN TELCO ACQUISITION
Dobson Wireline currently provides ICP services in Oklahoma City and Tulsa,
Oklahoma and plans to expand these operations into the major markets in Texas,
including Amarillo in late 1998. The acquisition of American Telco will
significantly accelerate Logix's expansion into the Texas market. American Telco
provides telecommunications services, primarily to business customers, in the
five largest markets in Texas: Houston, Dallas, Austin, Fort Worth and San
Antonio. It provides a unique complement to the Company's Texas expansion
strategy with 11 sales offices, approximately 100 sales representatives, and
switches in Houston and Dallas. American Telco has approximately 22,400
customers to whom it sells primarily long distance services, of which
approximately 16,400 are business customers. The Company believes there is a
significant opportunity to market its integrated LOGIX-TM- product line to the
existing American Telco business customers and to other small and medium-sized
business customers in Texas.
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SERVICES
ILEC
Since 1936, the Company has provided ILEC services and currently owns and
operates nine contiguous local exchanges in western Oklahoma and three
contiguous local exchanges adjacent to and east of the Oklahoma City
metropolitan area. At June 30, 1998 the Company's local telephone exchanges
served approximately 12,932 access lines. The Company provides local and long
distance telecommunications services with enhanced and value-added calling and
billing features.
The Company's ILEC operations receive HCF from state jurisdictions and the
federal USF due to factors such as the geographic conditions and subscriber
density in the areas in which it provides service. Approximately 35.6% and 30.9%
of the Company's ILEC revenues for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively, were from these two sources. The
Company's other primary sources of ILEC revenues consisted of end user and
access revenues. End user revenues consist of charges for local service and
enhanced services such as call waiting and call forwarding. Access revenue
represents amounts charged to IXCs for providing access from the IXC's point of
presence to the end user who makes or receives a long distance call.
FIBER
The Company provides long-haul transport services in Texas, Oklahoma and
Colorado (i) on a wholesale basis as a "carriers' carrier", (ii) to private
business and government end-users, and (iii) for Dobson Communication's other
subsidiaries. The Company has long-haul service contracts with various
long-distance carriers, including AT&T, SWBT, Sprint and NTS. NTS, which, in
turn, resells to MCI and WorldCom, is the largest customer of the Company's
fiber services, accounting for approximately 49% and 41% of its gross fiber
revenue for the years ended December 31, 1996 and 1997, respectively, and
approximately 32% for the six months ended June 30, 1998. The Company also
provides services to the State of Oklahoma and Vyvx.
ICP
Logix's ICP services include: (i) competitive local exchange services, (ii)
enhanced data services, (iii) Internet, intranet and extranet services, (iv)
interexchange (long distance) services, (v) private line services, and (vi)
integration services.
LOCAL EXCHANGE SERVICES. These include telephone services that connect a
customer's telephone or PBX to the public network and provide the customer with
access to long distance services, operator and directory assistance services,
911 service, integrated service digital network ("ISDN") services, voice mail
and other enhanced local features.
ENTERPRISE NETWORK SERVICES. These include the switching and transport of
digitized data (and voice) over a network designed to provide highly reliable,
flexible service and support of many data transmission protocols. The Company's
enterprise network services are provided over a network of frame relay and ATM
data switches owned and leased by the Company. The Company is also able to
provide remote access to businesses providing connectivity to corporate
networks.
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INTERNET AND INTRANET SERVICES. The Company offers dedicated access to the
Internet and web page hosting, and provides additional services such as intranet
services. Examples of the Company's services are listed below:
<TABLE>
<CAPTION>
SERVICE OR FEATURE DESCRIPTION
- ----------------------------- ---------------------------------------------------------------
<S> <C>
Dedicated Internet Access Connection to the Internet via the Company's frame relay
network.
Web Page Hosting The Company provides and maintains a World Wide Web presence
for its customers.
Intranet Service The Company provides customers with "private" equivalents of
the Internet allowing secure, closed user access to the
customer's private web sites, file transfer capabilities, etc.
</TABLE>
INTEREXCHANGE (LONG DISTANCE) SERVICES. These services include the
origination and termination of telephone calls between users in different cities
or exchanges. The Company provides these services on a usage basis, utilizing
its local/long distance switches, its inter-city network and services provided
by other carriers. The Company also offers inbound "800" and "888" long distance
services and nationwide calling card services.
PRIVATE LINE SERVICES. The Company provides dedicated communications
channels connecting discreet end points. These non-switched services can be
provided to two locations within the same city, or between locations in
different cities (interexchange private lines). The Company also provides
special access services connecting a customer to an IXC for the purpose of
delivering long distance calls to the IXC. The Company provides "carriers'
carrier" wholesale long-haul services to other telecommunications companies.
INTEGRATION SERVICES. These services include initial evaluation of a
customer's needs, the provision and custom configuration of network devices,
normally located at the customer's premises, which may include any special
engineering, installation, or service functions provided by the Company and
ongoing maintenance and training.
NETWORK INFRASTRUCTURE
ICP
The Company installed a Nortel DMS 500 supernode switch in Oklahoma City in
1997 for its ICP services in Oklahoma City and Tulsa. American Telco has a DSC
DEX-600 long distance switch and a Siemens-Stromberg Carlson DCO local switch in
Houston, and a Siemens-Stromberg Carlson DCO local switch in Dallas. The Company
will continue to utilize American Telco's switches for an interim period after
consummation of the American Telco Acquisition, but intends to replace such
switches with more efficient ones and redeploy the old switches to areas better
suited for their specifications. Some of American Telco's customers utilize call
processors which belong to the Company but are located at the customer premises.
These call processors have enhanced routing, disaster recovery and accounting
features and can be remotely managed by American Telco.
The Company's Interconnection Agreements with SBC and GTE allow it to (i)
resell SBC's and GTE's local exchange services in Oklahoma and Texas and (ii)
interconnect the Company's network with SBC's and GTE's networks for the purpose
of immediately gaining access to all of SBC's and GTE's unbundled network
elements. Based on these agreements, the Company is able to deploy its network
to enter new markets and offer local exchange services.
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The Company has agreements with various long-haul transport carriers to
transport the data and voice signals of its customers through its switches. The
Company also enters into agreements with various carriers to provide
transmission and termination services for its long distance traffic. Such
agreements typically provide for the resale of long distance services on a per
minute basis, with some agreements containing minimum volume commitments.
In entering new markets the Company intends to deploy an ANP unit that is
linked via leased lines to the Company's switches. As customer
telecommunications traffic warrants, the Company will install a Class V switch
and redeploy the ANP to a new market area. The Company will install its ANP unit
or switch and related equipment at a central location in each market and deploy
transmission equipment in ILEC central offices. The Company will initially lease
local network trunking facilities from the ILEC and/ or one or more ICPs in
order to connect the Company's ANP unit or switch to major ILEC central offices
serving the target market area. As each customer is obtained, service will be
provisioned by leasing unbundled loops from the ILEC.
In connection with the Company's enterprise network services, the Company
will expand its ATM network by installing ATM data switches and related
equipment in the Southwest. This expanded network will enable the Company to
market its enterprise network services to businesses with branch offices
throughout the Southwest. The Company will lease additional fiber capacity to
connect these ATM switches.
ILEC
Logix serves 12,932 access lines in western Oklahoma and east of the
Oklahoma City metropolitan area with 13 switches located in Oklahoma.
FIBER
The Company operates over 545 miles of long-haul fiber optic facilities. The
Company entered the fiber business in 1990 when it joined with AT&T to place
fiber between Oklahoma City and Amarillo, which links the Company's local
exchanges. The Company and AT&T each has its own cable, sharing in all legal
rights to the private right-of-way where the cables are located. The Company's
cable covers approximately 360 route miles and consists of 36 strands of fiber.
In 1991, the Company acquired a 20% interest in Forte of Colorado Partnership
which has 24 strands of fiber from Springfield, Colorado, to Colorado Springs,
approximately 185 miles in length. One of the Company's partners in Forte of
Colorado is NTS. To enhance the revenue potential for the above segments, the
Company, Forte of Colorado and other segment providers have interconnected their
networks and currently offer fiber-based transport services among Albuquerque,
Amarillo, Cheyenne, Colorado Springs, Dallas, Denver, Des Moines, El Paso,
Kansas City, Las Cruces, Lubbock, Oklahoma City, Omaha, Midland, Wichita and
Wichita Falls. Other segment providers have expressed interest in
interconnecting to this network and expansion may occur north to Chicago, south
to Houston and San Antonio, and east toward Atlanta. There can be no assurance
that such expansion will occur to all or any of these cities, or if such
expansion does occur, when it may occur or on what terms and conditions. While
the Company currently has no plans to add additional fiber optic lines, it will
seek to expand its network to additional cities through new interconnection
agreements.
SALES AND MARKETING
The Company believes there is substantial demand from small and medium-sized
business for bundled telecommunications services provided with a single monthly
bill and a single point of contact. While the Company's customer focus is on
small and medium-sized businesses, it also markets to large corporations,
financial services companies, government departments and agencies, and academic,
scientific and other major institutions. The Company also seeks to build market
share by installing its own telecommunications
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networks in new real estate projects so that it can become the local phone
company for the tenants of that project. To date the Company has installed
telecommunication networks in 13 real estate projects.
The Company's ICP services, are sold through the Company's existing sales
force supported by sales engineers, and often in cooperation with agents and
value added resellers (independent providers of communications hardware to
customers) and other business associates. This approach enables the Company to
emphasize the applications solutions aspects of its services and utilize the
expertise and resources of other vendors. The Company intends to continue
expanding its sales and engineering support staff and other technical
specialists in order to meet the expected demand for ICP services.
The Company's sales force includes specialized professionals who focus on
sales to commercial and carrier consumers and alternate channels (agents and
value added resellers). The Company's sales staff works to gain a better
understanding of the customer's operations in order to develop innovative,
application-specific solutions to each customer's needs. Sales personnel locate
potential business customers by several methods, including customer referral,
market research, cold calling and other networking alliances. The Company's
sales group also seeks to obtain building entry agreements with owners of
multiple office building complexes.
As a result of the acquisition of American Telco, the Company has 16 branch
offices with more than 120 sales professionals located in Oklahoma City, Tulsa,
Houston, Dallas, Austin, Fort Worth and San Antonio. Each branch office will be
staffed by personnel capable of marketing all of the Company's products and
providing comprehensive support to the Company's customers. Adding this number
of sales professionals located at various branch offices in target markets will
allow the Company to accelerate its strategy of face-to-face sales and a single
point of contact for all its customers. The Company believes there is a
significant opportunity to market its integrated LOGIX-TM- product line to the
existing American Telco business customers and to other small and medium-sized
business customers in Texas.
The Company markets its fiber services through its direct and indirect sales
force. The Company intends to initiate additional marketing programs to increase
its customer base and the use of its fiber network by its existing customers.
The Company believes that it has a competitive advantage in the market area
that it serves because it has the only long-haul fiber network between Oklahoma
City and Amarillo, other than AT&T. AT&T's network, however, does not branch off
to small communities between Oklahoma City and Amarillo. By expanding its
network through interconnect agreements to access other major population centers
(including routes which may be attractive to major carriers) and providing
high-quality, reliable transmission services on a fixed-cost basis at
competitive rates, the Company believes it can increase its fiber revenue.
CUSTOMER SERVICE
The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of all of their telecommunications services. To this end, the Company
assigns a dedicated account relations manager to each business account who is
responsible for proactively contacting the customer on a monthly basis. These
managers ensure that customers are satisfied with their current services and
promote new services and programs. Management believes that this activity
improves customer retention, enhances penetration within the existing customer
base and provides the Company with qualified sales leads through referrals.
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include surveying the site to assess ambient conditions and power, and space
requirements, as well as coordinating installation dates and equipment delivery
and testing. The Company's customer service and technical staff plans,
engineers, monitors and maintains the integrity, quality and availability of the
Company's networks. The Company's customer service and technical staff are
available to customers 24 hours every day.
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COMPETITION
GENERAL. The telecommunications industry is highly competitive and the
Company faces intense current and potential competition with respect to its
service offerings. Many of the Company's current and potential competitors have
financial, technical, personnel and other resources, including brand name
recognition, substantially greater than those of the Company. There has also
been, and the Company believes there will continue to be, significant merger and
joint venture activity and the creation of strategic alliances within the
telecommunications industry that will result in competitors with even greater
financial resources and other competitive advantages. In addition, rapidly
evolving technology, and new applications of existing technology, may also
provide competitors in the Company's markets with significant competitive
advantages over the Company. The Company believes that various legislative
initiatives, including the Telecommunications Act and certain state initiatives,
will facilitate the ability of RBOCs, other ILECs and IXCs to offer bundled
services, allowing such entities to leverage their extensive existing networks
and provide customers with single source telecommunications services similar to
the services provided by the Company. There can be no assurance that the Company
will be able to respond to such competitive pressures or that competition will
not have a material adverse effect on the Company. See "Risk Factors--
Competition."
LOCAL SERVICES. In each of its markets where the Company operates as a ICP,
the Company faces significant competition for the local services it offers from
RBOCs and other ILECs, which currently dominate their local telecommunications
markets. In particular, SBC is the ILEC and the dominant local services provider
in most of the markets currently served by the Company. These companies all have
long-standing relationships with their customers and have financial, personnel
and technical resources substantially greater than those of the Company. As a
recent ICP market entrant, the Company has not achieved, and does not expect to
achieve a significant market share for its services.
In the Texas markets, the Company also faces competition in most markets in
which it operates from one or more ICPs, including GTE, ACSI, ICG, Allegiance
Telecom and Intermedia. Other local service providers have operations or are
initiating operations within one or more of the Company's service areas. The
Company expects long distance carriers, including AT&T, Sprint and WorldCom, to
offer local services together with their long distance services in certain
markets. At least two of these competitors, AT&T and WorldCom, have entered or
announced plans to enter a number of the Company's service areas.
In addition, the recent trend toward mergers and strategic alliances among
RBOCs and larger telecommunications carriers since passage of the
Telecommunications Act raises serious questions about the adverse effect of
these mergers and alliances upon the development of competition in the
telecommunications industry. On June 24, 1998, AT&T announced its proposed
acquisition of Tele-Communications, Inc. On May 11, 1998, SBC and Ameritech
announced their merger which, if approved, would reduce the seven original RBOCs
to four. If approved, this merger would leave one RBOC, SBC, with control of a
significant portion of the local exchange and business access lines in the U.S.
It also will significantly reduce competition between RBOCs, such as Ameritech's
previously announced plans to launch local service in Texas and St. Louis,
Missouri in 1998 and in other markets within SBC's region. At the same time,
SBC's competitors have won less than two percent of SBC's market share in its
local markets as a whole. SBC already has merged with Pacific Bell, and a merger
with Southern New England Telecommunications in Connecticut is pending. Two
other RBOCs, Bell Atlantic and NYNEX have merged. WorldCom has acquired MFS
Communications Co., Inc., Brooks Fiber Properties, Inc. and MCI. In January
1998, AT&T announced plans to acquire another ICP, Teleport. In June 1998 Qwest
acquired LCI.
On May 6, 1998, US WEST announced that it had entered into a marketing
arrangement with Qwest whereby US WEST would market Qwest long distance services
to US WEST's in-region customers. One week later, Ameritech announced a similar
marketing arrangement with Qwest to market long distance services to Ameritech's
in-region customers. On May 14 and 15, 1998 a coalition of ICPs and
interexchange
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carriers filed suits in federal district courts in Seattle and Chicago seeking a
declaratory ruling that US WEST and Ameritech are providing long distance
services in violation of the Telecommunications Act. The plaintiffs are seeking
a preliminary and final injunction prohibiting US WEST and Ameritech from
marketing in their regions the long distance services of Qwest or any other long
distance carrier. On June 4, 1998, the federal district court in Seattle granted
the coalition's request for a preliminary injunction preventing US WEST from
marketing to additional customer under its Qwest teaming agreement. On June 10,
1998, the federal district court in Chicago denied a preliminary injunction of
the Ameritech/Qwest joint marketing agreement; however, on June 30, 1998, the
FCC ordered Ameritech to cease marketing Qwest long distance service for 90 days
while the FCC rules on the legality of the joint marketing agreement. In March
1997 BellSouth and IBM also announced an alliance to provide Internet and
intranet services to businesses in the southern United States.
The Company also expects certain cable television providers to enter its
local service markets. Other potential competitors of the Company include
utility companies and wireless telephone systems operators and private networks
built by large end-users. The Company cannot predict the number of competitors
that will emerge as a result of existing or any new federal and state regulatory
or legislative actions.
In the market areas where the Company operates as an ILEC, the Company is
the sole provider of local services. The Telecommunications Act requires the
Company to interconnect its ILEC networks with the networks of other ICPs at
rates that are reasonable and non-discriminatory. As a result, other ICPs,
including SBC, could negotiate interconnection agreements with the Company and
resell the Company's local exchange services in its market areas.
Competition in all of the Company's geographic market areas is based on
price, quality, reliability, customer service and responsiveness and service
features. The Company has kept its prices at levels competitive with those of
the ILECs while providing, in the opinion of the Company, a higher level of
service and responsiveness to its customers.
Although the ILECs are generally subject to greater pricing and regulatory
constraints than other local network service providers, ILECs are achieving
increasing pricing flexibility for their local services as a result of recent
legislative and regulatory developments. The ILECs have continued to lower
rates, resulting in downward pressure on certain dedicated and switched access
transport rates. This price erosion has decreased operating margins for these
services. However, the Company believes this effect will be more than offset by
the increased revenues available as a result of access to customers provided
through interconnection co-carrier agreements and the opening of local exchange
service to competition. In addition, the Company believes that lower rates for
dedicated access will benefit other services offered by the Company.
ENHANCED DATA SERVICES. The Company faces competition in its enhanced data
services business from ILECs, IXCs, very small aperture terminal ("VSAT")
providers, ISPs, Internet software providers and others. Many of the Company's
existing and potential competitors have financial and other resources
significantly greater than those of the Company.
The Company competes with the larger IXCs on the basis of price, service
responsiveness and a rapid response to technology and service trends. All of the
major IXCs, including AT&T, Sprint and WorldCom offer frame relay services and
several of the major IXCs have announced plans to provide Internet services. The
Company believes it competes favorably with these providers in its markets,
based on the features and functions of its services and its experience and
in-house expertise. Continued aggressive pricing is expected to support
continued rapid growth, but will place increasing pressure on operating margins.
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The Company also competes with VSAT services on the basis of price and data
capacity. The Company believes that the relatively low bandwidth of each VSAT
terminal and the cost of purchasing and installing VSAT equipment limits the
ability of VSAT to compete with the frame relay services provided by the
Company.
Many of the ILECs now offer services similar to the Company's enhanced data
services, but offer them only on an intraLATA basis. While the ILECs generally
cannot interconnect their frame relay networks with each other, the Company has
interconnected its frame relay network with those of various ILECs. As a result,
the Company can use certain ILEC services to keep its own costs down when
distributing into areas that cannot be more economically serviced on its own
network. The Company expects the ILECs to aggressively expand their enhanced
data services as regulatory developments permit them to deploy interLATA long
distance networks. When the ILECs are permitted to provide such services, they
will be in a position to offer single source service similar to that being
offered by the Company. In February 1998, the RBOCs, US WEST, Bell Atlantic and
Ameritech, petitioned the FCC under Section 706 of the Telecommunications Act to
allow them to build and operate packet- and cell-switched data networks across
LATA boundaries, to permit them to carry interLATA data traffic incident to
their provision of digital subscriber line services, to not require them to make
those data services available on a discounted resale basis, and to not require
them to make the non-bottleneck elements of such services available on an
unbundled basis. The Company provides or may provide certain services with which
these proposed services (or similar services offered by other RBOCs) would
compete if these petitions are granted by the FCC.
LONG DISTANCE. The long distance market has relatively insignificant
barriers to entry, high average churn rate, numerous entities competing for the
same customers and prices that have declined and are expected to continue to
decline. The Company believes that it competes on the basis of price, customer
service, accurate billing, clear pricing policies and, to a lesser extent,
variety of services. The numerous current and potential competitors in the
market include AT&T, Sprint, WorldCom, Excel, Qwest, other ICPs, microwave and
satellite carriers and private networks owned by large end-users. The Company
also may increasingly face competition from firms offering long distance data
and voice services over the Internet, which firms could enjoy a significant cost
advantage because they currently do not pay carrier access charges or universal
service fees.
RBOCs, such as SBC, are currently allowed to provide interLATA long distance
services outside their regions, as well as interLATA mobile services within
their regions. Under the Telecommunications Act, the RBOCs will be allowed to
provide interLATA long distance services within their regions after meeting
certain requirements intended to foster opportunities for local telephone
competition. While some RBOCs have applied for in region, interLATA approval, no
such applications have been approved to date. If the SBC Decision, however,
which ruled that the provisions of the Telecommunications Act restricting
interLATA service by the RBOCs are unconstitutional is upheld, RBOCs, including
SBC, would be allowed immediately to enter the interLATA market on a region-wide
basis irrespective of the progress towards local telephone competition. See
"--Regulation."
In providing interexchange services, the Company focuses on quality service
and economy to distinguish itself in a very competitive marketplace. The Company
has built a loyal customer base by emphasizing its customer service. The
additional new services that are offered as the Company implements its local
exchange services should further support this position by allowing the Company
to market a wide array of fully integrated telecommunications services. While
these services are subject to highly competitive pricing pressures, the
Company's cost to provide these services is decreasing as it deploys more
local/long distance voice switches and interexchange network facilities.
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FIBER
In providing bulk long-haul fiber capacity the Company's primary competitors
are IXC Communications, Inc., Qwest and AT&T. AT&T is the largest supplier of
long distance voice and data transmission services in the United States and has
a transmission line adjacent to the Company's between Oklahoma City and
Amarillo. The Company also competes with other facilities-based IXCs, such as
WorldCom and Sprint, all of which have substantially greater financial resources
than the Company and a far more extensive transmission network than the
Company's network. In Oklahoma, the Company's principal competitor is a
subsidiary of SBC. The Company may also face competition from the RBOCs, GTE and
others such as electric utilities and cable television companies, including both
wireless and satalite.
REGULATION
OVERVIEW. The Company's services are subject to federal, state and local
regulation. The Company, through its subsidiaries, holds various federal and
state regulatory authorizations. The FCC exercises jurisdiction over
telecommunications common carriers to the extent they provide, originate or
terminate interstate or international communications. The FCC also establishes
rules and has other authority over certain issues related to local telephone
competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require the Company to obtain
licenses, permits or franchises in order to use the public rights of way
necessary to install and operate its networks.
FEDERAL REGULATION. The Company is categorized as a non-dominant carrier by
the FCC, and as a result is subject to relatively limited regulation of its
interstate and international services. Certain general policies and rules apply,
as well as certain reporting requirements, but the Company's rates are not
subject to prior FCC Approval. The Company has all the operating authority
required by the FCC to conduct its long distance business at present. As a
non-dominant carrier, the Company may install and operate additional facilities
for the transmission of domestic and international interstate communications
without prior FCC authorization, except to the extent that radio licenses or
international authorizations are required.
The FCC also imposes prior approval requirements on transfers of control and
assignments of radio and microwave licenses and operating authorizations for the
provision of international communications services. The FCC has the authority
generally to condition, modify, cancel, terminate or revoke licenses and
operating authority for failure to comply with federal laws and/or the rules,
regulations and policies of the FCC. Fines or other penalties also may be
imposed for such violations. There can be no assurance that the FCC or third
parties will not raise issues with regard to the Company's compliance with
applicable laws and regulations.
The FCC also regulates the interstate access rates charged by ILECs for the
origination and termination of interstate long distance traffic. Those access
rates make up a significant portion of the cost of providing long distance
service. The FCC has recently implemented changes to its interstate access rules
that result in restructuring of the access charge system and changes in access
charge rate levels. These changes reduce per-minute access charges and
substitute new per-line flat-rate monthly charges. These actions, and additional
anticipated access charge reductions ordered by regulatory commissions in the
future, are expected to reduce access rates, and hence the cost of providing
long distance service, especially to business customers. However, the full
impact of the FCC's new decisions will not be known until those decisions are
implemented over the next several years, during which time those decisions may
be revised or subject to judicial review. In a related proceeding, the FCC has
adopted changes to the methodology by which access has been used in part to
subsidize universal telephone service and other public policy goals.
Telecommunications providers like the Company must pay a fee calculated as a
percentage of their end user gross revenues derived from telecommunication
services to support these goals. The full implications of this decision also
remain uncertain and subject to change. In addition, the FCC and the courts are
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considering related questions regarding the applicability of access charge, and
universal service fees to Internet service providers. Currently such providers
are not subject to these expenses. ILECs and other parties argue that this
exemption unfairly advantages Internet service providers, particularly when they
provide data, voice or other services in direct competition with conventional
telecommunications. The Company is not in a position to determine how these
access and universal service matters will be resolved, and whether or not such
resolution will be harmful to its competitive position.
In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers, including AT&T. The order does
not apply to the switched and special access services of the RBOCs or other
local exchange providers. The FCC order was issued pursuant to authority granted
to the FCC in the Telecommunications Act to "forbear" from regulating any
telecommunications services provider if the FCC determines that the public
interest will be served. Several parties have filed notices for reconsideration
of the FCC order and other parties appealed the decision. On February 13, 1997,
the United States Court of Appeals for the District of Columbia Circuit stayed
the implementation of the FCC order pending its review of the order on the
merits. Currently, that temporary stay remains in effect.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934, as amended by the
Telecommunications Act. While tariffs provided a means of providing notice of
prices, terms and conditions, the Company intends to rely primarily on its sales
force and direct marketing to provide such information to its customers.
The Telecommunications Act also gives the FCC and state PUCs roles in
establishing rules for the implementation of local telephone competition. The
Telecommunications Act imposes a variety of new duties on ILECs in order to
promote competition in local exchange and access services, and the FCC has
authority to develop rules to implement these duties. Some smaller independent
ILECs may seek suspension or modification of these obligations, and some
companies serving rural areas are exempt from them.
In that regard, on August 8, 1996, the FCC released the Local Competition
Order to implement the interconnection, network unbundling and resale provisions
of the Telecommunications Act. The Local Competition Order established rules
pursuant to which ILECs interconnect their networks with the networks of
competitive local exchange carriers at rates that are reasonable and
non-discriminatory. The Local Competition Order also established rules governing
the rights of ICPs to obtain and use elements of the ILECs' networks at
cost-based rates either to supplement or substitute for alternative local
network facilities that the ICP would otherwise be required to install. The
Local Competition Order set rules governing competitive local exchange carrier
access to wholesale versions of the ILECs' retail local services for resale. The
ILECs are required to establish administrative support systems so that these
services and functionalities can be made available to other carriers on a
nondiscriminatory basis. The Local Competition Order also created rules to deal
with reciprocal compensation for the transport and termination of local
telecommunications, non-discriminatory access to rights of way, and related
matters. A related FCC order adopted the same day established rules implementing
the Telecommunications Act with respect to local and toll dialing parity among
competitors; nondiscriminatory access to telephone numbers, operator services,
directory assistance and listings, and network information; and reform of
numbering administration.
The Local Competition Order was challenged in the federal courts by GTE, the
RBOCs, large independent ILECs and state regulatory commissions. On October 15,
1996, the U.S. Court of Appeals for the Eighth Circuit issued a stay of the
implementation of certain of the FCC's rules and on July 18 and
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October 14, 1997, the Eighth Circuit issued decisions finding that the FCC
lacked statutory authority under the Telecommunications Act for a major portion
of its rules. In particular, the Eighth Circuit found that the FCC was not
empowered to establish national pricing standards governing unbundled local
network elements or wholesale local services of the ILECs, or to require such
carriers to provide network elements in a combined form. The Eighth Circuit also
struck down other FCC rules, including one that would have enabled new entrants
to "pick and choose" from provisions of approved interconnection agreements
between the ILECs and other carriers. The Eighth Circuit, however, rejected
certain other objections to the FCC rules brought by the ILECs or the states,
including challenges to the FCC's definition of unbundled elements, and to the
FCC's rules allowing new competitors to create their own networks by combining
incumbent local exchange carrier network elements together without adding
additional facilities of their own. The overall impact of the Eighth Circuit's
decisions are to limit the obligations of ILECs as originally interpreted by the
FCC, materially reduce the role of the FCC in fostering local competition,
including its ability to take enforcement action if the Telecommunications Act
is violated, and increase the role of state utility commissions. On January 26,
1998, the Supreme Court granted a request by the FCC and other parties to review
the Eighth Circuit decisions. A decision from the Supreme Court is not expected
until early 1999. Meanwhile, certain state commissions have asserted that they
will be active in promoting local telephone competition under the authority of
the Eighth Circuit decisions, which have not been stayed, and this may minimize
some of the significance of the reduced FCC role. However, at this time, it is
premature to assess the impact of the Eighth Circuit's decisions and there can
be no assurance that these decisions and related developments will not have a
material adverse effect on the Company. Indeed, a number of state commissions
have set prices for unbundled network elements that are substantially higher and
wholesale discount rates lower for resold services than the Local Competition
Order provided on an interim basis. Furthermore, other FCC rules related to
local telephone competition remain the subject of legal challenges, and there
can be no assurance that decisions affecting those rules will not be adverse to
companies seeking to enter the local telephone market.
There can be no assurance that the FCC's remaining rules (including such
rules that may be reinstated by the Supreme Court, if any), together with rules
adopted by state public utility commissions, will be implemented in a manner
that will permit local telephone competition to develop to a substantial extent
and without significant delays. For example, many new carriers, including the
Company, have experienced problems with respect to the operational support
systems used by new carriers to order and receive network elements and wholesale
services from the ILECs. These systems are necessary for new carriers like the
Company to provide local service to customers on a timely and competitive basis.
The FCC created a task force to examine problems that have slowed the
development of local telephone competition.
In connection with offering local exchange services, the Company has entered
into approved interconnection agreements with SBC and GTE in Texas and Oklahoma
permitting the Company to (i) resell SBC's and GTE's local exchange services in
Oklahoma and Texas, (ii) interconnect the Company's network with SBC's and GTE's
networks for the purpose of exchanging local traffic with ILEC customers, and
(iii) immediately gain access to all of SBC's and GTE's unbundled network
elements. The Company is also negotiating interconnection agreements with SBC in
Arkansas, Kansas and Missouri, and with BellSouth in Louisiana and Tennessee.
As a general matter, no assurance is possible regarding how quickly or how
adequately the Company will be able to take advantage of the opportunities
created by the Telecommunications Act. The Company could be adversely affected
if the Eighth Circuit's decisions reversing some of the FCC's local competition
rules, or problems in the related arbitration and negotiation process, result in
increasing the cost of using incumbent local exchange carrier network elements
or services, or if such actions otherwise result in delays in the implementation
of the Telecommunications Act or impediments to the development of local
telephone competition.
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The Telecommunications Act also imposes certain duties on non-ILECs, such as
the Company. These duties include the obligation to complete calls originated by
competing carriers under reciprocal arrangements or through mutual exchange of
traffic without explicit payment; the obligation to permit resale of their
telecommunications services without unreasonable restrictions or conditions; and
the duty to provide dialing parity, number portability, and access to rights of
way. The Company does not anticipate that these obligations will impose a
material burden on its operations. However, in view of the fact that local
telephone competition is still in its infancy and implementation of the
Telecommunications Act has just begun, there can be no assurance in this regard.
The Telecommunications Act also establishes the foundation for substantial
new future competition for the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the RBOCs. The RBOCs are now permitted to
provide interLATA long distance service outside those states in which they offer
local exchange service ("out-of-region long distance service") upon receipt of
any necessary state and/or federal regulatory approvals. They also are allowed
to provide long distance services for their cellular and other mobile services
within the regions in which they also provide local exchange service ("in-region
service"). Under the Telecommunications Act, the RBOCs will be allowed to
provide wireline in-region services upon specific approval of the FCC and
satisfaction of other conditions, including a checklist intended to facilitate
competitive entry into local exchange markets. GTE is permitted to enter the
long distance market without regard to limitations by region. GTE is also
subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on local exchange carriers. SBC and other
RBOCs have begun to take actions directed towards obtaining authority from the
FCC to offer in-region long distance services in certain of the states in their
respective regions. The FCC forced the withdrawal of the first RBOC request for
in-region long distance authority, and rejected the next four applications.
However, there can be no assurance that the RBOC's will be prevented from
offering in-region long distance service until local competition is established.
The Eighth Circuit recently rejected the FCC's attempt to condition interLATA
entry on compliance with certain pricing principles that the Court had
previously found were outside the jurisdiction of the FCC to mandate as a
general matter. Other court actions are now pending challenging the terms under
which the FCC has denied an in-region application. Furthermore, on December 31,
1997, the U.S. District Court for the Northern District of Texas in the SBC
Decision ruled in favor of SBC that the Telecommunications Act provisions
restricting interLATA services by the RBOCs were unconstitutional. Although that
decision has been stayed pending appeal, it may, if sustained on appeal, allow
SBC to enter the interLATA market on a region-wide basis irrespective of the
state of local competition.
If the RBOCs are allowed to enter the long distance market prior to
establishing local competition, absent additional safeguards it would remove the
incentive RBOCs have to cooperate with the Company's efforts to offer local
exchange services.
The ability of the RBOCs to provide interLATA services will enable them to
provide customers with a full range of local and long distance
telecommunications services. The provision of interLATA services by RBOCs is
expected to reduce the market share of the major long distance carriers, which
are the Company's networks' primary customers. Consequently, the entry of the
RBOCs into the long distance market may have adverse consequences on the ability
of ICPs both to generate access revenues from the IXCs and to compete in
offering a package of local and long distance services. To date FCC authority to
provide in-region interLATA service has been sought by Ameritech in Michigan,
SBC in Oklahoma and BellSouth in South Carolina and Louisiana. In March 1998,
the U.S. Court of Appeals for the District of Columbia Circuit affirmed the
FCC's denial of SBC's application for long distance authority in Oklahoma. The
Department of Justice opposed each of these requests, and the FCC denied them.
More RBOC requests to provide in-region interLATA service are expected to be
filed with state commissions and the FCC in the near future. SBC has
applications pending with state commissions through its in-region states,
including Oklahoma. On June 3, 1998, the Texas PUC rejected SBC's application to
provide in-region
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interLATA service. Although SBC can be expected to refile its application with
the Texas PUC, this is a significant short-term development for IXCs and ICPs
operating in Texas and in neighboring states in SBC's region.
The FCC has granted ILECs certain flexibility in pricing their interstate
special and switched access services. Under this pricing scheme, local exchange
carriers may establish pricing zones based on access traffic density and charge
different prices for access provided in each zone. The Company anticipates that
the FCC will grant ILECs increasing pricing flexibility as the number of
interconnection agreements and competitors increases. In a pending rulemaking
proceeding scheduled for completion soon, the FCC is expected to announce new
and more specific policies regarding the conditions and timing under which ILECs
will be eligible for such increased pricing flexibility. There can be no
assurance that such pricing flexibility will not place the Company at a
competitive disadvantage, either as a purchaser of access for its long distance
operations, or as a vendor of access to other carriers or end user customers.
The Telecommunications Act repeals the telco/cable cross-ownership
prohibition and permits ILECs to provide cable television service. Prior to the
Telecommunications Act repeal, some ILECs were investing in fiber optic networks
on a limited basis through the FCC's "video dialtone" regulatory regime. With
the telco/cable cross ownership prohibition removed, ILECs are more likely to
invest in fiber optic networks because those facilities will be able to generate
a revenue stream previously unavailable on a widespread basis to the ILECs.
While ILEC entry into the video market may be a motivating factor for
construction of new facilities, these facilities also can be used by an ILEC to
provide services that compete with the Company's networks.
On May 8, 1997, the FCC released the Universal Service Order establishing a
significantly expanded federal telecommunications subsidy regime. For example,
the FCC established new subsidies for telecommunications and information
services provided to qualifying schools and libraries with an annual cap of $2.3
billion and for services provided to rural health care providers with an annual
cap of $400.0 million. The FCC also expanded the federal subsidies to low-income
consumers. Providers of interstate telecommunications service, such as the
Company, as well as certain other entities, must pay for these programs. The
Company's share of these federal subsidy funds will be based on intrastate,
interstate and international "end user" gross telecommunications revenues
effective January 1, 1998. For the first two quarters of 1998, the assessment
for the rural, high cost and low income fund has been 3.19% and 3.14% of
interstate and international end user telecommunications revenues. For the same
period, the assessment for schools and libraries and rural health care funds
("S/L") was 0.76% of intrastate, interstate, and international end user
telecommunications services. However, while the FCC has proposed a slightly
lower assessment for the rural, high cost and low income fund for the third
quarter of 1998 (3.08%), the proposed S/L factor of 1.54% is more than double
the comparable rate for the second quarter. In the May 8th order, the FCC also
announced that it will soon revise its rules for subsidizing service provided to
consumers in high cost areas, which may result in further substantial increases
in the overall cost of the subsidy program. Several parties have appealed the
May 8th order. Such appeals have been consolidated and transferred to the United
States Court of Appeals for the Fifth Circuit where they are currently pending.
In addition, on July 3, 1997, several ILECs filed a petition for stay of the May
8th order with the FCC. That petition is pending as well as several other
petitions for reconsideration.
In addition, on May 16, 1997, the FCC released the Access Charge Reform
Order revising its access charge rate structure. The new rules substantially
increase the costs that local exchange carriers which are subject to the FCC's
price cap rules, recover through monthly, non-traffic sensitive access charges
and substantially decrease the costs that price cap LECs recover through traffic
sensitive access charges. In the order, the FCC also announced its plan to bring
interstate access rate levels more in line with cost. The FCC has stated that
this plan will grant price cap LECs increased pricing flexibility upon
demonstrations of increased competition (or potential competition) in relevant
markets. The manner in which the FCC further implements this approach to
lowering access charge levels could have a material effect on the Company's
ability to compete in providing interstate access services and on the Company's
ILEC
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<PAGE>
operations. An October 1997 FCC access charge decision, for example, requires
local exchange carriers to provide interexchange carriers with certain
information about the number and types of charges they impose on interexchange
carriers' presubscribed customers. Several parties have appealed the Access
Charge Reform Order. Those appeals have been consolidated and transferred to the
United States Court of Appeals for the Eighth Circuit where they are currently
pending.
The Telecommunications Act potentially impacts the Company's ILEC
operations. Under previous regulations access charges contained implicit support
for high-cost areas. The FCC has initiated proceedings to overhaul the
contribution mechanism for federal support revenue. On May 16, 1997, the FCC
issued the Access Charge Reform Order that would remove implicit universal
service support from access revenues and place more emphasis for such support on
HCF/USF. To the extent reductions in access charges are not offset by explicit
universal service subsidies, this could have a materially adverse effect upon
the Company's operations. Until such time as the appeals of the Universal
Service Order and/or Access Charge Reform Order are decided, there can be no
assurance of how either of these Orders will be implemented or enforced or what
effect the Orders will have on competition within the telecommunications
industry generally, or on the competitive position of the Company, in
particular.
A number of ILECs, including SBC and BellSouth, have been contesting whether
the obligation to pay reciprocal compensation to ICP's should apply to local
telephone calls terminating to Internet service providers ("ISPs"). The ILECs
claim that this traffic is interstate in nature and therefore should be exempt
from compensation arrangements applicable to local, intrastate calls. The FCC,
however, has determined on a number of occasions, most recently in its May 16,
1997, access charge reform order, that calls to ISPs should be exempt from
interstate access charges and should be governed by local exchange tariffs.
Currently, the commissions of nineteen states, including Maryland, Michigan, New
York, Oklahoma, Tennessee, Texas and Virginia, have ruled that reciprocal
compensation arrangements do apply to ISP traffic. On June 16, 1998, a federal
district court in Texas denied SBC's appeal of the Texas PUC's decision that
local calls to ISPs are entitled to payment of reciprocal compensation. Disputes
over the appropriate treatment of ISP traffic are pending in other states.
STATE REGULATION. The Company is also subject to various state laws and
regulations. Most public utility commissions require providers such as the
Company to obtain authority from the commission prior to the initiation of
intrastate service. The Company has been certified to provide intrastate
telecommunications services in Oklahoma and Texas. The certification permits the
Company to provide a range of local communications services, including basic
local exchange service, resold inter-exchange service, and competitive access
service. In most states, including Texas and Oklahoma, the Company also is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate. The Company also is required to
update or amend its tariffs when it adjusts its rates or adds new products, and
is subject to various reporting and record-keeping requirements.
Dobson Telephone is subject to the regulatory authority of the OCC, which
sets rates, terms and conditions of service, and mandates minimum service and
quality of service requirements for telephone companies in Oklahoma. Telephone
companies in Oklahoma have elected to be access providers, providing long
distance service only between their own exchanges. Interexchange carriers,
including SBC, provide all other long distance services for other customers.
Logix has received authority to provide competitive local exchange
telecommunications services and to resell intrastate long distance services
within Oklahoma and has received authority to resell intrastate long distance
services within Texas. American Telco has received authority to provide
competitive local exchange telecommunication services and to resell intrastate
long distance services within Texas.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or
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<PAGE>
other penalties also may be imposed for such violations. There can be no
assurance that state utilities commissions or third parties will not raise
issues with regard to the Company's compliance with applicable laws or
regulations.
Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service competition, the
Telecommunications Act preserves the ability of states to impose reasonable
terms and conditions of service and other regulatory requirements. However,
these statutes and related questions arising from the Telecommunications Act
will be elaborated further through rules and policy decisions made by the FCC,
courts and PUCs in the process of addressing local service competition issues.
The Company also will be heavily affected by state commission decisions
related to the ILECs, particularly in view of the decisions of the Eighth
Circuit noted above which resulted in a larger role for state commissions and a
reduced role for the FCC. For example, state commissions have significant
responsibility under the Telecommunications Act to oversee relationships between
ILECs and ICPs with respect to use of the ILECs' network elements and wholesale
local services. State commissions arbitrate interconnection agreements between
the incumbent local exchange carrier pricing issues in major proceedings now
underway. They will also determine how competitors can take advantage of the
terms and conditions of interconnection agreements that ILECs reach with other
carriers. It is too early to evaluate how these matters will be resolved, or
their impact on the ability of the Company to pursue its business plan.
States also regulate the intrastate carrier access services of the ILECs.
The Company is required to pay such access charges to originate and terminate
its intrastate long distance traffic. The Company could be adversely affected by
high access charges, particularly to the extent that the ILECs do not incur the
same level of costs with respect to their own intrastate long distance services.
In a related development, states also will be developing intrastate universal
service charges parallel to the interstate charges created by the FCC. For
example, ILECs such as SBC are proposing that states create funds that would be
supported by potentially large payments by firms such as the Company based on
their total intrastate revenues. Another issue is use by certain ILECs, with the
approval of PUCs, of extended local area calling that converts otherwise
competitive intrastate toll service to flat rate local service. States also are
or will be addressing various intraLATA dialing parity issues that may affect
competition. The Company's business could be adversely affected by these or
other developments.
The Company's ILEC operations have been determined by the OCC to be eligible
to receive both federal universal funds and OUSF and HCF funds. The Oklahoma
Telecom Act specifically provides that eligible local exchange
telecommunications service providers are to receive OUSF funding to reimburse
them for their reasonable investment and expenses incurred in providing
universal services which are not recovered from the federal universal service
fund or any other state or federal fund, for infrastructure expenditures or
costs incurred in response to facility or service requirements established by
governmental mandate and for other purposes deemed necessary by the OCC to
preserve and advance universal service. The OCC is promulgating rules to
implement the Oklahoma Telecom Act. The interpretation of the Oklahoma Telecom
Act and application of the OCC rules implementing the OUSF could have a material
effect on Company's operations.
The Company also will be affected by how states regulate the retail prices
of the ILECs with which it competes. The Company believes that, as the degree of
intrastate competition increases, the states will offer the ILECs increasing
pricing flexibility. This flexibility may present the ILECs with an opportunity
to subsidize services that compete with the Company's services with revenues
generated from non-competitive services, thereby allowing ILECs to offer
competitive services at lower prices than they otherwise could. In a related
development, certain RBOCs are seeking authority to create "ICP" affiliates that
would operate on a much less regulated basis and therefore could provide
significant competition in the business market whether or not the traditional
ILEC local business receives more pricing flexibility. The Company
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<PAGE>
cannot predict the extent to which these developments may occur or their impact
on the Company's business.
LOCAL GOVERNMENT AUTHORIZATIONS AND RELATED RIGHTS OF WAY. The Company is
required to obtain street use and construction permits and licenses and/or
franchises to install and expand its fiber optic networks using municipal rights
of way. In some municipalities where the Company has installed or anticipates
constructing networks, it will be required to pay license or franchise fees
based on a percentage of gross revenues or on a per linear foot basis. There can
be no assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, the ILECs do not pay such
franchise fees or pay fees that are substantially less than those required to be
paid by the Company, although the Telecommunications Act requires that in the
future such fees be applied in a competitively neutral manner. To the extent
that, notwithstanding the Telecommunications Act, competitors do not pay the
same level of fees as the Company, the Company could be at a competitive
disadvantage. Termination of the existing franchise or license agreements prior
to their expiration dates or a failure to renew the franchise or license
agreements and a requirement that the Company remove its facilities or abandon
its network in place could have a material adverse effect on the Company. In
addition, the Company would be adversely affected if it is unable to obtain
additional authorization for new construction on reasonable terms. Furthermore,
open issues exist regarding the ability of new local service providers to gain
access to commercial office buildings to serve tenants. Two favorable federal
district court decisions interpreting the Telecommunications Act limit the
extent to which Texas localities may impose right-of-way regulations and fees on
the Company where the Company resells the services of ILECs and other
facilities-based carriers. However, no assurance can be given that these
decisions will not be subject to appeal or that future court decisions, either
in Texas or other states, will prove favorable to the Company.
GENERAL. The telecommunications market is in a period of substantial change
and uncertainty. As the Telecommunications Act and related FCC and state actions
are implemented, new issues are likely to arise that can affect the Company and
its business plan. No assurance can be given that future regulatory developments
will not have a materially adverse impact on the Company.
EMPLOYEES AND AGENTS
As of June 30, 1998, the Company had approximately 490 employees. In
addition, the Company also enters into agreements with independent sales agents
to market its products. None of the Company's employees are represented by a
labor organization, and the Company considers its employee relations to be good.
PROPERTIES
Dobson Communications maintains its corporate headquarters in Oklahoma City,
Oklahoma. The Company leases a portion of this space, which is approximately
6,025 square feet, from an affiliate of the Company at a monthly rental of
approximately $9,750. See "Management--Certain Transactions." The Company also
owns 12 switch sites and leases 19 sales and administrative offices and four
switch sites at aggregate annual rentals of approximately $1.5 million. The
Company anticipates that it will review these leases from time to time and may,
in the future, lease or acquire new facilities as needed. The Company expects to
lease or purchase additional sales and administrative office spaces and switch
sites in connection with the expansion of its business. The Company does not
anticipate that it will encounter any material difficulties in meeting its
future needs for any leased space.
LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually or in the aggregate are material to the Company. The Company is a
party to routine filings and customary regulatory proceedings with the FCC, OCC
and state PUCs relating to its operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are set forth below.
Certain of the officers and directors hold or have held positions in Dobson
Communications and several of its subsidiaries. The ages of the persons set
forth below are as of June 30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Everett R. Dobson(1)................ 38 Chairman of the Board, President and Chief Executive Officer of
Dobson Communications and Chairman of the Board, Chief Executive
Officer, Treasurer and Secretary and Director of Logix
Stephen T. Dobson(1)................ 34 Treasurer, Secretary and Director of Dobson Communications and
President and Director of Logix
William J. Hoffman, Jr.............. 35 Vice President of Dobson Communications and Vice President and Chief
Operating Officer of Logix
James R. Rutherford................. 41 President of Dobson Telephone Company
Bruce R. Knooihuizen................ 41 Vice President and Chief Financial Officer of Dobson Communications
and Vice President and Chief Financial Officer of Logix
John W. Gray, Jr.................... 35 Vice President of Regulations of Logix Communications Corporation
Robert L. Scott..................... 35 Vice President of Network and Technology Systems of Logix
Communications Corporation
Glenn D. Hall....................... 54 Vice President of Network Development and Distribution of Logix
Communications Corporation
Russell L. Dobson(1)................ 62 Director of Logix
Justin L. Jaschke................... 40 Director of Logix
Thadeus J. Mocarski................. 36 Director of Logix
</TABLE>
- ------------------------
(1) Everett R. Dobson and Stephen T. Dobson are sons of Russell L. Dobson.
Logix was incorporated under the name "Dobson Wireline Company" in December
1997 in connection with a corporate reorganization (the "Reorganization")
pursuant to which Dobson Communications segregated its wireline and wireless
activities and became the holding company parent of Dobson Operating Company
("DOC"). In October 1998, the Company changed its name to "Logix Communications
Enterprises, Inc."
EVERETT R. DOBSON has served as a Chairman and Chief Executive Officer of
the Company since its formation in December 1997 and as a director and officer
of Dobson Communications since 1982. From 1990 to 1996, he served as a director,
President and Chief Operating Officer of Dobson Communications and President of
Dobson Communications' cellular subsidiaries. He was elected Chairman of the
Board and Chief Executive Officer of Dobson Communications in April 1996. Mr.
Dobson devotes approximately 40% of his time to the Company. Mr. Dobson served
on the board of the Cellular Telecommunications Industry Association ("CTIA") in
1993 and 1994. He holds a B.A. in Economics from Southwestern Oklahoma State
University ("SWOSU") where he currently sits on the SWOSU Foundation Board and
chairs the investment committee.
STEPHEN T. DOBSON has been President and a director of the Company since
March 1998, and has served as an officer of the Company since its incorporation
in 1997. He has been a director of Dobson
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Communications since 1990. He has served as Treasurer and Secretary of Dobson
Communications since 1990 and General Manager and Secretary of Dobson Telephone
since 1994 and 1990, respectively. However, Mr. Dobson devotes substantially all
of his time to the Company. He became President of Logix Communications
Corporation ("LOGIX") in January 1997. Mr. Dobson is a member of the Western
Rural Telephone Association ("WRTA"), National Telephone Cooperative Association
and Telecommunications Resellers Association. He holds a B.S. in business
administration from the University of Central Oklahoma.
WILLIAM J. HOFFMAN, JR. joined Dobson Communications as Vice President and
Chief Operating Officer and Vice President and Chief Operating Officer of the
Company in October 1997. Mr. Hoffman devotes substantially all of his time to
the Company. Prior to joining Dobson Communications, Mr. Hoffman was employed by
Intermedia Communications, Inc. as Division Vice President--Florida Division
from 1995 to 1997 and from 1987 to 1995 by Sprint Communications, serving as
Branch Manager, Senior National Account Manager, Product Marketing Manager and
National Account Consultant. He was a Captain in the U.S. Army in Europe working
in military intelligence from 1983 to 1987. Mr. Hoffman holds a B.S. in
electrical engineering from Auburn University.
JAMES R. RUTHERFORD became President of Dobson Telephone Company in March
1998. Mr. Rutherford has been employed by Dobson Communications and its
subsidiaries since 1988 and has worked in various capacities, including manager
and coordinator of contract engineering and construction, outside plant manager,
general manager, and assisted in the start-up and development of the Logix's ICP
operations. Prior to joining Dobson Telephone, Mr. Rutherford was employed by
C.H. Guernsey & Co., a telecommunications engineering firm, for ten years
working in outside plant engineering and design, and project coordination. He
serves as a director of the Oklahoma High Cost Fund Board and is actively
involved in the Oklahoma Telephone Association ("OTA") and the WRTA industry
organizations. In addition, Mr. Rutherford serves on the Oklahoma Rural
Telephone Companies technical and regulatory committees.
BRUCE R. KNOOIHUIZEN joined Dobson Communications as Vice President and
Chief Financial Officer in July 1996, and has held the same positions at the
Company since its incorporation in 1997. Mr. Knooihuizen devotes approximately
40% of his time to the Company. From 1994 to 1996, Mr. Knooihuizen was Chief
Financial Officer and Secretary for The Westlink Co. in San Diego, a wireless
provider which was formerly an operating unit of U S WEST. Previously, he was
Treasurer and Controller of Ameritech Cellular from 1990 to 1994, Director,
Accounting Operations of Ameritech Applied Technologies from 1988 to 1990, and
Controller of Ameritech Properties in 1988, all located in Chicago. From 1980 to
1988 he held various financial and accounting positions with The Ohio Bell
Telephone Company. Mr. Knooihuizen received a B.S. in finance from Miami
University in Oxford, Ohio and an M.B.A. in finance from the University of
Cincinnati.
JOHN W. GRAY, JR. has been Vice President of Regulations of LOGIX since
March 1998. Prior to joining LOGIX, he served as lead counsel for the OCC from
July 1989 to March 1998. With the OCC, Mr. Gray's duties included representing
the Telecommunications Section of the Public Utility Division, Oklahoma
Corporation Commission in federal and state, administrative, legislative and
judicial proceedings. Mr. Gray also served as the OCC contact person with the
FCC and Department of Justice. He received his J.D. from the University of Tulsa
College of Law and holds a Bachelor of Criminal Justice from the University of
Nebraska.
ROBERT L. SCOTT has been Vice President of Network Development and
Distribution of LOGIX since March 1998. Mr. Scott served as the director of
strategic planning and project delivery of Janssen Pharmaceutics, a subsidiary
of Johnson & Johnson, from January 1997 until joining LOGIX. From November 1994
until January 1997 Mr. Scott served as manager of network systems and strategies
for Johnson & Johnson and was an internal program manager for General Electric
for two years prior to
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joining Johnson & Johnson. He has also worked in network strategies for Johnson
& Johnson, General Electric and ABC Television Network. Prior to those
positions, he served in the military for six years.
GLENN D. HALL joined LOGIX as Vice President of Network Development and
Distribution in March 1998. Prior to that, Mr. Hall served as the director of
access management at Sprint from September 1991 to March 1998. Other positions
at Sprint held by Mr. Hall included the director of access technologies and
product support manager. Prior to joining Sprint, Mr. Hall was a network staff
manager for AT&T. He received his AA in Communication Technologies at Hinds
Community College and a BA in Business at Ottowa University.
RUSSELL L. DOBSON has been a director of Dobson Communications since 1990
and was Chairman of the Board and Chief Executive Officer from 1990 to 1996. Mr.
Dobson joined his father at Dobson Telephone in 1956 and became the controlling
owner and Chief Executive Officer in 1975 when he purchased his father's
interest. He has been active in many industry-related groups, including the OTA,
WRTA and Organization for the Protection and Advancement of Small Telephone
Companies.
JUSTIN L. JASCHKE has been a director of Dobson Communications since October
1996 and of the Company since its incorporation in 1997. Mr. Jaschke has been
the Chief Executive Officer of Verio, Inc., a privately held Internet access
provider, since its inception in March 1996. He is also a member of Verio,
Inc.'s Board of Directors. Prior to forming Verio, Inc., Mr. Jaschke served as
Chief Operating Officer for Nextel Communications, Inc. ("Nextel") following its
merger with OneComm Corporation ("OneComm") in July of 1995. Mr. Jaschke served
as OneComm's President and a member of its Board of Directors from the time that
he joined that company in April 1993 until the merger with Nextel. Mr. Jaschke
currently serves as Chairman of the Board of Directors of V-I-A Internet, Inc.
and also serves on the Board of Directors of Metricom, Inc., a leading wireless
data communications provider. From May 1990 to April 1993, Mr. Jaschke served as
President and CEO of Bay Area Cellular Telephone Company. From November 1987 to
May 1990, Mr. Jaschke was Vice President of Corporate Development of PacTel
Cellular, and from 1985 to 1987 was Director of Mergers and Acquisitions of
PacTel Corporation. Prior to that, Mr. Jaschke was a management consultant with
Marakon Associates. Mr. Jaschke has a B.S. in mathematics from the University of
Puget Sound and an M.S. in management from the Massachusetts Institute of
Technology Sloan School of Management.
THADEUS J. MOCARSKI has been a director of Dobson Communications since April
1996 and of the Company since its incorporation in 1997. Mr. Mocarski has been a
partner of Fleet Equity Partners a private equity fund located in Providence,
Rhode Island, since 1994. Affiliates of Fleet Equity Partners (the "Fleet
Investors") own all of the outstanding Class B and Class C Preferred Stock of
Dobson Communications. From 1989 to 1994, Mr. Mocarski was employed by the law
firm Edwards & Angell in Providence, Rhode Island, where he represented various
private equity capital firms in their investment and acquisition activities,
including Fleet Equity Partners. Mr. Mocarski received a B.A. from Colby College
and a J.D. from the Washington College of Law. Mr. Mocarski is a director of
Exodus Communications, Inc., an operator of internet data centers headquartered
in Santa Clara, California.
COMPOSITION OF BOARD OF DIRECTORS
The Company's Board of Directors presently consists of five directors.
Directors and executive officers of the Company are elected to serve until they
resign or are removed, or are otherwise disqualified to serve, or until their
successors are elected and qualified. Directors of the Company are elected for
one-year terms at the annual meeting of stockholders which is held in April of
each year. Officers of the Company are appointed at the Board's first meeting
after each annual meeting of stockholders.
DIRECTOR COMPENSATION
Directors receive no additional compensation for services rendered as
directors but are reimbursed for any out-of-pocket expenses incurred in
attending meetings.
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EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation during
1997 earned by the Company's chief executive officer and its other three most
highly compensated executive officers as of December 31, 1997 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES UNDERLYING
--------------------- OTHER ANNUAL OPTION AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY($) BONUS($) COMPENSATION($)(2) (# OF SHARES)(3) COMPENSATION($)(4)
- --------------------------------- ---------- --------- ------------------ --------------------- -------------------
<S> <C> <C> <C> <C> <C>
Everett R. Dobson................ $ 69,000 $ 46,000 $ 12,600(5) -- $ 2,200
Chairman of the Board and Chief
Executive Officer
Stephen T. Dobson................ 100,000 75,000 13,800(6) -- 6,500
President
Robert J. Mirabito(7)............ 85,000 25,000 -- 1,207 4,400
President of fiber subsidiaries
James R. Rutherford.............. 71,400 20,000 -- 1,207 9,000
President of Dobson Telephone
</TABLE>
- ------------------------
(1) Certain officers of Logix are also officers of Dobson Communications and
various of its other subsidiaries. Stephen T. Dobson and James R. Rutherford
are full-time employees of Dobson Wireline as was Robert Mirabito prior to
May 29, 1998. As a result, all of the compensation paid to these
individuals, whether by Dobson Communications or Logix is included in the
above summary compensation table. With respect to Everett R. Dobson, the
Chief Executive Officer, the above table only includes that portion of his
annual compensation which is allocated to Logix. See "--Certain
Transactions."
(2) Represents the value of perquisites and other personal benefits in excess of
10% of annual salary and bonus.
(3) Represents options to purchase shares of Dobson Communications Class B
common stock. Upon his resignation, Mr. Mirabito forfeited his non-vested
options.
(4) Includes the matching contributions made by Dobson Communications to the
account of the executive officer under Dobson Communications' 401(k) Profit
Sharing Plan.
(5) Includes $8,400 for personal use of Dobson Communications aircraft and
$4,200 for a company-provided vehicle.
(6) Includes $10,400 for personal use of Dobson Communications aircraft and
$3,400 for a company-provided vehicle.
(7) Mr. Mirabito resigned effective May 29, 1998.
The Named Executive Officers listed below were granted options to purchase
shares of Dobson Communications Corporations' Class B Common Stock in 1997. No
stock options were exercised by the
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Named Executive Officers in 1997 or during the first six months of 1998, nor
were additional options granted during the first six months of 1998:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ANNUAL RATES
TOTAL OPTIONS OF STOCK APPRECIATION
NUMBER OF GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED 1997 ($/SHARE) DATE 5%($) 10%($)
- -------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
G. Edward Evans................. 6,033(2) 42.9% $ 100 01/06/07 $ 379,412 $ 961,505
Robert J. Mirabito.............. 1,207(3) 8.6 100 03/25/07 75,908 192,365
</TABLE>
- ------------------------
(1) The assumed annual rates of stock price appreciation of 5% and 10% are set
by the Securities and Exchange Commission and are not intended as a forecast
of possible future appreciation in stock prices.
(2) Options to purchase 12% of such shares first become exercisable on each of
the first five anniversaries of the grant date; options to purchase an
additional 8% of such shares first become exercisable on the same dates if
annual performance objectives are achieved.
(3) Options to purchase 20% of such shares first become exercisable on each of
the first five anniversaries of the grant date. Mr. Mirabito resigned
effective May 29, 1998 and has forfeited his options.
1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
NUMBER OF SECURITIES UNDERLYING 12/31/97
UNEXERCISED OPTIONS AT 12/31/97 ($) EXERCISABLE/UNEXERCISABLE
NAME (#) EXERCISABLE/UNEXERCISABLE (1)
- ------------------------------------ -------------------------------- -------------------------------
<S> <C> <C>
Bruce R. Knooihuizen................ 1,508/6,033 $ 301,600/$1,206,600
G. Edward Evans..................... 0/6,033 0/1,206,600
Robert J. Mirabito.................. 0/1,207 0/241,400
</TABLE>
- ------------------------
(1) The value of unexercised in-the-money options at December 31, 1997 is
computed as the product of (i) stock value at December 31, 1997 less stock
option exercise price and (ii) number of underlying securities at December
31, 1997.
(2) Mr. Mirabito resigned effective May 29, 1998 and has forfeited his options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Logix does not have a separate compensation committee of its board of
directors. The board of directors sets the compensation for its executive
officers and Everett R. Dobson, Chairman of the Board, and Stephen T. Dobson,
President, are directors and participate in these deliberations concerning
executive officer compensation. Each of the directors of Logix also serve on the
board of directors of Dobson Communications and on the boards of directors of
various subsidiaries of Dobson Communications. As such, each of the directors
participates in the deliberations concerning executive officers' compensation
for Dobson Communications and its subsidiaries.
EMPLOYMENT AGREEMENTS
In connection with the employment of William J. Hoffman, Jr. in 1997, Dobson
Communications agreed to provide compensation in the form of a combination of
some or all of the following: salary, bonus, stock options and/or other
benefits. The terms of Mr. Hoffman's employment are a $10,000 payment upon
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acceptance of employment, an initial annual salary of $110,000, an annual bonus
ranging from 30% to 50% of his annual salary, country club initiation fees and
dues, a five-year option to purchase 664 shares of Dobson Communications' Class
B Common Stock at an exercise price equal to its fair market value at date of
grant, with 60% of the options vesting ratably over five years and 40% vesting
over five years based on the achievement of annual performance objectives. Mr.
Hoffman is also entitled to a severance payment equal to one year's salary in
the event of termination of employment of Mr. Hoffman without cause. The options
to purchase shares of Class B Common Stock held by Mr. Hoffman become fully
vested upon a change of control of Dobson Communications. Effective August 1,
1998, and pursuant to the Logix Stock Option Plan, the Company granted to Mr.
Hoffman options to purchase an aggregate of 1,042,500 shares of Common Stock
over a ten year term at an exercise price of $2.00 per share, which options vest
at the rate of 20% on each anniversary date of the grant. See "--Stock Option
Plan."
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, 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 Communication, including the development of goodwill for Dobson
Communications and the Company. During 1997, Mr. Dobson was paid $197,946 by
Dobson Communications.
STOCK OPTION PLANS
Logix adopted a Stock Option Plan (the "Logix Plan") effective August 1,
1998. The purpose of the Logix Plan is be to encourage key employees of the
Company by providing opportunities to participate in the ownership of Logix and
its future growth through the grant of incentive stock options and nonqualified
stock options. The Logix Plan permits the grant of options to directors. The
Logix Plan is intended to be administered by the Board of Directors, but may be
administered by a committee of the Board (whether the Board or a committee, the
"Committee")
The maximum number of shares of Logix Common Stock for which options may be
granted under the Plan is 3,750,000, subject to adjustment in the event of any
stock dividend, stock split, recapitalization, reorganization or certain defined
change in control events. Shares subject to previously expired or terminated
options become available again for grants of options. The shares to be issued
under the Plan will be newly issued shares. The shares to be issued under the
Logix Plan will be newly issued shares.
The number of shares and other terms of each grant are determined by the
Committee. The price payable upon the exercise of an incentive stock option may
not be less than 100% of the fair market value of the Logix Common Stock at the
time of the grant, or in the case of an incentive stock option granted to an
employee owning stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (a "10% Shareholder"), 110% of the
fair market value on the date of grant. Incentive stock options may be granted
to an employee only to the extent that the aggregate exercise price of all such
options under all Company plans becoming exercisable for the first time by the
employee during any calendar year does not exceed $100,000. The price payable
upon the exercise of a nonqualified stock option must be at least the minimum
legal consideration required under the laws of Oklahoma.
Each option granted under the Plan will expire on the date specified by the
Committee, but not more than ten years from the date of grant or, in the case of
a 10% Shareholder, not more than five years from the date of grant. Unless
otherwise agreed, an incentive stock option will terminate not more than 90 days
(or twelve months in the event of death or disability) after the optionee's
termination of employment.
An optionee may exercise an option by giving notice to the Company,
accompanied by an instrument of accession providing that the optionee agrees to
be bound by the terms applicable to shareholders under the Shareholders'
Agreement and full payment of the purchase price in cash or, at the discretion
of the
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Committee, (i) Common Stock having a fair market value equal to the exercise
price, (ii) the optionee's personal recourse note bearing interest payable not
less than annually at no less than 100% of the lowest applicable federal rate
(as defined in Section 1274(d) of the Internal Revenue Code), (iii) an
assignment of proceeds from the sale of a portion of the stock subject to the
option being exercised, or (iv) a combination of the foregoing.
Outstanding options become nonforfeitable and exercisable in full
immediately prior to certain defined change of control events. Unless otherwise
determined by the Committee, outstanding options will terminate immediately
prior to the consummation of the dissolution or liquidation of Dobson.
The Plan may be terminated or amended by the Board of Directors at any time
subject, in the case of certain amendments, to shareholder approval. If not
earlier terminated, the Plan expires on August 1, 2008.
Effective August 1, 1998, the Company granted options to purchase an
aggregate of 1,417,500 shares at an exercise price of $2.00 share. Each option
agreement provides that the right to exercise becomes vested at the rate of 20%
on each anniversary date of the grant.
Key employees of the Company may also participate in the Dobson
Communications 1996 Stock Option Plan (the "Dobson Communications Plan"). The
Dobson Communications Plan permits the grant of stock options to purchase Class
B Common Stock of Dobson Communications.
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transaction
between the Company and persons or entities affiliated with officers, directors,
or principal stockholders of Dobson Communications be on terms no less favorable
to the Company than reasonably could have been obtained in an arm's length
transaction with independent third parties. Any other matters involving
potential conflicts of interests are to be resolved on a case-by-case basis.
Dobson Communications leases its headquarters from WillRuss Limited
Liability Company ("WillRuss") pursuant to a 10-year lease expiring in 2005.
WillRuss is owned by Russell L. Dobson, a director of the Company, and his wife.
Monthly rent under the lease is approximately $23,000, or $.93 per square foot.
The Company utilizes a portion of the space leased by Dobson Communications, and
is allocated a portion of the rent. The amount allocated to the Company in 1997
was $194,000. The Company believes that the terms of this lease are no less
favorable to the Company than could be obtained in a lease from an unrelated
party.
Dobson Communications owns approximately 15% of the outstanding common stock
of Zenex. Everett R. Dobson was a director of Zenex from August 1995 to
September 1997. On January 6, 1998, a subsidiary of the Company purchased
contractual rights, information data and other rights with respect to certain of
Zenex's long distance customers located in areas served by Dobson Telephone for
$105,000. In addition, the Company recently purchased certain long distance
customers and related assets for approximately $4.5 million. In connection with
the purchase of these assets of Zenex, a note payable in the amount of $284,765,
including accrued interest, from Zenex to Everett R. Dobson was paid in full.
Beginning in 1997 Dobson Communications began to provide certain
administrative services, including accounting, information systems management,
human resources management and marketing. Additionally, officers of Logix are
also officers of Dobson Communications and various of its other subsidiaries.
These officers perform functions for all of the Dobson Communications
subsidiaries, including Logix. Logix reimburses Dobson Communications based on
Dobson Communications' cost of providing the services. In 1997, the total amount
charged to Logix for these administrative services and officer compensation was
$1,448,000.
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Logix provides telephone services to Dobson Communications and its
subsidiaries. These services amounted to $338,000, $421,000 and $480,000 in
1995, 1996 and 1997, respectively.
Logix, through its fiber optic network, provides long-haul transport
services to Dobson Communications' cellular subsidiaries. These services are
provided on a market rate basis. For each of 1995, 1996 and 1997, these services
amounted to $1.1 million.
Logix is a party to a tax sharing agreement with Dobson Communications and
its other subsidiaries. Logix, as a member of the affiliated group with Dobson
Communications joins with Dobson Communications and its other subsidiaries in
filing a consolidated federal income tax return. Under the tax sharing
agreement, each subsidiary's contribution toward the group's consolidated
federal income tax liability is determined as if such party were at all times a
separate taxpayer not included in the group. Based on this determination of
separate tax liability, each subsidiary pays to Dobson Communications an amount
in lieu of taxes equal to the amount the subsidiary would be obligated to pay if
it filed returns as a separate taxpayer. If, but only to the extent that, the
group realizes a tax benefit for any taxable year as a result of the inclusion
of a subsidiary's tax items in the determination of tax liability of the group,
Dobson Communications will pay to the subsidiary an amount equal to such tax
benefits realized. As a result of the tax sharing agreement, Logix's liability
to Dobson Communications for income taxes $.4 million, $.4 million and $1.1
million in 1995, 1996 and 1997, respectively.
As a result of various intercompany activities, Logix had receivables from
Dobson Communications and its subsidiaries totaling $11.5 million, $8.2 million
and $2.1 million at December 31, 1996, 1997 and June 30, 1998, respectively.
On December 31, 1997 Dobson Communications made a capital contribution to
Logix in the form of assumption of Logix's fiber subsidiary's obligation under a
Dobson Communication's credit facility. The amount of such capital contribution
was $11.5 million.
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PRINCIPAL SHAREHOLDERS
All of the issued and outstanding capital stock of the Company is owned
beneficially and of record by Dobson Operating Company which is a wholly-owned
subsidiary of Dobson Communications. The following table provides information,
as of October 31, 1998, concerning beneficial ownership of Dobson Communication
Class A Common Stock and Class B Preferred Stock by (a) each person known by the
Company to beneficially own more than 5% of such stock, (b) each director and
named executive officer of Dobson Communications who beneficially owns any Class
A Common Stock or Class B Preferred Stock of Dobson Communications, and (c) all
directors and executive officers as a group:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B PREFERRED STOCK
------------------------ ------------------------ PERCENT OF
NUMBER OF PERCENT OF NUMBER OF PERCENT OF TOTAL VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS SHARES CLASS POWER(1)
- ---------------------------------------------------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Everett R. Dobson .................................. 469,998(2) 99.3% 40,000(3) 40.0% 89.0%
13439 N. Broadway Ext.
Oklahoma City, OK 73114
Russell L. Dobson .................................. 3,154 * -- -- *
13439 N. Broadway Ext.
Oklahoma City, OK 73114
Thadeus J. Mocarski ................................ -- -- 100,000(4) 100.0 17.4
50 Kennedy Plaza
Providence, RI 02903
Fleet Venture Resources, Inc. ...................... -- -- 69,446 69.4 12.1
50 Kennedy Plaza
Providence, RI 02903
Fleet Equity Partners VI, L.P. ..................... -- -- 29,762 29.8 5.2
50 Kennedy Plaza
Providence, RI 02903
All directors and executive officers as a group (8
persons).......................................... 473,152 100.0 100,000 100.0 100.0
</TABLE>
- ------------------------
* Less than 1%.
(1) In calculating the percent of total voting power, the voting power of shares
of Class A Common Stock (one vote per share) and Class B Preferred Stock of
Dobson Communications (presently equivalent to one vote per share) is
aggregated.
(2) All such shares are held by Dobson CC Limited Partnership. As the president
and sole director and shareholder of RLD, Inc., the general partner of the
partnership, Everett R. Dobson has voting and investment power with respect
to such shares.
(3) Includes an option, presently exercisable, to purchase 27,778 shares from
Fleet Venture Resources, Inc. ("FVR"), an indirect subsidiary of Fleet
Financial Group, 11,905 shares from Fleet Equity Partners VI, L.P. ("FEP6")
and 317 shares from Kennedy Plaza Partners ("KPP").
(4) Includes 69,446 shares held by FVR, 29,762 shares held by FEP6 and 792
shares held by KPP. Mr. Mocarski has shared voting and investment power with
respect to such shares in his capacity as Senior Vice President of FVR, as
Senior Vice President of Fleet Growth Resources II, Inc., an indirect
subsidiary of Fleet Financial Group and a general partner of FEP6, and as a
general partner of KPP. Mr. Mocarski disclaims beneficial ownership of all
such shares, except to the extent of his pecuniary interest therein.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
RUS/RTB FACILITY
Dobson Telephone is a party to loan agreements with the United States of
America, Rural Utilities Services ("RUS") and the Rural Telephone Bank ("RTB")
pursuant to which the RUS and RTB have agreed to loan the Company an aggregate
maximum of $75 million at any time outstanding (the "RUS/ RTB Facility"). At
June 30, 1998, the aggregate outstanding principal balance of these loans was
$28.0 million. The loans bear interest at annual rates varying from 2% to
10 3/4% and with scheduled maturities until 2028.
No loans under the RUS/RTB Facility may mature after May 2043. All advances
under the RUS/RTB Facility are secured by substantially all of Dobson
Telephone's assets, including its licenses and other intangible assets.
The RUS/RTB Facility contains covenants which, among other things, require
prior approval of the applicable lending agencies before Dobson Telephone can
declare or pay dividends, make distributions to or investments in affiliates or
stockholders or redeem its capital stock, unless after such payments, Dobson
Telephone's current assets equal or exceed current liabilities and its adjusted
net worth meets specified requirements. In addition, the RUS/RTB Facility limits
Dobson Telephone's ability to merge or consolidate or sell its assets or enter
into any contracts for the operation or maintenance of its property for use by
others or for toll traffic, operator assistance, extended scope or switching
services to be furnished by or for connecting or other companies other than
contracts generally used in the telephone industry. Dobson Telephone is
restricted from advancing payments or loans to any stockholders or affiliates,
other than for certain wireline related investments unless if after such
investment, the aggregate of investments does not exceed one-third of Dobson
Telephone's net worth and its net worth is at least 20% of its total assets.
The RUS/RTB Facility also provides that while Dobson Telephone's adjusted
net worth is less than 10% of its total assets, Dobson Telephone is restricted
from increasing salaries of officers or directors without the prior consent of
the majority of the noteholders. In addition, if retained earnings decrease as a
result of operations, Dobson Telephone must increase its charges for telephone
service or execute a plan for reducing expenses, each with the approval of the
noteholders. Dobson Telephone is also required to maintain a ratio of net income
or net margins plus interest expense of 1.50 to 1.
Failure to satisfy any of the covenants constitutes an event of default
under the RUS/RTB Facility permitting the applicable lending agencies to
accelerate payment of the outstanding indebtedness or sell or take possession of
the mortgaged property notwithstanding Dobson Telephone's ability to meet its
debt obligations. In the event of a default in the payment of principal or
interest on the outstanding indebtedness, if in the opinion of the holders of a
majority of outstanding indebtedness, Dobson Telephone's operations are not
being efficiently operated, the Company may be required to terminate operating
contracts or the employment of certain managers. The RUS/RTB Facility also
contains certain other events of default, including forfeiture of permits or
licenses required to carry on a material portion of its business, and customary
events of default, including, without limitation, material undischarged
judgments and bankruptcy.
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DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture dated as of June 12, 1998
between the Company, as issuer, and United States Trust Company of New York (the
"Trustee"). A copy of the Indenture is available upon request from the Company.
The New Notes will be issued under the Indenture, which will be qualified under
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), upon
effectiveness of the Registration Statement of which this Prospectus is a part.
The form and terms of the New Notes are identical in all material respects to
the form and terms of the Old Notes except that the New Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting a
transfer thereof. Upon consummation of the Exchange Offer, holders of the Notes
will not be entitled to registration rights under, or the contingent increase in
interest rate provided pursuant to, the Old Notes. The New Notes will evidence
the same debt as the Old Notes and will be treated as a single class under the
Indenture with any Old Notes that remain outstanding.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act as in effect on
the date of the Indenture. The Notes are subject to all such terms and
references made to the Indenture and the Trust Indenture Act for a statement
thereof. A copy of the Indenture has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of the material provisions of the Indenture does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part thereof by reference to the Trust
Indenture Act. Whenever particular defined terms of the Indenture not otherwise
defined herein are referred to, such defined terms are incorporated herein by
reference. For definitions of certain capitalized terms used in the following
summary, see "--Certain Definitions."
GENERAL
The Notes will be unsecured (except to the extent described under
"--Security") unsubordinated obligations of the Company, initially limited to
$350 million aggregate principal amount, and will mature on June 15, 2008. Each
Note will bear interest at the rate shown on the front cover of this Prospectus
from the Closing Date or from the most recent Interest Payment Date to which
interest has been paid or provided for, payable semiannually (to holders of
record at the close of business on the June 1 or December 1 immediately
preceding the Interest Payment Date) on June 15 and December 15 of each year,
commencing December 15, 1998. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
If by the date that is six months after the Closing Date, the Company has
not consummated a registered exchange offer for the Notes or caused a shelf
registration statement with respect to resales of the Notes to be declared
effective, the interest rate on the Notes shall be increased by .5% per annum
until the consummation of a registered exchange offer or the effectiveness of a
shelf registration statement. See "--Registration Rights."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 114 W. 47th Street, New York,
New York 10036); provided that, at the option of the Company, payment of
interest may be made by check mailed to the holders at their addresses as they
appear in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
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Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes of the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after June 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal
amount) set forth below, plus accrued and unpaid interest to the Redemption Date
(subject to the right of holders of record on the relevant Regular Record Date
that is prior to the Redemption Date to receive interest due on an Interest
Payment Date), if redeemed during the 12-month period commencing June 15 of the
years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 106.125%
2004........................................................................ 104.083
2005........................................................................ 102.042
2006 and thereafter......................................................... 100.000
</TABLE>
In addition, at any time prior to June 15, 2001, the Company may redeem up
to 35% of the aggregate principal amount of the Notes with the Net Cash Proceeds
of one or more sales of Capital Stock of the Company (other than Disqualified
Stock), at any time as a whole or from time to time in part, at a Redemption
Price (expressed as a percentage of principal amount) of 112.250%, plus accrued
and unpaid interest; PROVIDED that at least 65% of the aggregate principal
amount of the Notes originally issued on the Closing Date remains outstanding
after each such redemption and notice of any such redemption is mailed within 60
days after the related sale of Capital Stock.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; PROVIDED that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note.
SECURITY
Immediately prior to the closing of the Offering, the Company entered into
an escrow and security agreement (the "Escrow and Security Agreement") with the
Placement Agents and The United States Trust Company of New York, escrow agent
(in such capacity, the "Escrow Agent").
Of the net proceeds from the Offering of the Old Notes, $121 million have
been invested in Pledged Securities held in a Pledge Account (excluding
approximately $.8 million paid as premiums). The Pledged Securities consist of
U.S. Government obligations having scheduled interest and principal payments
which exceed the amount sufficient, as estimated by Arthur Andersen LLP, to
provide for payment in full of the first six scheduled interest payments due on
all Notes then outstanding.
Pursuant to the Escrow and Security Agreement, immediately prior to an
Interest Payment Date, the Company may either deposit with the Trustee from
funds otherwise available to the Company cash sufficient to pay the interest
scheduled to be paid on such date or the Company may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due on
the Notes. In the event the
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Company exercises the former option, the Company may direct the Trustee to
release a like amount of proceeds from the Pledge Account. A failure to pay
interest on the Notes in a timely manner through the first six scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period. The Pledged Securities and Pledge
Account will also secure the repayments of the principal amount and premium on
the Notes.
Under the Escrow and Security Agreement, once the Company makes the first
six scheduled interest payments on the Notes, all of the remaining Pledged
Securities, if any, will be released from the Pledge Account and thereafter the
Notes will be unsecured.
SINKING FUND
There are no sinking fund payments for the Notes.
RANKING
The Notes are unsubordinated indebtedness of Logix, and will rank PARI PASSU
in right of payment with all existing and future unsubordinated indebtedness of
Logix and senior in right of payment to all subordinated indebtedness of Logix.
As of June 30, 1998, the Company had (on an unconsolidated basis) no
indebtedness outstanding other than the Notes. In addition, Logix is a holding
company and the Notes will be effectively subordinated to all existing and
future liabilities (including trade payables) of the Company's subsidiaries. As
of June 30, 1998, the subsidiaries of the Company had approximately $43.4
million of liabilities (excluding intercompany payables), including
approximately $28.0 million of indebtedness, all of which indebtedness was
secured. See "Risk Factors--Leverage; Ability to Meet Required Debt Service."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any
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gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except
for purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid or accrued as dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; (vi) all
extraordinary gains and extraordinary losses, net of tax; and (vii) any
compensation expense paid or payable solely with Capital Stock (other than
Disqualified Stock) of the Company or any options, warrants or other rights to
acquire Capital Stock (other than Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; PROVIDED that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
"Limitation on Restricted Payments" covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
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Certificate) not in excess of $10 million in any transaction or series of
related transactions, or (d) sales or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received consists of property
or assets (other than current assets) of a nature or type or that are used in a
business (or a company having property or assets of a nature or type, or engaged
in a business) similar or related to the nature or type of the property and
assets of, or business of, the Company and its Restricted Subsidiaries existing
on the date of such sale or other disposition.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Section 13(d) or
14(d)(2) under the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of (x) Dobson
Communications, on a fully diluted basis, than is beneficially owned by Everett
R. Dobson and the Fleet Investors and their Affiliates on such date or (y) the
Company, on a fully diluted basis, than is beneficially owned by the Existing
Stockholders on such date and (b) after the occurrence of a Public Market, a
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the Company,
on a fully diluted basis, than is held by the Existing Stockholders on such
date; or (ii) individuals who on the Closing Date constitute the Board of
Directors (together with any new directors (x) whose election by the Board of
Directors or whose nomination by the Board of Directors for election by the
Company's stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved or (y) so long as no "person" or "group"
(within the meaning of Section 13(d) or 14(d)(2) under the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of a greater percentage of the total voting power of the Voting Stock of
Dobson Communications, on a fully diluted basis, than is held by Everett R.
Dobson and the Fleet Investors and their Affiliates on such date, whose election
was approved by Dobson Communications) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including without limitation, all series and classes of such common stock.
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"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; PROVIDED that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission (such four fiscal quarter period being the "Four Quarter
Period"); PROVIDED that, in making the foregoing calculation, (A) PRO FORMA
effect shall be given to any Indebtedness that is to be Incurred or repaid on
the Transaction Date as if such Incurrence or repayment had occurred on the
first day of such Four Quarter Period; (B) PRO FORMA effect shall be given to
Asset Dispositions and Asset Acquisitions (including giving PRO FORMA effect to
the application of proceeds of any Asset Disposition) that occur during the
period beginning on the first day of the Four Quarter Period and ending on the
Transaction Date (the "Reference Period"), as if they had occurred and such
proceeds had been applied on the first day of such Reference Period; and (C) PRO
FORMA effect shall be given to asset dispositions and asset acquisitions
(including giving PRO FORMA effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into the Company or any Restricted
Subsidiary during such Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions occurred when such
Person was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such Reference Period; PROVIDED that to the extent that clause (B)
or (C) of this sentence requires that PRO FORMA effect be given to an Asset
Acquisition or Asset Disposition, such PRO FORMA calculation shall be based upon
the four full fiscal quarters immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is acquired or
disposed of for which financial information is available.
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"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Dobson Communications" means Dobson Communications Corporation, an Oklahoma
corporation.
"Existing Stockholders" means (i) Everett R. Dobson and the Fleet Investors
and their respective Affiliates and (ii) Dobson Communications, so long as no
"person" or "group" (within the meaning of Section 13(d) or 14(d)(2) under the
Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of Dobson Communications on a fully diluted basis and such ownership
represents a greater percentage of the total voting power of the Voting Stock of
Dobson Communications, on a fully diluted basis than is held by the Existing
Stockholders in clause (i) on such date.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
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"Fleet Investors" means Fleet Venture Resources, Inc., Fleet Equity Partners
VI, L.P. and Kennedy Plaza Partners.
"Fleet Investors Capital Stock" means the capital stock of the Company
issued to the Fleet Investors in connection with a spin-off of the Company by
Dobson Communications.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); PROVIDED that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
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Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date (or, in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the unamortized
portion of the original issue discount of such Indebtedness at the time of its
issuance as determined in conformity with GAAP, (B) that money borrowed and set
aside at the time of the Incurrence of any Indebtedness in order to prefund the
payment of the interest on such Indebtedness shall not be deemed to be
"Indebtedness" so long as such money is held to secure the payment of such
interest and (C) that Indebtedness shall not include any liability for federal,
state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the
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Company or any Restricted Subsidiary) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes from the
holders commenced by mailing a notice to the Trustee and each holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such holder, the principal
amount of Notes delivered for purchase and a statement that such holder is
withdrawing his election to have such Notes purchased; and (vii) that holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof. On the Payment Date, the Company
shall (i) accept for payment on a pro rata basis Notes or portions thereof
validly tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; PROVIDED that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws
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and regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
satisfaction of judgments; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits; (vi) Interest Rate Agreements and
Currency Agreements designed solely to protect the Company or its Restricted
Subsidiaries against fluctuations in interest rates or foreign currency exchange
rates; and (vii) loans or advances to officers or employees of the Company or of
any Restricted Subsidiary that do not in the aggregate exceed $2 million at any
time outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
(including intangibles) acquired after the Closing Date; PROVIDED that (a) such
Lien is created solely for the purpose of securing Indebtedness Incurred, in
accordance with the "Limitation on Indebtedness" covenant described below, (1)
to finance the cost (including the cost of design, development, acquisition,
construction, installation, improvement, transportation or integration) of the
item of property or assets subject thereto and such Lien is created prior to, at
the time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or (2) to refinance any Indebtedness previously so secured, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
PROVIDED that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
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arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables; and (xix) Liens that secure Indebtedness with an
aggregate principal amount not in excess of $5 million at any time outstanding.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Escrow and Security Agreement for the deposit of the Pledged
Securities to be purchased by the Company with the net proceeds from the Notes.
"Pledged Securities" means the Government Securities to be purchased by the
Company and held in the Pledge Account in accordance with the Escrow and
Security Agreement.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred stock or preference stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance an Asset Acquisition, which Indebtedness by its terms, or by
the terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment
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with respect to, such Indebtedness may be made prior to the payment in full of
all of the Company's obligations under the Notes; PROVIDED that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, and (v) securities with maturities of six months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary
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to be a Restricted Subsidiary; PROVIDED that (i) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect to
such designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be Incurred (and shall be deemed to have been
Incurred) for all purposes of the Indenture. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); PROVIDED that the Company may Incur Indebtedness,
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $250 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any of its Restricted Subsidiaries; PROVIDED that any event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, (other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi), (viii) or (xi) of this paragraph)
and any refinancings thereof in an amount not to exceed the amount so refinanced
or refunded (plus premiums, accrued interest, fees and expenses); PROVIDED that
Indebtedness the proceeds of which are used to refinance or refund the Notes or
Indebtedness that is PARI PASSU with, or subordinated in right of payment to,
the Notes shall only be permitted under this clause (iii) if (A) in case the
Notes are refinanced in part or the Indebtedness to be refinanced is PARI PASSU
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made PARI PASSU with, or subordinate in right of payment to, the
remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated
in right of payment to the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average Life
of such new Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded; and PROVIDED FURTHER that in no event
may Indebtedness of the Company be
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refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to
this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business, (B) under Currency
Agreements and Interest Rate Agreements; PROVIDED that such agreements (a) are
designed solely to protect the Company or its Subsidiaries against fluctuations
in foreign currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; or (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the extent
the net proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B) deposited to
defease the Notes as described below under "Defeasance"; (vi) Guarantees of the
Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness (including
Guarantees) Incurred to finance the cost (including the cost of design,
development, acquisition, construction, installation, improvement,
transportation or integration) to acquire equipment, inventory or network assets
(including acquisitions by way of Capitalized Lease and acquisitions of the
Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of
the fair market value of the equipment, inventory or network assets so acquired)
by the Company or a Restricted Subsidiary after the Closing Date; (viii)
Indebtedness of the Company not to exceed, at any one time outstanding, two
times (A) the Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or Net Cash Proceeds have
not been used pursuant to clause (C)(2) of the first paragraph or clause (iii),
(iv), (vi) or (vii) of the second paragraph of the "Limitation on Restricted
Payments" covenant described below to make a Restricted Payment; and (II) if
such capital contribution or Net Cash Proceeds are used to consummate a
transaction pursuant to which the Company Incurs Acquired Indebtedness, the
amount of such Net Cash Proceeds exceeds one-half of the amount of Acquired
Indebtedness so Incurred and (B) 80% of the fair market value of property (other
than cash and cash equivalents) received by the Company after the Closing Date
from the sale of its Capital Stock (other than Disqualified Stock) to a Person
that is not a Subsidiary of the Company, to the extent (I) such capital
contribution or sale of Capital Stock has not been used pursuant to clause
(iii), (iv), (vi) or (vii) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted Payment and
(II) if such capital contribution or Capital Stock is used to consummate a
transaction pursuant to which the Company Incurs Acquired Indebtedness, 80% of
the fair market value of the property received exceeds one-half of the amount of
Acquired Indebtedness so Incurred PROVIDED that such Indebtedness does not
mature prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes; (ix) Acquired Indebtedness; (x) Strategic Subordinated
Indebtedness; and (xi) subordinated Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (x) above) in an aggregate
principal amount outstanding at any time not to exceed $30 million, less any
amount of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this
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"Limitation on Indebtedness" covenant shall not be deemed to be exceeded, with
respect to any outstanding Indebtedness due solely to the result of fluctuations
in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) PRO RATA dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed with the Commission PLUS (2) the aggregate Net
Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted by the
Indenture of Indebtedness of the Company for cash subsequent to the Closing Date
upon the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
or any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes), in each case except to the extent such Net Cash Proceeds are used to
Incur Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, PLUS (3) an amount equal
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to the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
any Person the primary business of which is related, ancillary or complementary
to the business of the Company and its Restricted Subsidiaries on the date of
such Investments; PROVIDED that the aggregate amount of Investments made
pursuant to this clause (vi) does not exceed the sum of (a) $25 million and (b)
the amount of Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii) or (iv) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (z) the net reduction in Investments made pursuant to this clause
(vi) resulting from distributions on or repayments of such Investments or from
the Net Cash Proceeds from the sale of any such Investment (except in each case
to the extent any such payment or proceeds is included in the calculation of
Adjusted Consolidated Net Income) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition of "Investments"),
PROVIDED that the net reduction in any Investment shall not exceed the amount of
such Investment; (vii) Investments acquired in exchange for Capital Stock (other
than Disqualified Stock) of the Company; (viii) the declaration or payment of
dividends on the Common Stock of the Company following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by
the Company in such Public Equity Offering; (ix) prior to the occurrence of a
Public Market, the purchase, redemption, retirement or other acquisition for
value of shares of Capital Stock of the Company, or options to purchase such
shares, held by directors, employees or officers, or former directors, employees
or officers, of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon the death, disability, retirement,
termination of employment or pursuant to the terms of any agreement under which
such shares of Capital Stock or options were issued; PROVIDED that the aggregate
consideration paid for such purchase, redemption, retirement or other
acquisition for value of such shares or options after the Closing
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Date does not exceed $5 million in the aggregate (unless such repurchases are
made with the proceeds of insurance policies and the shares are purchased from
the executors, administrators, testamentary trustees, heirs, legatees or
beneficiaries); (x) transactions between the Company or any of its Restricted
Subsidiaries and Dobson Communications and its Subsidiaries (other than the
Company and its Subsidiaries) on a cost, rather than fair market value, basis or
on other terms of the kind customarily employed to allocate charges among
members of a consolidated group of entities, in any such case that are fair and
reasonable to the Company or such Restricted Subsidiary; (xi) in the event of a
spin-off of the Company by Dobson Communications, the purchase of shares of
Fleet Investors Capital Stock pursuant to the exercise of put rights or
mandatory redemption provisions; provided (a) after giving effect to any such
purchase the Consolidated Leverage Ratio would be less than 6.0 to 1 and (b) if
the event triggering the exercisability of the put rights or mandatory
redemption constitutes an Asset Sale or Change of Control, no such repurchase
shall be made prior to the Company's repurchase of such Notes as are required to
be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of
Notes upon a Change of Control" covenants described below; (xii) the declaration
or payment of dividends on the Fleet Investors Capital Stock (a) if after giving
pro forma effect to any such dividend, the Consolidated Leverage Ratio would be
less than 5.0 to 1 or (b) following a Public Equity Offering of Capital Stock of
the Company provided (I) the Net Cash Proceeds received by the Company in such
Public Equity Offering is at least $90 million and (II) the aggregate amount of
dividends permitted to be made in any fiscal year of the Company under clause
(viii) and this clause (xii) shall not exceed 6% of the Net Cash Proceeds
received by the Company in the Public Equity Offering; and (xiii) other
Restricted Payments in an aggregate amount not to exceed $10 million; PROVIDED
that, except in the case of clauses (i) and (iii), no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof and an exchange
of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii)
or (iv) thereof), and the Net Cash Proceeds from any capital contribution or any
issuance of Capital Stock referred to in clauses (iii), (iv) and (vi), shall be
included in calculating whether the conditions of clause (C) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds of
an issuance of Capital Stock of the Company are used for the redemption,
repurchase or other acquisition of the Notes, or Indebtedness that is PARI PASSU
with the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any amendments, extensions,
refinancings, renewals or replacements of such agreements; PROVIDED that the
amendments, encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of
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applicable law; (iii) existing with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person or
the property or assets of any Person other than such Person or the property or
assets of such Person so acquired; (iv) in the case of clause (iv) of the first
paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi)
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) the encumbrance or restriction applies only
in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, (B) the encumbrance or
restriction is not materially more disadvantageous to the holders of the Notes
than is customary in comparable financings (as determined by the Company) and
(C) the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes. Nothing contained in this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
the Company or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary; provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; PROVIDED that this
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paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is (A) PARI PASSU with the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be PARI PASSU
with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated
to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Stockholders and
Affiliates" covenant and not covered by clauses (ii) through (v) of this
paragraph, the aggregate amount of which exceeds $1 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
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The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
(vi) Liens securing Indebtedness Incurred under clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant; or (vii) Permitted
Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 85% of the consideration received
consists of cash or Temporary Cash Investments; PROVIDED, HOWEVER, that this
clause (ii) shall not apply to long-term assignments in capacity in a
telecommunications network. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission), then the Company shall or shall cause the
relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash
Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or
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engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the 12-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of this
"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period as set forth in clause (i) of the preceding sentence and not
applied as so required by the end of such period shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the holders on a PRO RATA basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus, in
each case, accrued interest to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, PLUS accrued
interest to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after the Closing Date, in
either case, whether or not the Company is then required to file reports with
the Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act if it were subject thereto. The
Company shall supply the Trustee and each holder or shall supply to the Trustee
for forwarding to each such holder, without cost to such holder, copies of such
reports and other information. In addition, at all times prior to the earlier of
the date of the Registration and the date that is six months after the Closing
Date, the Company shall, at its cost, deliver to each holder of the Notes
quarterly and annual reports substantially equivalent to those which would be
required by the Exchange Act. In addition, at all times prior to the
Registration, upon the request of any holder or any prospective purchaser of the
Notes designated by a holder, the Company shall supply to such holder or such
prospective purchaser the information required under Rule 144A under the
Securities Act.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable, upon acceleration, redemption or
otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest payments
on the Notes on the applicable Interest Payment Date
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will constitute an Event of Default with no grace or cure period; (c) default in
the performance or breach of the provisions of the Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the assets
of the Company or the failure to make or consummate an Offer to Purchase in
accordance with the "Limitation on Asset Sales" or "Repurchase of Notes upon a
Change of Control" covenant; (d) the Company defaults in the performance of or
breaches any other covenant or agreement of the Company in the Indenture or
under the Notes (other than a default specified in clause (a), (b) or (c) above)
and such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the holders of 25% or more in aggregate
principal amount of the Notes; (e) there occurs with respect to any issue or
issues of Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder thereof
to declare such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such acceleration has
not been rescinded or annulled within 30 days of such acceleration and/or (II)
the failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or extended
within 30 days of such payment default; (f) any final judgment or order (not
covered by insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and shall not be
paid or discharged, and there shall be any period of 30 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Significant
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; (h) the Company or any Significant
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Escrow and Security
Agreement shall cease to be in full force and effect or enforceable in
accordance with its terms, other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the holders), may,
and the Trustee at the request of such holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then
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outstanding shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holder. The
holders of at least a majority in principal amount of the outstanding Notes by
written notice to the Company and to the Trustee, may waive all past defaults
and rescind and annul a declaration of acceleration and its consequences if (i)
all existing Events of Default, other than the nonpayment of the principal of,
premium, if any, and interest on the Notes that have become due solely by such
declaration of acceleration, have been cured or waived and (ii) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see "--Modification
and Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from holders of Notes. A holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the holder gives the Trustee written notice of a continuing Event of Default;
(ii) the holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
holder or holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
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covenant; PROVIDED that this clause (iv) shall not apply to a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture; and (v) the Company delivers to the
Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv) above) and Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; PROVIDED, HOWEVER, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
PROVIDED FURTHER that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation,
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Merger and Sale of Assets," clause (d) under "Events of Default" with respect to
such other covenants and clauses (e) and (f) under "Events of Default" shall be
deemed not to be Events of Default, upon, among other things, the deposit with
the Trustee, in trust, of money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, the
satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the
preceding paragraph and the delivery by the Company to the Trustee of an Opinion
of Counsel to the effect that, among other things, the holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes; PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of each holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Escrow and Security Agreement, the
Indenture, or in any of the Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of the Company or of any
successor Person thereof. Each holder, by accepting the Notes, waives and
releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise
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of the rights and powers vested in it under the Indenture as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; PROVIDED, HOWEVER, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will initially be represented by
one or more permanent global Notes in definitive, fully registered form without
interest coupons (each a "Restricted Global Note"; and together with the
Regulation S Global Note, the "Global Notes") and will be deposited with the
Trustee as custodian for, and registered in the name of a nominee of, DTC. Old
Notes sold in offshore transactions in reliance on Regulation S under the
Securities Act were initially represented by one or more temporary global Notes
in definitive, fully registered form without interest coupons (each a "Temporary
Regulation S Global Note") and were deposited with the Trustee as custodian for,
and registered in the name of a nominee of, DTC for the accounts of Euroclear
and Cedel Bank. The Temporary Regulation S Global Note is exchangeable for one
or more permanent global Notes (each a "Permanent Regulation S Global Note"; and
together with the Temporary Regulation S Global Notes, the "Regulation S Global
Note") on or after the 40th day following June 12, 1998 upon certification that
the beneficial interests in such global Note are owned by non-U.S. persons.
Prior to the 40th day after the Closing Date, beneficial interests in the
Temporary Regulation S Global Note may only be held through Euroclear or Cedel
Bank.
Ownership of beneficial interests in a Global Note are limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in a Global Note will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Cedel Bank or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such systems. Cedel
Bank and Euroclear will hold interests in the Regulation S Global Notes on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof. Neither
the Company, the Trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
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DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note are credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which may
be legended as set forth under the heading "Transfer Restrictions."
The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedel Bank, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes, which may bear the
legend referred to under "Transfer Restrictions," in exchange for the Global
Notes. Holders of an interest in a Global Note may receive Certificated Notes,
which may bear the legend referred to under "Transfer Restrictions," in
accordance with DTC's rules and procedures in addition to those provided for
under the Indenture.
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CERTAIN U.S. FEDERAL TAX CONSEQUENCES
The following summary describes the material anticipated U.S. federal income
tax consequences of the purchase, ownership and disposition of the Notes. Except
where noted, it deals only with Notes held as capital assets within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"),
by U.S. holders and does not deal with special situations, such as those of
dealers in securities or currencies, financial institutions, life insurance
companies, tax exempt organizations, persons holding Notes as a part of a
hedging or conversion transaction or a straddle or U.S. holders whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based upon the provisions of the Code and regulations, administrative and
judicial decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified with possible retroactive effect so as to result
in U.S. federal income tax consequences different from those discussed below.
ALL PROSPECTIVE PURCHASERS MAY WISH TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR TAX SITUATION REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE OWNERSHIP AND DISPOSITION OF THE
NOTES.
THE NEW NOTES
EXCHANGE FOR REGISTERED SECURITIES. The exchange by holder of and Old Note
for a New Note should not constitute a taxable exchange. Each New Note should be
treated as having been originally issued at the time the Old Note exchanged
therefor was originally issued.
STATED INTEREST. Each holder of Notes must include as ordinary interest
income the interest attributable to such Notes at the time it accrues or is
received, in accordance with the holder's accounting method for U.S. federal
income tax purposes.
ORIGINAL ISSUE DISCOUNT. The Notes were not issued with original issue
discount for federal income tax purposes.
TAX CONSEQUENCES TO U.S. HOLDERS
As used herein, a "U.S. holder" means a beneficial owner that is a citizen
or resident of the U.S., a corporation, partnership or other entity created or
organized in or under the laws of the U.S. or any political subdivision thereof,
an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or a trust the administration of which is subject to
the primary supervision of a court within the U.S. and for which one or more
persons have the authority to control all substantial decisions. An individual
may, subject to certain exceptions, be deemed to be a resident (as opposed to a
non-resident alien) of the U.S. by virtue of being present in the U.S. on at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). A "Non-U.S. holder" is a holder that is not a U.S.
holder.
TAXATION OF INTEREST ON THE NOTES
Interest paid on the Notes will be taxable to a U.S. holder as ordinary
interest income in accordance with such holder's method of tax accounting. The
Company expects that the Notes will not be issued with original issue discount
within the meaning of the Code.
MARKET DISCOUNT
If a U.S. holder acquires a Note for an amount that is less than its
principal amount, the amount of the difference will be treated as "market
discount," unless such difference is less than a specified DE MINIMIS
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amount. Under the market discount rules of the Code, a U.S. holder will be
required to treat any partial principal payment on, or any gain on the sale,
exchange, retirement or other disposition (including a gift) of, a Note as
ordinary income to the extent of any accrued market discount that has not
previously been included in income. Market discount generally accrues on a
straight-line basis over the remaining term of the Note, unless the U.S. holder
elects to accrue market discount on a constant interest method. A U.S. holder
may not be allowed to deduct immediately all or a portion of the interest
expense on any indebtedness incurred or continued to purchase or to carry such
Note.
A U.S. holder may elect to include market discount in income currently as it
accrues (either on a straight-line basis or, if the U.S. holder so elects, on a
constant-yield basis), in which case the interest deduction deferral rule set
forth in the preceding paragraph will not apply. Such an election will apply to
all bonds acquired by the U.S. holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the Internal Revenue Service ("IRS").
AMORTIZABLE BOND PREMIUM
A U.S. holder that purchases a Note for an amount in excess of the principal
amount will be considered to have purchased the Note at a "premium." A U.S.
holder generally may elect to amortize such premium over the remaining term of
the Note on a constant yield method. The amount amortized in any year will be
treated as a reduction of the U.S. holder's interest income from the Note. Bond
premium on a Note held by a U.S. holder that does not make such an election will
decrease the gain or increase the loss otherwise recognized on disposition of
the Note. The election to amortize bond premium on a constant yield method, once
made, applies to all debt obligations held or subsequently acquired by the
electing U.S. holder on or after the first day of the taxable year to which the
election applies and may not be revoked without the consent of the IRS.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Upon the sale, exchange or redemption or retirement of a Note, a U.S. holder
will recognize gain or loss equal to the difference between the amount realized
upon the redemption, sale, exchange or retirement and such U.S. holder's
adjusted tax basis of the Note. A U.S. holder's tax basis in a Note will, in
general, be the U.S. holder's cost therefor, increased by any market discount
previously included in income by the U.S. holder with respect to the Notes and
reduced by any principal payments on the Notes and by any amounts deducted with
respect to amortizable bond premium. Such gain or loss will be capital gain or
loss, except to the extent discussed above.
The Taxpayer Relief Act of 1997 includes substantial changes to the federal
taxation of capital gains recognized by certain noncorporate taxpayers, such as
individuals, including a 20% maximum tax rate for certain gains from the sale of
capital assets held for more than 18 months. The deduction of capital losses is
subject to certain limitations.
The exchange of a Note by a U.S. holder for an Exchange Note (as described
in "Description of the Notes-Registration Rights") should not constitute a
taxable exchange. A U.S. holder will have the same tax basis and holding period
in the Exchange Note as it did in the Note.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of principal and interest and to the proceeds of sales of Notes made to
U.S. holders other than certain exempt recipients (such as corporations). A 31%
backup withholding tax will apply to such payments if the U.S. holder fails (i)
to provide a taxpayer identification number ("TIN"), (ii) furnishes an incorrect
TIN, (iii) is notified by the IRS that it has failed to properly report payments
of interest and dividends or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding. In the case of
interest paid after
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December 31, 1999, a U.S. holder generally will be subject to backup withholding
at a 31% rate unless certain IRS certification procedures are complied with
directly or through an intermediary.
The Company will furnish annually to the IRS and to record holders of the
Notes (other than with respect to certain exempt holders) information relating
to the stated interest paid or accrued during the calendar year.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against such U.S. holder's U.S. federal income
tax liability provided the required information is furnished to the IRS.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
TAXATION OF INTEREST ON THE NOTES
Subject to the discussion below concerning backup withholding, no
withholding of U.S. federal income tax will be required with respect to the
payment by the Company or any paying agent of principal or interest on a Note
owned by a Non-U.S. holder, provided that the beneficial owner (i) does not
actually or constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote within the meaning of
Section 871(h)(3) of the Code and the regulations thereunder, (ii) is not a
controlled foreign corporation related, directly or indirectly, to the Company
through stock ownership, (iii) is not a bank whose receipt of interest on a Note
is described in Section 881(c)(3)(A) of the Code and (iv) satisfies the
statement requirement (described generally below) set forth in Section 871(h)
and Section 881(c) of the Code and the regulations thereunder.
To satisfy the requirement referred to in (iv) above, the beneficial owner
of such Note, or a financial institution holding the Note on behalf of such
owner, must provide, in accordance with specified procedures, the Company or its
paying agent with a statement to the effect that the beneficial owner is not a
U.S. person. These requirements will be met if (x) the beneficial owner provides
his name and address, and certifies, under penalties of perjury, that he is not
a U.S. person (which certification may be made on an IRS Form W-8 (or successor
form)) or (y) a financial institution holding the Note on behalf of the
beneficial owner certifies, under penalties of perjury, that such statement has
been received by it and furnishes a paying agent with a copy thereof.
In the event that any of the above requirements are not satisfied, the
Company will nonetheless not withhold federal income tax on interest paid to a
Non-U.S. holder if it receives IRS Form 4224 (or, after December 31, 1999, a
Form W-8) from such Non-U.S. holder, establishing that such income is
effectively connected with the conduct of a trade or business in the U.S.,
unless the Company has knowledge to the contrary. Interest or redemption premium
paid to a Non-U.S. holder that is effectively connected with the conduct by the
holder of a trade or business in the U.S. is generally taxed at the graduated
rates that are applicable to U.S. holders. In the case of a Non-U.S. holder that
is a corporation, such effectively connected income may also be subject to the
U.S. federal branch profits tax (which is generally imposed on a foreign
corporation on the deemed repatriation from the U.S. of effectively connected
earnings and profits) at a 30% rate (unless the rate is reduced or eliminated by
an applicable income tax treaty and the holder is a qualified resident of the
treaty country).
SALE, EXCHANGE, OR REDEMPTION OF NOTES
A Non-U.S. holder will generally not be subject to U.S. federal income tax
with respect to capital gain recognized on a sale, exchange, redemption or other
disposition of Notes unless (i) the gain is effectively connected with a trade
or business of the Non-U.S. holder in the U.S., (ii) in the case of a Non-U.S.
holder who is an individual, such holder is present in the U.S. for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, or (iii) the Non-U.S. holder is subject to tax pursuant to
certain provisions of the Code applicable to U.S. expatriates.
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Gains derived by a Non-U.S. holder from the sale or other disposition of
Notes that are effectively connected with the conduct by the holder of a trade
or business in the U.S. are generally taxed at the graduated rates that are
applicable to U.S. holders. In the case of a Non-U.S. holder that is a
corporation, such effectively connected income may also be subject to the U.S.
branch profits tax (which is generally imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings and
profits) at a 30% rate (unless the rate is reduced or eliminated by an
applicable income tax treaty and the holder is a qualified resident of the
treaty country).
FEDERAL ESTATE TAX
A Note beneficially owned by an individual who at the time of death is a
Non-U.S. holder will not be subject to U.S. federal estate tax as a result of
such individual's death, provided that such individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote within the meaning of Section 871(h)(3)
of the Code and provided that the interest payments with respect to such Note
would not have been, if received at the time of such individual's death,
effectively connected with the conduct of a U.S. trade or business by such
individual.
INFORMATION REPORTING AND BACKUP WITHHOLDING
No information reporting or backup withholding will be required with respect
to payments made by the Company or any paying agent to Non-U.S. holders if a
statement described in (iv) under "Tax Consequences to Non-U.S.
Holders--Taxation of Interest on the Notes" has been received and the payor does
not have actual knowledge that the beneficial owner is a U.S. person.
Information reporting and backup withholding will not apply if payments of
interest on a Note are made outside the U.S. to an account maintained at an
office or branch of a U.S. or foreign bank or other financial institution,
provided certain procedures are in place and are observed.
Payments on the sale, exchange or other disposition of a Note made to or
through a foreign office of a broker generally will not be subject to backup
withholding. However, payments made by a broker that is a U.S. person, a
controlled foreign corporation for U.S. federal income tax purposes, a foreign
person 50% or more of whose gross income is effectively connected with a U.S.
trade or business for a specified three year period, or (with respect to
payments after December 31, 1999) a foreign partnership with certain connections
to the U.S., will be subject to information reporting unless the broker has in
its records documentary evidence that the beneficial owner is not a U.S. person
and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption. Backup withholding may apply to any payment that such
broker is required to report if the broker has actual knowledge that the payee
is a U.S. person. Payments to or through the U.S. office of a broker will be
subject to information reporting and backup withholding unless the holder
certifies, under penalties of perjury, that it is not a U.S. person or otherwise
establishes an exemption.
Non-U.S. holders should consult their tax advisors regarding the application
of information reporting and backup withholding in their particular situations,
the availability of an exemption therefrom, and the procedures for obtaining
such an exemption, if available. Any amounts withheld under the backup
withholding rules generally will be allowed as a refund or credit against the
Non-U.S. holder's U.S. federal income tax liability and may entitle such holder
to a refund, provided the required information is furnished to the IRS.
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PLAN OF DISTRIBUTION
There has previously been only a limited secondary market and no public
market for the Old Notes. The Company does not intend to apply for the listing
of the Notes on a national securities exchange or for their quotation through
The Nasdaq Stock Market. The Notes are eligible for trading in the PORTAL
market. The Company has been advised by the Placement Agents that the Placement
Agents currently intend to make a market in the Notes; however, no Placement
Agent is obligated to do so and any market making may be discontinued by any
Placement Agent at any time. In addition, such market making activity may be
limited during the Exchange Offer. Therefore, there can be no assurance that an
active market for the Old Notes or the New Notes will develop. If a trading
market does not develop or is not maintained, holders of Notes may experience
difficulty in reselling Notes. If a trading market develops for the Notes,
future trading prices of such securities will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on such factors,
such securities may trade at a discount from their offering price.
BROKER-DEALERS WHO DID NOT ACQUIRE OLD NOTES AS A RESULT OF MARKET MAKING
ACTIVITIES OR TRADING ACTIVITIES MAY NOT PARTICIPATE IN THE EXCHANGE OFFER.
With respect to resale of New Notes, based on an interpretation by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder (other than a person that is an affiliate of the
Company within the meaning of Rule 405 under the Securities Act or a "broker" or
"dealer" registered under the Exchange Act) who exchanges Old Notes for New
Notes in the ordinary course of business and who is not participating, does not
intend to participate, and has no arrangement or understanding with any person
to participate, in the distribution of the New Notes, will be allowed to resell
the New Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the New Notes a prospectus that
satisfies the requirements of Section 10 thereof. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on the
position of the staff of the Commission enunciated in EXXON CAPITAL HOLDINGS
CORPORATION (available May 13, 1988) or similar no-action letters or any similar
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available.
As contemplated by the no-action letters mentioned above and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Company in the Letter of Transmittal that (i) the
New Notes are to be acquired by the holder in the ordinary course of business,
(ii) the holder is not engaging and does not intend to engage in the
distribution of the New Notes, and (iii) the holder acknowledges that, if such
holder participates in the Exchange Offer for the purpose of distributing the
New Notes, such holder must comply with the registration and prospectus delivery
requirements of the Securities Act and cannot rely on the above no-action
letters.
Any broker or dealer registered under the Exchange Act (each a
"Broker-Dealer") who holds Old Notes that were acquired for its own account as a
result of market-making activities or other trading activities (other than Old
Notes acquired directly from the Company or an affiliate of the Company) may
exchange such Old Notes for New Notes pursuant to the Exchange Offer; however,
such Broker-Dealer may be deemed an underwriter within the meaning of the
Securities Act and, therefore, must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of the New
Notes received by it in the Exchange Offer, which prospectus delivery
requirement may be satisfied by the delivery by such Broker-Dealer of this
Prospectus. The Company has agreed to cause the Exchange Offer Registration
Statement, of which this Prospectus is a part, to remain continuously effective
for a period of 180 days, if required, from the Exchange Date, and to make this
Prospectus, as amended or supplemented, available to any such Broker-Dealer for
use in connection with resales. Any Broker-Dealer participating in
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the Exchange Offer will be required to acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of New Notes received by it in the Exchange Offer. The delivery by a
Broker-Dealer of a prospectus in connection with resales of New Notes shall not
be deemed to be an admission by such Broker-Dealer that it is an underwriter
within the meaning of the Securities Act. The Company will not receive any
proceeds from any sale of New Notes by a Broker-Dealer.
New Notes received by Broker-Dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the New Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Broker-Dealer and/or the
purchasers of any such New Notes.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes are being
passed upon for the Company by McAfee & Taft A Professional Corporation,
Oklahoma City, Oklahoma.
EXPERTS
The consolidated balance sheets of Logix Communications Enterprises, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1997, included in this Prospectus
and in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report appearing herein in
reliance upon the authority of said firm as experts in giving said report.
The combined financial statements of American Telco, Inc. and American Telco
Network Services, Inc., as of December 31, 1996 and 1997 and for each of the
three years in the period ended December 31, 1997 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
117
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
Report of independent public accountants................................................................... F-2
Consolidated balance sheets as of December 31, 1996 and 1997............................................... F-3
Consolidated statements of operations for the years ended December 31, 1995, 1996 and 1997................. F-4
Consolidated statements of stockholder's equity for the years ended December 31, 1995, 1996 and 1997....... F-5
Consolidated statements of cash flows for the years ended December 31, 1995, 1996 and 1997................. F-6
Notes to consolidated financial statements................................................................. F-7
Condensed consolidated balance sheets as of December 31, 1997 and June 30, 1998
(unaudited).............................................................................................. F-19
Condensed consolidated statements of operations for the six months ended June 30, 1997 and 1998
(unaudited).............................................................................................. F-20
Condensed consolidated statements of cash flows for the six months ended June 30, 1997 and 1998
(unaudited).............................................................................................. F-21
Notes to condensed consolidated financial statements (unaudited)........................................... F-22
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
Report of independent accountants.......................................................................... F-26
Combined balance sheet as of December 31, 1996 and 1997.................................................... F-27
Combined statement of income for the years ended December 31, 1995, 1996 and 1997.......................... F-28
Combined statement of shareholders' equity for the years ended December 31, 1995, 1996 and 1997............ F-29
Combined statement of cash flows for the years ended ended December 31, 1995, 1996 and 1997................ F-30
Notes to combined financial statements..................................................................... F-31
Condensed combined balance sheet as of December 31, 1997 and March 31, 1998 (unaudited).................... F-35
Condensed combined statement of income for the three months ended March 31, 1997 and 1998 (unaudited)...... F-36
Combined statement of stockholders' equity for the year ended December 31, 1997 and the three months ended
March 31, 1998........................................................................................... F-37
Condensed combined statement of cash flows for the three months ended March 31, 1997 and 1998
(unaudited).............................................................................................. F-38
Notes to condensed combined financial statements (unaudited)............................................... F-39
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Logix Communications Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Logix
Communications Enterprises, Inc. (formerly named Dobson Wireline Company) (an
Oklahoma corporation) and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Logix Communications Enterprises, Inc. and subsidiaries as of December 31, 1996
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
April 7, 1998 (except with
respect to the matter discussed
in Note 13, as to which the
date is September 30, 1998)
F-2
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 628,650 $ 254,269
Accounts receivable, net of allowance for doubtful accounts of $13,525 and
$16,258 in 1996 and 1997, respectively......................................... 2,054,335 1,792,231
Inventory........................................................................ 117,385 240,787
RTFC subordinated capital certificates........................................... 1,051,057
Prepaid expenses and other....................................................... 76,375 724,508
------------- -------------
Total current assets........................................................... 3,927,802 3,011,795
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net................................................. 35,135,539 35,976,412
------------- -------------
OTHER ASSETS:
Receivables--Affiliates.......................................................... 11,514,356 8,206,935
Deferred costs, net of accumulated amortization of $129,707 and $221,332 in 1996
and 1997, respectively......................................................... 513,596 1,128,447
Excess of cost over original cost of assets acquired, net of accumulated
amortization of $1,035,529 and $1,130,769 in 1996 and 1997, respectively....... 2,771,443 2,676,203
Investment in unconsolidated partnership and other............................... 745,551 953,564
------------- -------------
Total other assets............................................................. 15,544,946 12,965,149
------------- -------------
Total assets................................................................... $ 54,608,287 $ 51,953,356
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,666,553 $ 1,131,185
Accrued expenses................................................................. 1,048,190 204,380
Deferred revenue and customer deposits........................................... 42,800 67,448
Current portion of long-term debt................................................ 1,190,924 1,140,824
------------- -------------
Total current liabilities...................................................... 3,948,467 2,543,837
------------- -------------
LONG-TERM DEBT, net of current portion............................................. 40,565,108 27,498,535
DEFERRED CREDITS:
Income taxes..................................................................... 1,636,000 1,700,000
Investment tax credits and other................................................. 161,612 133,817
------------- -------------
Total deferred credits......................................................... 1,797,612 1,833,817
------------- -------------
COMMITMENTS (Note 11)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized and 71,250,000 shares
issued and outstanding in 1996 and 1997........................................ 712,500 712,500
Paid-in capital.................................................................. -- 11,447,926
Retained earnings................................................................ 7,584,600 7,916,741
------------- -------------
Total stockholder's equity..................................................... 8,297,100 20,077,167
------------- -------------
Total liabilities and stockholder's equity..................................... $ 54,608,287 $ 51,953,356
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE............................................................. $ 16,264,643 $ 17,908,178 $ 20,176,710
OPERATING EXPENSES:
Cost of service................................................... 2,471,111 2,822,531 3,268,343
Selling, general and administrative............................... 6,532,020 7,815,864 8,734,923
Depreciation and amortization..................................... 4,124,045 4,478,933 4,931,315
------------- ------------- -------------
Total operating expenses........................................ 13,127,176 15,117,328 16,934,581
------------- ------------- -------------
OPERATING INCOME.................................................... 3,137,467 2,790,850 3,242,129
------------- ------------- -------------
OTHER INCOME (EXPENSES):
Equity in income (loss) of unconsolidated partnership............. (170,266) (80,520) 82,121
Interest income................................................... 4,692 -- 14,674
Interest expense.................................................. (1,979,763) (2,194,169) (2,458,588)
Other............................................................. (101,438) (2,591) 6,163
------------- ------------- -------------
Total other expenses............................................ (2,246,775) (2,277,280) (2,355,630)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS.................. 890,692 513,570 886,499
INCOME TAX PROVISION................................................ (391,149) (182,512) (336,870)
------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEMS................................... 499,543 331,058 549,629
EXTRAORDINARY EXPENSE, net of income tax benefit of $133,300 in 1997
(Note 4).......................................................... -- -- 217,488
------------- ------------- -------------
NET INCOME.......................................................... $ 499,543 $ 331,058 $ 332,141
------------- ------------- -------------
------------- ------------- -------------
BASIC NET INCOME PER SHARE:
Before extraordinary expense...................................... .007 .005 .008
Extraordinary expense............................................. -- -- (.003)
------------- ------------- -------------
BASIC NET INCOME PER SHARE.......................................... $ .007 $ .005 $ .005
------------- ------------- -------------
------------- ------------- -------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................... 71,250,000 71,250,000 71,250,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PAID-IN RETAINED
NOTES AMOUNT CAPITAL EARNINGS
--------- --------- ---------- ---------
COMMON STOCK
--------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994.............................. 71,250,000 $ 712,500 $ -- $6,753,999
Net income................................... -- -- -- 499,543
--------- --------- ---------- ---------
DECEMBER 31, 1995.............................. 71,250,000 712,500 -- 7,253,542
Net income................................... -- -- -- 331,058
--------- --------- ---------- ---------
DECEMBER 31, 1996.............................. 71,250,000 712,500 -- 7,584,600
Net income................................... -- -- -- 332,141
Capital Contribution for Logix Communications
Corporation................................ -- -- 1,000 --
Capital contribution from parent company
(Note 4)................................... -- -- 11,446,926 --
--------- --------- ---------- ---------
DECEMBER 31, 1997.............................. 71,250,000 $ 712,500 $11,447,926 $7,916,741
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 499,543 $ 331,058 $ 332,141
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization..................................... 4,124,045 4,478,933 4,931,315
Deferred credits.................................................. (153,530) (263,716) 36,205
Extraordinary loss on financing cost.............................. -- -- 350,788
Equity in loss (income) of unconsolidated partnership............. 170,266 103,424 (82,121)
Changes in current assets and liabilities--
Accounts receivable............................................... (1,053,761) 728,890 262,104
Inventory......................................................... (9,961) 6,612 (123,402)
Prepaid expenses and other........................................ 41,148 64,166 (648,133)
Accounts payable.................................................. 360,007 594,131 (535,368)
Accrued expenses.................................................. (221,955) 334,583 (843,810)
Deferred revenue and customer deposits............................ (96,780) (29,503) 24,648
------------ ------------- ------------
Net cash provided by operating activities....................... 3,659,022 6,348,578 3,704,367
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (2,357,483) (3,902,015) (5,442,417)
Proceeds from sale of property, plant and equipment................. 23,500 -- --
(Increase) decrease in receivable--affiliate........................ (2,118,093) (1,421,790) 3,307,421
Deferred start-up costs............................................. -- (124,739) (1,101,322)
Investment in unconsolidated partnership and other.................. 261,043 (36,857) (223,740)
------------ ------------- ------------
Net cash used in investing activities........................... (4,191,033) (5,485,401) (3,460,058)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable......................................... $ 700,000 $ 100,000 $ --
Repayments of notes payable......................................... -- (800,000) --
Proceeds from long-term debt........................................ 731,000 12,011,306 --
Repayments of long-term debt........................................ (1,738,144) (11,591,611) (1,669,747)
Redemption of RTFC subordinated capital certificates................ 67,950 57,632 1,051,057
Deferred financing costs............................................ -- (396,184) --
------------ ------------- ------------
Net cash used in financing activities........................... (239,194) (618,857) (618,690)
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (771,205) 244,320 (374,381)
CASH AND CASH EQUIVALENTS, beginning of year.......................... 1,155,535 384,330 628,650
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year................................ $ 384,330 $ 628,650 $ 254,269
------------ ------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest (net of amounts capitalized)............................. $ 1,835,566 $ 1,728,405 $ 2,820,797
Income taxes...................................................... $ 253,031 $ 375,000 $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital contribution from parent company through
forgiveness of long-term debt (Note 4)............................ $ 11,446,926
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Logix Communications Enterprises, Inc. (formerly named Dobson Wireline
Company) ("Logix") was incorporated as an Oklahoma corporation in December 1997
as part of a reorganization by its parent company, Dobson Communications
Corporation ("Dobson Communications"). Logix and its subsidiaries are referred
to herein as the "Company." Logix is a wholly owned subsidiary of Dobson
Communications that provides, through its subsidiaries, voice, data and Internet
services to residential, business, government and other institutional users in
Oklahoma, Texas and Colorado. The Company provides these services through three
business segments: incumbent local exchange carrier ("ILEC") operations, fiber
optic telecommunications and integrated communications provider ("ICP")
operations. The consolidated financial statements of the Company include the
accounts of Logix, Dobson Telephone Company, Inc. ("Dobson Telephone"), Dobson
Fiber Company, Inc. ("Dobson Fiber"), Dobson Fiber/FORTE of Colorado, Inc.,
Logix Communications Corporation ("LCC") and Dobson Network Management, Inc.
collectively referred to herein as the "Subsidiaries."
REORGANIZATION OF DOBSON COMMUNICATIONS
In January 1998, Dobson Communications transferred all of the common stock
of the Subsidiaries to . 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 between the Company and its
subsidiaries prior to the reorganization have been eliminated.
CAPITAL RESOURCES AND GROWTH
The Company's total indebtedness and debt service requirements will
substantially increase as a result of the transactions described in Note 13, and
the Company will be subject to significant financial restrictions and
limitations. If the Company is unable to borrow sufficient funds through the
bridge facility or the senior notes described in Note 13, the Company may be
unable to borrow additional funds from other sources during such time period to
fund planned capital expenditures, its ongoing operations or other permissible
uses.
The Company's ability to manage future growth will depend upon its ability
to monitor operations, control costs, maintain effective quality controls and
significantly expand the Company's internal management, technical and accounting
systems, all of which will result in higher operating expenses. Any failure to
expand these areas and to implement and improve such systems, procedures and
controls in an efficient manner at a pace consistent with the growth of the
Company's business could have a material adverse effect on the Company's
business, financial condition and results of operations.
ILEC
The Company, through Dobson Telephone, provides wireline telephone service
to nine contiguous exchanges in western Oklahoma and three contiguous exchanges
adjacent to and east of the Oklahoma City metropolitan area. Dobson Telephone
operates under the authority of the Federal Communications Commission ("FCC").
Rates charged by Dobson Telephone are regulated by the FCC and the Oklahoma
Corporation Commission. Dobson Telephone, like other wireline companies that
operate in rural areas where the cost to provide service is higher than normal,
receives high cost support funds from state jurisdictions and the federal
universal service fund. Approximately 31%, 36% and 36% of the Company's
F-7
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION: (CONTINUED)
revenue from its ILEC operations for the year ended December 31, 1995, 1996 and
1997, respectively, was from these two sources.
FIBER OPTIC TELECOMMUNICATIONS
The Company provides fiber optic telecommunications service between Oklahoma
City, Oklahoma and Amarillo, Texas through Dobson Fiber. In addition, the
Company has a 20% interest in and manages the FORTE of Colorado Partnership
which provides fiber optic telecommunication service between Springfield,
Colorado and Colorado Springs, Colorado (See Note 10).
ICP
The Company commenced its ICP operations in October 1997 through its
subsidiary, LCC. LCC provides facilities based and resells integrated services
including local exchange, long distance, data, wireless, paging and Internet in
Oklahoma City and Tulsa, Oklahoma. Until October 1997, LCC's principal
activities included developing its business plans, procuring governmental
authorizations, hiring management and other key personnel, working on the design
and development of its competitive local exchange telephone networks and
operations support systems ("OSS"), acquiring equipment and facilities and
negotiating interconnection agreements. Accordingly, Logix has incurred
operating losses and operating cash flow deficits.
LCC's success will be affected by the problems, expenses, and delays
encountered in connection with the formation of a new business, and the
competitive environment in which LCC intends to operate. LCC's performance will
further be affected by its ability to assess potential markets, secure financing
or raise additional capital, implement expanded interconnection and collocation
with ILEC facilities, lease adequate trunking capacity from ILECs or other ICPs,
purchase and install switches in additional markets, expand or replace its OSS
and other back office systems, develop a sufficient customer base, and attract,
retain, and motivate qualified personnel. LCC's networks and telecommunications
services are subject to significant regulation at the federal, state and local
levels. Delays in receiving required regulatory approvals or the enactment of
new adverse regulation or regulatory requirements may have a material adverse
effect upon LCC. Although management believes that LCC will be able to
successfully mitigate these risks, there is no assurance that LCC will be able
to do so or that LCC will ever operate profitably. Expenses are expected to
exceed revenues in each location in which LCC offers service until sufficient
customer base is established.
On March 26, 1998, Logix entered into a definitive agreement to purchase
substantially all of the assets of American Telco, Inc. and American Telco
Network Services, Inc. (collectively, "ATI") for $130 million, subject to
adjustment, as discussed in Note 13.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
all majority owned subsidiaries. For financial reporting purposes, the Company
consolidates each subsidiary and partnership in which it has a controlling
interest. Significant intercompany accounts and transactions have been
eliminated. Investments in unconsolidated partnerships where the Company does
not have a controlling interest are accounted for under the equity method.
F-8
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents on the accompanying consolidated balance sheets
includes cash and short-term investments with original maturities of three
months or less.
INVENTORY
The Company values its inventory at the lower of cost or market on the
first-in, first-out method of accounting.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses potential impairments of long-lived assets, certain
identifiable intangibles and excess of cost over original cost of assets
acquired when there is evidence that events or changes in circumstances indicate
that an asset's carrying value may not be recoverable. An impairment loss is
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset. The amount of any recognized impairment would be
based on the estimated fair value of the asset subject to impairment compared to
the carrying amount of such asset. No such losses have been identified by the
Company.
DEFERRED COSTS
Deferred costs consist primarily of fees incurred to secure long-term debt
and start-up costs. Deferred start-up costs are amortized on a straight-line
basis over three years. Deferred financing costs are being amortized on a
straight-line basis over the term of the debt of eight years. Amortization
expense related to these costs of $8,694, $3,622 and $163,510 was recorded in
1995, 1996 and 1997, respectively. As discussed in Note 12, the Company wrote
off its deferred start-up costs effective January 1, 1998.
EXCESS OF COST OVER ORIGINAL COST OF ASSETS ACQUIRED
The excess of cost over the original cost of assets acquired relates to
Dobson Telephone's acquisition of McLoud Telephone Company in 1985 and is being
amortized using the straight-line method over 40 years. Amortization expense of
$95,240 was recorded in 1995, 1996 and 1997. As the excess cost over original
cost of assets acquired is a term defined and required by regulatory accounting
practices applicable to Dobson Telephone, such amounts are presented separately
from amounts included in the caption "Goodwill."
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included as selling,
general and administrative expenses in the accompanying consolidated statements
of operations. Advertising expense of $3,866, $7,877 and $221,473 was incurred
in 1995, 1996 and 1997.
INCOME TAXES
The Company files a consolidated income tax return with its parent, Dobson
Communications. Income taxes are allocated among the various entities included
in the consolidated tax return, as agreed, based on the ratio of each entity's
taxable income (loss) to consolidated taxable income (loss). Deferred income
taxes reflect the estimated future tax effects of temporary differences between
financial statement and tax bases of assets and liabilities at year-end. Amounts
owed to Dobson Communications for income taxes are reflected in
receivables-affiliates and deferred credits in the accompanying balance sheets.
F-9
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
The Company records service revenues over the period they are earned. The
cost of providing service is recognized as incurred.
Toll revenue is billed in arrears. The Company accrued estimated unbilled
revenues for services provided of approximately $277,000 and $271,000 as of
December 31, 1996 and 1997, respectively, which are included in accounts
receivable in the accompanying consolidated balance sheets. Monthly access
charges are billed in advance and are reflected in deferred revenue and customer
deposits on the accompanying consolidated balance sheets.
EARNINGS PER SHARE
Basic net income per common share is computed by using the weighted average
number of shares of common stock outstanding during the year. In 1997, the
Company adopted SFAS No. 128, "Earnings Per Share" which did not change the
Company's reported net income per common share for 1995 and 1996. The Company
has not presented diluted earnings per share as it has no potentially dilutive
securities.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. Management of the Company will adopt this accounting standard as of
January 1, 1998. SFAS No. 130 requires that all items required to be recognized
under accounting standards as components of comprehensive income, consisting of
both net income and those items that bypass the statement of operations and are
reported as a separate component of stockholder's equity, be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company does not believe that its comprehensive income
through December 31, 1997 will differ materially from net income.
At December 31, 1997, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which requires a new basis
of determining reportable segments (i.e., the management approach). This
approach (as contrasted with the prior requirement which utilized a specified
classification system for determining segments) designates the Company's
internal organization as used by management for making operating decisions and
assessing performance as the source of business segments. The Company is
organized into three business segments to facilitate the delivery of service to
customers: ILEC, Fiber and ICP. Segment results are presented on this new basis
in Note 9 at December 31, 1995, 1996 and 1997.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Newly constructed
telephone systems and fiber optic cable systems are added to property, plant and
equipment at cost which includes contracted services, direct labor, materials,
overhead and capitalized interest. For the years ended December 31, 1995, 1996
F-10
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT: (CONTINUED)
and 1997, interest capitalized was not significant. Existing property, plant and
equipment purchased through acquisitions is recorded at its fair value at the
date of the purchase. Repairs, minor replacements and maintenance are charged to
operations as incurred. The provisions for depreciation are provided using the
straight-line method based on the estimated useful lives of the various classes
of depreciable property.
Listed below are the major classes of property, plant and equipment and
their estimated useful lives, in years, as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
USEFUL LIFE 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Telephone systems and equipment........................................ 5-40 $ 42,659,436 $ 46,115,237
Fiber systems and equipment............................................ 5-22 15,643,458 15,956,178
Buildings and improvements............................................. 20-40 2,857,835 3,379,420
Vehicles and other work equipment...................................... 3-10 2,348,439 2,774,902
Furniture and office equipment......................................... 5-10 1,701,020 2,167,201
Under construction..................................................... 46,962 61,612
Land................................................................... 201,494 211,494
------------- -------------
Property, plant and equipment........................................ 65,458,644 70,666,044
Accumulated depreciation............................................... (30,323,105) (34,689,632)
------------- -------------
Property, plant and equipment, net................................... $ 35,135,539 $ 35,976,412
------------- -------------
------------- -------------
</TABLE>
4. LONG-TERM DEBT:
The Company's long-term debt as of December 31, 1996 and 1997, consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Revolving credit facility.......................................................... $ 12,011,306 $ --
Mortgage notes payable............................................................. 29,744,726 28,639,359
------------- -------------
Total debt....................................................................... 41,756,032 28,639,359
Less--Current maturities........................................................... 1,190,924 1,140,824
------------- -------------
Total long-term debt............................................................. $ 40,565,108 $ 27,498,535
------------- -------------
------------- -------------
</TABLE>
REVOLVING CREDIT FACILITY
On February 28, 1997, the Dobson Communications' bank credit agreement was
amended and restated to provide Dobson Communications with a $200 million
revolving credit facility maturing in 2005. Interest on borrowings under this
credit agreement accrues at variable rates (weighted average rate of 8.43% at
December 31, 1997). The Company's portion of the initial proceeds were used to
refinance existing indebtedness, and for general corporate purposes. In
connection with the closing of the revolving credit facility, the Company
extinguished its then existing credit facility, and recognized a pretax loss of
approximately $351,000 as a result of writing off previously capitalized
financing costs associated with the old revolving credit facility. This loss has
been reflected as an extraordinary item, net of tax, in the Company's
consolidated statement of operations for the year ended December 31, 1997.
Effective December 31, 1997, Dobson Communications made a capital
contribution to the Company of approximately $11,447,000, which represented the
Company's outstanding portion of the revolving credit facility payable to Dobson
Communications.
F-11
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
MORTGAGE NOTES
The mortgage notes payable to the United States of America, through the
Rural Utilities Service ("RUS") and the Rural Telephone Bank ("RTB") with
interest rates ranging from 2% to 10.75% due in quarterly or monthly
installments maturing at various dates from 1998 to 2028. The mortgage notes are
secured by substantially all the assets of Dobson Telephone and contain, among
other things, restrictions on the payment of dividends and redemption of capital
stock, as defined. Under the long-term debt agreements, Dobson Telephone is
restricted, without RUS approval for Dobson Telephone, from making any loans to,
or in any manner extending its credit to various affiliates. The agreements also
prohibit payment of dividends or distributions or new investments in affiliated
companies unless after such action Dobson Telephone's current assets exceed its
current liabilities and its adjusted net worth (as defined in the agreement) is
at least 40% of (i) its adjusted assets (as defined in the agreement), or, (ii)
if smaller, the sum of 10% of its adjusted assets, plus 30% of the excess of its
adjusted net worth over 10% of its adjusted assets, if any, plus 30% of the
amount of any reduction of its adjusted net worth resulting from the declaration
or payment of dividends or other distributions.
Minimum future payments of long-term debt for years subsequent to December
31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,140,824
1999........................................................... 1,171,514
2000........................................................... 1,209,193
2001........................................................... 1,230,378
2002........................................................... 1,274,207
2003 and thereafter............................................ 22,613,243
----------
$28,639,359
----------
----------
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
Dobson Communications maintains a 401(k) plan (the "Plan") in which
substantially all employees of the Company are eligible to participate. The Plan
requires the Company to match 100% of employees' contributions up to 4% of their
salary. Contributions to the Plan charged to the Company's operations were
approximately $44,000, $40,000 and $47,000 during the years ended December 31,
1995, 1996 and 1997, respectively.
F-12
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TAXES:
Provision (benefit) for income taxes for the years ended December 31, 1995,
1996 and 1997, were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal income taxes-
Current.......................................................... $ 478,513 $ 407,512 $ 302,870
Deferred......................................................... (82,200) (197,000) 38,000
Deferred investment tax credits amortized........................ (48,000) (48,000) (39,000)
State income taxes (current and deferred).......................... 42,836 20,000 35,000
---------- ---------- ----------
Total income tax provision (benefit)........................... $ 391,149 $ 182,512 $ 336,870
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The provisions for income taxes for the years ended December 31, 1995, 1996
and 1997, differ from amounts computed at the statutory rate as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at statutory rate (34%)............................... $ 302,835 $ 174,614 $ 301,410
Deferred investment credits amortized.............................. (48,000) (48,000) (39,000)
Amortization of excess of cost over original cost of assets
acquired......................................................... 32,000 32,000 32,000
State income taxes, net of Federal income tax effect............... 43,982 13,200 23,100
Other, net......................................................... 60,332 10,698 19,360
---------- ---------- ----------
$ 391,149 $ 182,512 $ 336,870
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The tax effects of the temporary differences which gave rise to deferred tax
assets and liabilities at December 31, 1996 and 1997, were as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Current deferred income taxes:
Accrued liabilities..................................................... $ -- $ 9,000
Deferred expenses....................................................... $ -- 17,000
------------- -------------
Net current deferred income tax asset................................. $ -- 26,000
Noncurrent deferred income taxes:
Fixed assets............................................................ (1,636,000) (1,700,000)
------------- -------------
Net noncurrent deferred income tax asset (liability).................. (1,636,000) (1,700,000)
------------- -------------
Total deferred income taxes........................................... $ (1,636,000) $ (1,674,000)
------------- -------------
------------- -------------
</TABLE>
Investment tax credits previously recorded by the Company for book purposes
have been deferred and are being amortized over the average lives of the
property giving rise to the credits. The investment tax credit amortization used
to offset income tax expense was $48,000 for each of the years ended December
31, 1995 and 1996, and $39,000 in 1997.
At December 31, 1997, the Company had investment tax credit carryforwards
for tax purposes of $134,000, which may be utilized to reduce future Federal
income taxes payable. Unless utilized, the remaining investment tax credit
carryforwards will expire in 1999.
F-13
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS:
Beginning in 1997, Dobson Communications began to provide certain
administrative services, including accounting, information systems management,
human resource management and marketing. Additionally, officers of the Company
are also officers of Dobson Communications and various of its other
subsidiaries. These officers perform functions for all of Dobson Communications,
including the Company. The Company reimburses Dobson Communications based on
Dobson Communications' cost of providing the services. Dobson Communications
allocates these costs based on the subsidiaries' usage of corporate services.
Management of the Company believes this is the most reasonable method to
allocate such costs. The total amount charged to the Company for these
administrative services and officer compensation was $2,345,000, $3,245,000 and
$2,644,000 in 1995, 1996 and 1997, respectively. Management believes these costs
would not have been significantly different had the costs been incurred directly
by the Company.
The Company had receivables from Dobson Communications and certain of its
subsidiaries totaling $11,514,356 and $8,206,935 at December 31, 1996 and 1997,
respectively. These receivables represent advances to these entities net of
repayments and intercompany allocations. The net receivables from these
affiliates have been reflected as receivables-affiliates in the accompanying
balance sheets.
The Company carries telephone traffic and provides network monitoring for
affiliated companies of Dobson Communications. Fees of approximately $1,658,000
and $1,722,000 were earned from the affiliated companies for services provided
during 1996 and 1997, respectively, and are reflected in revenue in the
accompanying statements of operations.
8. ACCRUED EXPENSES:
The Company's accrued expenses as of December 31, 1996 and 1997, consisted
of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ----------
<S> <C> <C>
Interest...................................................................... $ 508,077 $ 14,400
Property tax.................................................................. 321,495 --
Vacation, wages and other..................................................... 218,618 189,980
------------ ----------
Total accrued expenses........................................................ $ 1,048,190 $ 204,380
------------ ----------
------------ ----------
</TABLE>
9. REPORT OF BUSINESS SEGMENTS:
The Company operates in three reportable segments: ILEC, Fiber and ICP.
These segments are strategic business units that offer different products and
services. The segments are managed separately because each business requires
different technology and marketing strategies. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 2. The Company evaluates and measures performance of
each segment based on Adjusted EBITDA, which is defined in Note (2) on p. F-16,
and income (loss) before income taxes, extraordinary items and cumulative effect
of changes in accounting principle. 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 noncash items other than depreciation and amortization in
reported profit or loss. A summary of the Company's operations by segment is as
follows:
F-14
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REPORT OF BUSINESS SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1995
----------------------------------------------
ILEC FIBER ICP(1) TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External............................... $13,697,428 $2,500,815 $ 66,400 $16,264,643
Intersegment........................... 83,954 23,961 239,220 347,135
Intersegment revenue (4)............... -- -- -- (347,135)
---------- ---------- ---------- ----------
Total operating revenue.............. 13,781,382 2,524,776 305,620 16,264,643
---------- ---------- ---------- ----------
Adjusted EBITDA (2)...................... $5,549,431 $1,732,922 $ (20,841) $7,261,512
Depreciation and amortization............ (3,185,070) (925,448) (13,527) (4,124,045)
Interest Expense, net (3)................ (1,367,552) (607,519) -- (1,975,071)
Other Expense, net (5)................... (102,894) (168,810) -- (271,704)
---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle............................ 893,915 31,145 (34,368) 890,692
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
ILEC FIBER ICP(1) TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External............................... $14,365,436 $3,429,928 $ 112,814 $17,908,178
Intersegment........................... 85,312 22,597 170,160 278,069
Intersegment revenue (4)............... -- -- -- (278,069)
---------- ---------- ---------- ----------
Total operating revenue.............. 14,450,748 3,452,525 282,974 17,908,178
---------- ---------- ---------- ----------
Adjusted EBITDA (2)...................... $5,531,951 $2,012,580 $ (274,748) $7,269,783
Depreciation and amortization............ (3,247,313) (1,212,311) (19,309) (4,478,933)
Interest Expense, net (3)................ (1,341,508) (852,661) -- (2,194,169)
Other Expense, net (5)................... (18,417) (64,694) -- (83,111)
---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle............................ 924,713 (117,086) (294,057) 513,570
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-15
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REPORT OF BUSINESS SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
ILEC FIBER ICP(1) TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External............................... $15,361,080 $4,588,708 $ 226,922 $20,176,710
Intersegment........................... 109,260 80,058 220,500 409,818
Intersegment revenue (4)............... -- -- -- (409,818)
---------- ---------- ---------- ----------
Total operating revenue.............. 15,470,340 4,668,766 447,422 20,176,710
---------- ---------- ---------- ----------
Adjusted EBITDA (2)...................... $7,031,493 $3,104,075 $(1,962,124) $8,173,444
Depreciation and amortization............ (3,259,900) (1,421,536) (249,879) (4,931,315)
Interest expense, net (3)................ (1,282,710) (1,161,204) -- (2,443,914)
Other Income (Expense), net (5).......... (12,564) 100,848 -- 88,284
---------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle............................ 2,476,319 622,183 (2,212,003) 886,499
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INFORMATION:
Segment assets
ILEC............................................................ $ 44,668,443 $ 43,303,275 $ 43,268,782
Fiber........................................................... 13,679,561 16,240,856 15,069,721
ICP (1)......................................................... 195,073 303,470 7,384,411
Intersegment receivables (4).................................... (4,648,685) (5,239,314) (13,769,558)
------------- ------------- -------------
Total segment assets.......................................... $ 53,894,392 $ 54,608,287 $ 51,953,356
------------- ------------- -------------
OTHER INFORMATION:
Capital expenditures
ILEC............................................................ 1,516,011 1,145,184 952,061
Fiber........................................................... 839,222 2,693,578 552,947
ICP............................................................. 2,250 63,253 3,917,409
------------- ------------- -------------
Total capital expenditures.................................... $ 2,357,483 $ 3,902,015 $ 5,442,417
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(1) In 1996 and 1997, ICP includes LCC and its predecessor and Dobson Network
Management, Inc. In 1995, ICP includes Dobson Network Management, Inc.
(2) Adjusted EBITDA, as defined by the Company, represents earnings before
interest expense, income taxes, depreciation and amortization, other income
(expense) and extraordinary items.
(3) Included in interest expense is amortization expense of deferred financing
cost. The amortization expense is allocated to the Fiber segment based on
the segment's pro rata portion of total Dobson Communications' debt on the
date of debt issuance.
(4) The intersegment eliminations were included to reconcile reportable segment
activities to the Company's consolidated totals.
(5) Included in other income, net is equity in income (loss) of unconsolidated
partnership of $(170,266), $(80,520) and $82,121 for 1995, 1996 and 1997,
respectively.
F-16
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP:
The Company owns a 20% interest in the FORTE of Colorado Partnership. This
investment is accounted for on the equity method. The following is a summary of
the significant financial information for the FORTE of Colorado Partnership as
of and for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current assets...................................... $ 258,408 $ 348,175 $ 564,525
Other assets........................................ 8,509,531 7,718,713 7,913,196
Current liabilities................................. 1,230,776 1,232,198 1,377,810
Other liabilities................................... 6,045,796 4,995,924 4,850,538
Partners' capital................................... 1,491,367 1,838,766 2,249,373
Revenue............................................. 802,029 1,171,963 2,009,634
Operating income (loss)............................. (436,633) (48,577) 729,924
Net income (loss)................................... (851,329) (401,601) 410,607
</TABLE>
11. COMMITMENTS:
Future minimum lease payments required under operating leases that have an
initial or remaining noncancellable lease term in excess of one year at December
31, 1997, are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 259,446
1999.............................................................. 218,317
2000.............................................................. 216,802
2001.............................................................. 205,363
2002.............................................................. 207,267
2003 and thereafter............................................... 736,710
</TABLE>
Included in the annual lease commitments is approximately $194,000, payable
annually to an affiliated entity through July 2005. Lease expense under the
above leases was approximately $178,000, $199,000 and $240,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Unless otherwise noted, the carrying value of the Company's financial
instruments approximates fair value. The Company estimates the fair value of its
long-term debt using a discounted cash flow analysis based on the current rates
available to the Company for debt with similar terms and remaining maturation.
Indicated below are the carrying amounts and estimated fair values of the
Company's financial instruments as of December 31:
<TABLE>
<CAPTION>
1996 1997
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revolving credit facility......... $12,011,306 $12,011,306 $ -- $ --
Mortgage notes payable............ 29,744,726 24,855,656 28,639,359 26,969,543
</TABLE>
F-17
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS:
PENDING ACQUISITIONS
On March 26, 1998, Logix entered into a definitive agreement to purchase the
stock of ATI for $130 million, subject to adjustment. ATI is based in Houston,
Texas and provides resale services primarily to business customers in five major
Texas markets, including Houston, Dallas, Ft. Worth, San Antonio and Austin. At
the time of the agreement, the Company placed $5 million into an escrow account
pending closing. Logix plans to finance the acquisition through the issuance of
senior notes.
On January 6, 1998, a subsidiary of the Company purchased from previously
assigned Zenex Communications, Inc. ("Zenex") contractual rights, information,
data and other rights with respect to certain of Zenex's long distance customers
located in areas served by Dobson Telephone for $105,000.
ZENEX
On April 7, 1998, the Company entered into a non-binding letter of intent
with Zenex to purchase certain long distance customers and related assets of
Zenex, excluding Zenex's switch and the assets relating to Zenex's prepaid long
distance cards, for $500,000 and the assumption of certain liabilities of Zenex.
ACCOUNTING 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 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 will recognize a pretax loss of approximately $1,128,000 as
cumulative effect of accounting change as a result of adopting this SOP.
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.
F-18
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 254,269 $ 81,726,256
Restricted cash and investments................................................. -- 41,443,000
Accounts receivable, net........................................................ 1,792,231 11,346,485
Other current assets............................................................ 965,295 1,140,613
------------- --------------
Total current assets.......................................................... 3,011,795 135,656,354
------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net................................................ 35,976,412 44,681,479
------------- --------------
OTHER ASSETS:
Receivables--affiliates......................................................... 8,206,935 2,093,072
Restricted cash and investments................................................. -- 80,343,012
Goodwill, net................................................................... -- 125,605,753
Excess purchase cost over original cost of assets acquired, net................. 2,676,203 2,628,583
Deferred costs, net............................................................. 1,128,447 10,564,763
Other intangibles............................................................... -- 4,744,816
Investment in unconsolidated partnership and other.............................. 953,564 1,336,074
------------- --------------
Total other assets............................................................ 12,965,149 227,316,073
------------- --------------
Total assets................................................................ $ 51,953,356 $ 407,653,906
------------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 1,131,185 $ 11,511,753
Accrued expenses................................................................ 204,380 2,965,131
Current portion of long-term debt............................................... 1,140,824 1,255,604
Deferred revenue and customer deposits.......................................... 67,448 262,304
------------- --------------
Total current liabilities..................................................... 2,543,837 15,994,792
LONG-TERM DEBT, net of current portion............................................ 27,498,535 376,748,592
DEFERRED CREDITS.................................................................. 1,833,817 621,846
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............................................................... 7,916,741 2,128,250
------------- --------------
Total stockholder's equity.................................................... 20,077,167 14,288,676
------------- --------------
Total liabilities and stockholder's equity.................................... $ 51,953,356 $ 407,653,906
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-19
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
REVENUE............................................................. $9,992,283 $14,635,394
OPERATING EXPENSES:
Cost of service................................................... 1,336,964 6,263,698
Selling, general and administrative............................... 3,841,370 8,723,770
Depreciation and amortization..................................... 2,345,778 3,129,486
--------- ----------
Total operating expenses........................................ 7,524,112 18,116,954
--------- ----------
OPERATING INCOME(LOSS).............................................. 2,468,171 (3,481,560)
OTHER INCOME (EXPENSE):
Equity in income of unconsolidated partnership.................... 42,411 65,581
Interest income................................................... 5,874 313,977
Interest expense.................................................. (1,237,981) (2,721,191)
Other............................................................. 19,419 16,416
--------- ----------
Total other expense, net........................................ (1,170,277) (2,325,217)
INCOME(LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.......................... 1,297,894 (5,806,777)
INCOME TAX (PROVISION) BENEFIT...................................... (493,200) 717,733
--------- ----------
INCOME(LOSS) BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................................... 804,694 (5,089,044)
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).................................................... $ 587,206 $(5,788,491)
--------- ----------
--------- ----------
BASIC NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE
Before extraordinary expense and cumulative effect of change in
accounting principle............................................ $ .011 $ (.071)
Extraordinary expense............................................. (.003) --
Cumulative effect of change in accounting principle and
extraordinary expense........................................... -- (.010)
--------- ----------
BASIC NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS PER COMMON
SHARE............................................................. $ .008 $ (.081)
--------- ----------
--------- ----------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................... 71,250,000 71,250,000
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-20
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 587,206 $ (5,788,491)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization.............................. 2,345,778 3,129,486
Deferred income taxes and investment tax credits........... (308,964) (1,211,971)
Extraordinary loss on financing cost....................... 350,788 --
Cumulative effect of change in accounting principle........ -- 1,128,447
Equity in income of unconsolidated partnership............. (42,411) (65,581)
Changes in current assets and liabilities--
Accounts receivable........................................ 394,750 (854,794)
Other current assets....................................... 44,664 231,462
Accounts payable........................................... (1,185,811) 3,959,791
Accrued expenses........................................... (314,703) 728,141
Deferred revenue and customer deposits..................... (1,880) 133,256
------------ ------------
Net cash provided by operating activities................ 1,869,417 1,389,746
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures......................................... (1,016,529) (6,140,370)
Deferred start-up costs...................................... (981,996) --
Decrease (increase) in receivables/payables affiliates,
net........................................................ 873,432 6,113,863
Acquisition of businesses.................................... -- (136,588,385)
Investments in unconsolidated partnership and other.......... (120,797) (316,929)
------------ ------------
Net cash used in investing activities.................... (1,245,890) (136,931,821)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt................................. (1,821,455) (635,163)
Redemption of RTFC subordinated capital certificates......... 1,051,057 --
------------ ------------
Issuance of senior notes..................................... -- 350,000,000
Purchase of restricted investments........................... -- (120,976,000)
Premium on restricted investments, net....................... -- (810,012)
Deferred financing costs..................................... -- (10,564,763)
------------ ------------
Net cash provided by (used in) financing activities...... (770,398) 217,014,062
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (146,871) 81,471,987
CASH AND CASH EQUIVALENTS, beginning of period................. 628,650 254,269
------------ ------------
CASH AND CASH EQUIVALENTS, end of period....................... $ 481,779 $ 81,726,256
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-21
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated balance sheets of Logix Communications
Enterprises, Inc. ("Logix") and subsidiaries (collectively with Logix, the
"Company") as of December 31, 1997 and June 30, 1998, the condensed consolidated
statements of operations for the six months ended June 30, 1997 and 1998, and
the condensed consolidated statements of cash flows for the six months ended
June 30, 1997 and 1998 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. is a
wholly owned subsidiary of Dobson Communications that provides, through its
subsidiaries, voice, data and Internet services to residential, business,
government and other institutional users in Oklahoma, Texas and Colorado. The
Company provides these services through three business segments: incumbent local
exchange carrier ("ILEC") operations, fiber optic telecommunications 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"), Dobson
Fiber Company, Inc. ("Dobson Fiber"), Dobson Fiber/ FORTE of Colorado, Inc.,
Logix Communications Corporation ("LCC"), American Telco, Inc. ("ATI") and
Dobson Network Management, Inc. collectively referred to herein as the
"Subsidiaries."
REORGANIZATION OF DOBSON COMMUNICATIONS
In January, 1998, Dobson Communications transferred all of the common stock
of the Subsidiaries, excluding ATI, 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 March 26, 1998, the Company entered into a definitive agreement to
purchase the common stock of ATI for $131.5 million. ATI is based in Houston, TX
and provides telecommunications services to customers in five major Texas
markets, including Houston, Dallas, Fort Worth, San Antonio and Austin. The
Company closed this acquisition on June 15, 1998, using the proceeds from the
debt offering described in Note 6.
F-22
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
The purchase price of the assets acquired and liabilities assumed is as
follows, subject to adjustment:
<TABLE>
<CAPTION>
($ 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>
3. RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of an interest pledge deposit, net
of premium, of approximately $121 million to fund the first six semi-annual
interest payments which begin 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 June 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 Company has no
potentially dilutive securities.
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 ATI Acquisition 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).
F-23
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. REPORT OF BUSINESS SEGMENTS
The Company operates in three reportable segments: ILEC, Fiber and ICP.
These 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 Note (2) on page
F-25, 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------
ILEC FIBER ICP TOTAL
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External................................ $7,864,177 $2,400,136 $4,371,081 $14,635,394
Intersegment............................ -- 174,019 84,833 258,852
Intersegment revenue(1)................. -- -- -- (258,852)
--------- --------- ---------- ----------
Total operating revenue............... 7,864,177 2,574,155 4,455,914 14,635,394
--------- --------- ---------- ----------
Adjusted EBITDA(2)........................ $4,323,905 $1,406,864 $(6,082,843) $ (352,074)
Depreciation and amortization............. (1,563,227) (680,076) (886,179) (3,129,482)
Interest expense, net..................... (538,659) 200 (1,868,755) (2,407,214)
Other Income, net......................... 15,720 65,581 696 81,997
--------- --------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle......................... 2,237,739 792,569 (8,837,081) (5,806,773)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------
ILEC FIBER ICP TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External.................................. $7,701,745 $2,214,362 $ 76,176 $9,992,283
Intersegment.............................. -- 40,000 100,000 140,000
Intersegment revenue(1)................... -- -- -- (140,000)
--------- --------- --------- ---------
Total operating revenue................. 7,701,745 2,254,362 176,176 9,992,283
--------- --------- --------- ---------
Adjusted EBITDA(2).......................... $3,465,770 $1,544,376 $(196,197) $4,813,949
Depreciation and amortization............... (1,617,751) (717,805) (10,222) (2,345,778)
Interest expense, net....................... (664,112) (567,991) (4) (1,232,107)
Other Income, net........................... 19,419 42,411 -- 61,830
--------- --------- --------- ---------
Income (loss) before income taxes,
extraordinary items and cumulative
effect of change in accounting
principle........................... 1,203,326 300,991 (206,423) 1,297,894
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-24
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. REPORT OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- --------------
<S> <C> <C>
INVESTMENT INFORMATION:
Segment assets
ILEC............................................................................ $ 42,490,224 $ 42,995,063
Fiber........................................................................... 14,709,691 14,791,219
ICP............................................................................. 1,776,791 353,788,438
Intersegment receivables (1).................................................... (7,023,350) (3,920,814)
------------- --------------
Total segment assets.......................................................... $ 51,953,356 $ 407,653,906
------------- --------------
------------- --------------
</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, $9.75 million remained at June
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, $18
million remained at June 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, $25.2 million remained at June 30, 1998.
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, $13.7 million remained at
June 30, 1998.
9. SUBSEQUENT EVENTS
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, 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.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
American Telco, Inc. and American Telco Network Services, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of American Telco, Inc.
and American Telco Network Services, Inc. (the Companies) at December 31, 1996
and 1997, and the results of their operations and their cash flows for each of
the three years ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Companies' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
March 12, 1998
F-26
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 647,427 $ 173,502
Accounts receivable--trade, net of allowance for doubtful accounts of $240,107
and $255,464, respectively..................................................... 4,622,870 6,031,822
Prepaid expenses................................................................. 91,139 112,457
------------- -------------
Total current assets........................................................... 5,361,436 6,317,781
Property and equipment, net........................................................ 6,456,227 7,952,279
Other assets....................................................................... 29,880 491,997
------------- -------------
$ 11,847,543 $ 14,762,057
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................................................. $ -- $ 853,000
Current portion of long-term debt................................................ -- 74,488
Accounts payable................................................................. 4,197,500 5,502,721
Accrued expenses................................................................. 1,160,503 1,323,816
Deposits......................................................................... 44,770 45,072
------------- -------------
Total current liabilities...................................................... 5,402,773 7,799,097
Long-term debt..................................................................... -- 336,804
------------- -------------
Total liabilities.............................................................. 5,402,773 8,135,901
------------- -------------
Shareholders' equity:
Common stock..................................................................... 10,100 10,100
Additional paid-in capital....................................................... 900 900
Retained earnings................................................................ 6,433,770 6,615,156
------------- -------------
------------- -------------
6,444,770 6,626,156
------------- -------------
Commitments and contingencies (Note 6)
------------- -------------
$ 11,847,543 $ 14,762,057
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
COMBINED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................................................ $ 39,409,290 $ 44,275,734 $ 52,041,133
Cost of service..................................................... 21,583,189 22,981,931 29,453,698
Selling, general and administrative expenses........................ 12,635,738 15,701,621 18,540,195
Depreciation and amortization....................................... 1,757,968 1,937,529 2,600,963
------------- ------------- -------------
Total operating expenses............................................ 35,976,895 40,621,081 50,594,856
Income from operations.............................................. 3,432,395 3,654,653 1,446,277
Other income (expense):
Interest expense, net............................................. (201,474) (35,685) (195,988)
Other, net........................................................ (57,327) 34,064 228,097
------------- ------------- -------------
Net income.......................................................... $ 3,173,594 $ 3,653,032 $ 1,478,386
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ATI CLASS A ATI CLASS B ATNSI
COMMON STOCK COMMON STOCK COMMON STOCK ATNSI ATI
---------------------- ---------------------- ------------------------ PAID-IN- RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
--------- ----------- --------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994........ 100,000 $ 1,000 900,000 $ 9,000 1,000 $ 100 $ 900 $3,393,407
Net income (loss)........ 3,402,571
Distributions............ (1,937,000)
--------- ----------- --------- ----------- ----- ----- ----- ----------
December 31, 1995........ 100,000 1,000 900,000 9,000 1,000 100 900 4,858,978
Net income............... 3,646,090
Distributions............ (2,774,000)
--------- ----------- --------- ----------- ----- ----- ----- ----------
December 31, 1996........ 100,000 1,000 900,000 9,000 1,000 100 900 5,731,068
Net income (loss)........ 1,640,324
Distributions............ (1,297,000)
--------- ----------- --------- ----------- ----- ----- ----- ----------
December 31, 1997........ 100,000 $ 1,000 900,000 $ 9,000 1,000 $ 100 $ 900 $6,074,392
--------- ----------- --------- ----------- ----- ----- ----- ----------
--------- ----------- --------- ----------- ----- ----- ----- ----------
<CAPTION>
ATNSI
RETAINED
EARNINGS TOTAL
--------- ----------
<S> <C> <C>
December 31, 1994........ $ 924,737 $4,329,144
Net income (loss)........ (228,977) 3,173,594
Distributions............ -- (1,937,000)
--------- ----------
December 31, 1995........ 695,760 5,565,738
Net income............... 6,942 3,653,032
Distributions............ -- (2,774,000)
--------- ----------
December 31, 1996........ 702,702 6,444,770
Net income (loss)........ (161,938) 1,478,386
Distributions............ -- (1,297,000)
--------- ----------
December 31, 1997........ $ 540,764 $6,626,156
--------- ----------
--------- ----------
</TABLE>
F-29
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income......................................................... $ 3,173,594 $ 3,653,032 $ 1,478,386
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation..................................................... 1,757,968 1,937,529 2,600,963
Loss on sale of property and equipment........................... 107,830 18,044 15,410
Changes in operating assets and liabilities:
Accounts receivable.............................................. (627,935) (227,841) (1,408,952)
Prepaid expenses and other assets................................ 24,989 35,669 (9,659)
Accounts payable................................................. (340,120) 1,372,273 1,305,221
Accrued expenses................................................. 175,490 107,602 163,313
Deposits......................................................... 3,917 1,296 302
------------- ------------- -------------
Net cash provided by operating activities...................... 4,275,733 6,897,604 4,144,984
------------- ------------- -------------
Investing activities:
Purchase of property and equipment................................. (917,667) (3,174,116) (4,081,132)
Increase in other assets........................................... (507,000)
Proceeds from sale of property and equipment....................... 182,392 6,141 1,931
------------- ------------- -------------
Net cash used by investing activities.......................... (735,275) (3,167,975) (4,586,201)
------------- ------------- -------------
Financing activities:
Repayments of advances from an officer............................. (210,000) (250,000)
Net borrowings (payments) on revolving lines of credit............. (401,739) (725,663) 853,000
Proceeds from long-term debt....................................... 419,924
Principal payments on long-term debt............................... (222,222) (283,336) (8,632)
Distributions to shareholders...................................... (1,937,000) (2,774,000) (1,297,000)
------------- ------------- -------------
Net cash used by financing activities.......................... (2,770,961) (4,032,999) (32,708)
------------- ------------- -------------
Net increase (decrease) in cash...................................... 769,497 (303,370) (473,925)
Cash and cash equivalents, beginning of year......................... 181,300 950,797 647,427
------------- ------------- -------------
Cash and cash equivalents, end of year............................... $ 950,797 $ 647,427 $ 173,502
------------- ------------- -------------
------------- ------------- -------------
Supplemental cash flow information:
Cash paid for interest............................................. $ 210,666 $ 64,763 $ 190,884
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS COMBINATION
The companies included in the accompanying combined financial statements,
American Telco, Inc. (ATI) and American Telco Network Services, Inc. (ATNSI)
(collectively, the Companies), are under common control. All material
intercompany transactions and profits or losses have been eliminated in these
combined financial statements.
ATI and ATNSI were incorporated in Texas on May 12, 1983 and December 29,
1986, respectively. ATI is a provider of local and long distance telephone
services and ATNSI provides related telecommunication services. In 1997, ATI
began to provide local telephone service to commercial customers in certain
major Texas cities. Local service revenues were less than 10% of total revenues
during 1997.
REVENUE RECOGNITION
The Companies use the accrual method in recognizing telephone service income
when service is provided. Expenses associated with the cost of
telecommunications are accrued when service is used. Management believes the
Companies are not subject to significant concentrations of credit risk due to
the diverse nature of their customer base.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives; leasehold improvements
are amortized using the straight-line method over the lease term or the
estimated useful life of the related assets, whichever is shorter.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121 (FAS
121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Companies review for the impairment of long-lived
assets and certain identifiable intangibles on a periodic basis and whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under FAS 121, an impairment loss would be recognized
when estimated future cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. No such
impairment losses have been identified by the Companies through December 31,
1997.
INCOME TAXES
The Companies have elected to be treated as S Corporations for federal
income tax purposes. As such, no provision for federal income taxes has been
presented in these combined financial statements since taxes are to be paid by
the shareholders individually. In 1997 certain costs amounting to approximately
$1,000,000 have been capitalized for financial reporting purposes that will be
expensed as incurred for tax purposes.
CASH EQUIVALENTS
The Companies consider all temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.
F-31
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED COSTS
Effective January 1, 1997, the Companies adopted the policy of capitalizing
costs incurred to increase the capacity of their telecommunications network.
Such costs were previously expensed as incurred. During 1997, the Companies
incurred and capitalized $257,000 related to network capacity upgrades. These
costs are included in other assets and are amortized using the straight-line
method over a period of four years. Management believes the impact on the
Companies' financial position and results of operations resulting from this
change in accounting principles is not material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes the estimates and assumptions used in the preparation of these
financial statements are reasonable.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment comprised the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
DESCRIPTION USEFUL LIVES 1996 1997
- ------------------------------------------------------------------ --------------- ------------- -------------
<S> <C> <C> <C>
Furniture and equipment........................................... 5-7 $ 5,006,021 $ 6,722,739
Switch equipment.................................................. 5 3,854,871 5,217,303
Automatic call processors......................................... 5 3,025,835 3,550,408
Leasehold improvements............................................ 1-3 348,456 449,416
------------- -------------
12,235,183 15,939,866
Less--accumulated depreciation and amortization................... (5,778,956) (7,987,587)
------------- -------------
$ 6,456,227 $ 7,952,279
------------- -------------
------------- -------------
</TABLE>
The Companies have capitalized $760,003 during 1997 of internal costs
related to the development of new customer service, local service, line charge
reconciliation and billing softwares developed during the year. This amount is
included in furniture and equipment at December 31, 1997.
3. INDEBTEDNESS
In September 1996, ATI entered into a credit agreement with a financial
institution. The credit agreement provides for an aggregate of $3,500,000 in
borrowings under a line of credit and under letters of credit. Borrowings under
the line of credit may not exceed 80% of eligible accounts receivable, and
letters of credit outstanding may not exceed $1,000,000. Advances bear interest
at prime, with an adjusted LIBOR rate option, and are secured by accounts
receivable, contract rights, deposit accounts and general intangibles. At
December 31, 1997, the outstanding balance under this facility was $853,000.
Maximum borrowings outstanding under the line of credit were $3,426,000 during
1997.
F-32
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. INDEBTEDNESS (CONTINUED)
At December 31, 1997, ATI had a long-term loan amounting to $411,292. The
loan bears interest at prime. Payments are made monthly and include $8,731 in
principal and the related interest accruing during the month. The term of the
loan is 60 months starting in December 1997.
These agreements require that certain restrictive and minimum financial
covenants be maintained.
The Companies also have received advances from certain
officers/shareholders.
4. SHAREHOLDERS' EQUITY
COMMON STOCK
ATI -- Class A voting common stock, $.01 par value, 100,000 shares
authorized, 100,000 issued and outstanding
ATI -- Class B nonvoting common stock, $.01 par value, 900,000 shares
authorized, 900,000 issued and outstanding
ATNSI -- $.10 par value, 100,000 shares authorized, 1,000 issued and
outstanding
5. RELATED PARTY TRANSACTIONS
O.L.C. Company (OLC), an affiliate of the Companies prior to its sale to a
third party on July 3, 1997, provided telecommunications services to the
Companies totaling $5,835,000, $5,892,000 and $3,157,000 for the years ended
December 31, 1995 and 1996 and from January 1, 1997 to July 3, 1997,
respectively, which are included as direct costs in the accompanying combined
statement of income. The Companies had a balance of $772,358 owing to OLC as of
December 31, 1996, which is included in accounts payable in the accompanying
combined balance sheet.
The Companies charged a management fee totaling $192,000 to OLC for the
first six months of 1997 which is included in other income, net in the
accompanying combined statement of income.
The Companies paid promotional services to an affiliate totaling $210,000,
$259,000 and $225,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
6. OPERATING LEASES AND SERVICE AGREEMENTS
The Companies lease office space and equipment under noncancelable operating
leases. Future minimum lease payments under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ------------------------------------------------------------ ------------
<S> <C>
1998........................................................ $ 1,103,764
1999........................................................ 845,878
2000........................................................ 896,241
2001........................................................ 784,870
2002........................................................ 483,587
Thereafter.................................................. 745,750
------------
$ 4,860,090
------------
------------
</TABLE>
F-33
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. OPERATING LEASES AND SERVICE AGREEMENTS (CONTINUED)
ATNSI has executed various agreements for leased lines to various cities.
Several of the agreements provide for, among other things, a cancelation charge
if the agreements are canceled before the first year.
7. PROFIT SHARING PLAN
ATI has adopted a profit sharing and employee savings plan under Section
401(k) of the Internal Revenue Code of 1986. Participants can contribute from 1%
to 20% of their pre-tax compensation and can receive a matching employer
contribution of up to 4% of the participants' eligible compensation for the plan
year. The amount of ATI's contribution to the plan is at the discretion of the
Board of Directors. ATI's 401(k) plan contribution expenses accrued at December
31, 1996 and 1997 were $232,136 and $92,412, respectively.
8. SUBSEQUENT EVENT
On March 6, 1998, the Company's shareholders signed a letter of intent to
sell the Company's operations to an unrelated third party.
F-34
<PAGE>
AMERICAN TELCO INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 173,502 $ 280,314
Accounts receivable trade, net of allowance for doubtful accounts
of $255,464 and $267,278, respectively......................... 6,031,822 7,348,347
Prepaid expenses................................................. 112,457 158,519
---------- ----------
Total current assets........................................... 6,317,781 7,787,180
Property and equipment, net........................................ 7,952,279 7,897,921
Other assets....................................................... 491,997 573,698
---------- ----------
$14,762,057 $16,258,799
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................................. $ 853,000 $ 878,000
Current portion of long-term debt................................ 74,488 74,488
Accounts payable................................................. 5,502,721 5,554,603
Accrued expenses................................................. 1,323,816 1,688,409
Deposits......................................................... 45,072 52,594
---------- ----------
Total current liabilities...................................... 7,799,097 8,248,094
Long-term debt..................................................... 336,804 319,101
---------- ----------
Total liabilities.............................................. 8,135,901 8,567,195
---------- ----------
Shareholders' equity:
Common stock..................................................... 10,100 10,100
Additional paid-in capital....................................... 900 900
Retained earnings................................................ 6,615,156 7,680,604
---------- ----------
6,626,156 7,691,604
---------- ----------
Commitments (Note 4)...............................................
---------- ----------
$14,762,057 $16,258,799
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
AMERICAN TELCO INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
CONDENSED COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues........................................................... $12,133,101 $15,741,866
---------- ----------
Expenses:
Cost of service.................................................. 6,825,027 9,405,537
Selling, general and administrative.............................. 4,480,092 4,309,134
Depreciation and amortization.................................... 615,426 715,456
---------- ----------
Total expenses................................................. 11,920,545 14,430,127
---------- ----------
Income from operations............................................. 212,556 1,311,739
Interest expense................................................... (29,138) (61,798)
Other income (expenses), net....................................... 13,519 (1,493)
---------- ----------
Net income......................................................... $ 196,937 $1,248,448
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
AMERICAN TELCO, INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
ATI CLASS A ATI CLASS B ATNSI
COMMON STOCK COMMON STOCK COMMON STOCK ATNSI ATI
---------------------- ---------------------- ------------------------ PAID-IN- RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
--------- ----------- --------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996........ 100,000 $ 1,000 900,000 $ 9,000 1,000 $ 100 $ 900 $5,731,068
Net income (loss)........ 1,640,324
Distributions............ (1,297,000)
--------- ----------- --------- ----------- ----- ----- ----- ----------
December 31, 1997........ 100,000 1,000 900,000 9,000 1,000 100 900 6,074,392
Net income (loss)........ 1,198,092
Distributions............ (183,000)
--------- ----------- --------- ----------- ----- ----- ----- ----------
March 31, 1998........... 100,000 $ 1,000 900,000 $ 9,000 1,000 $ 100 $ 900 $7,089,484
--------- ----------- --------- ----------- ----- ----- ----- ----------
--------- ----------- --------- ----------- ----- ----- ----- ----------
<CAPTION>
ATNSI
RETAINED
EARNINGS TOTAL
--------- ----------
<S> <C> <C>
December 31, 1996........ $ 702,702 $6,444,770
Net income (loss)........ (161,938) 1,478,386
Distributions............ -- (1,297,000)
--------- ----------
December 31, 1997........ 540,764 6,626,156
Net income (loss)........ 50,356 1,248,448
Distributions............ -- (183,000)
--------- ----------
March 31, 1998........... $ 591,120 $7,691,604
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
AMERICAN TELCO INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1998
---------- ----------
THREE MONTHS ENDED
MARCH 31,
----------------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income..................................................... $ 196,937 $1,248,448
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 615,426 715,456
Loss on sale of property and equipment....................... 653 15,239
Changes in operating assets and liabilities:
Accounts receivable.......................................... (1,300,690) (1,316,525)
Prepaid expenses and other assets............................ (22,503) (46,062)
Accounts payable............................................. (441,773) 51,882
Accrued expenses............................................. 543,412 364,593
Deposits..................................................... (2,946) 7,522
---------- ----------
Net cash (used) provided by operating activities........... (411,484) 1,040,553
---------- ----------
Investing activities:
Purchase of property and equipment, net........................ (1,149,824) (676,337)
Increase in other assets....................................... (260,500) (81,701)
---------- ----------
Net cash used in investing activities...................... (1,410,324) (758,038)
---------- ----------
Financing activities:
Net borrowings on revolving lines of credit.................... 1,691,000 25,000
Principal payments on long-term debt........................... (17,703)
Distributions to S Corporations' shareholders.................. (145,170) (183,000)
---------- ----------
Net cash provided (used) by financing activities........... 1,545,830 (175,703)
---------- ----------
Net (decrease) increase in cash.................................. (275,978) 106,812
Cash and equivalents at beginning of period...................... 647,427 173,502
---------- ----------
Cash and equivalents at end of period............................ $ 371,449 $ 280,314
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
AMERICAN TELCO INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO CONDENSED COMBINED FINANCIAL INFORMATION
MARCH 31, 1998
(UNAUDITED)
The condensed combined balance sheets of American Telco, Inc. and American
Telco Network Services, Inc. as of December 31, 1997 and March 31, 1998, the
condensed combined statements of operations for the three months ended March 31,
1997 and 1998, the combined statement of shareholders equity for the year ended
December 31, 1997 and the three months ended March 31, 1998, and the condensed
combined statements of cash flows for the three months ended March 31, 1997 and
1998 are unaudited. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements. 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 combined 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 Companies' December 31, 1997
combined financial statements.
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The companies included in the accompanying combined financial statements,
American Telco, Inc. (ATI) and American Telco Network Services, Inc. (ATNSI)
(collectively, the Companies), are under common control. All material
intercompany transactions and profits and losses have been eliminated in these
combined financial statements.
ATI and ATNSI were incorporated in Texas on May 12, 1983 and December 29,
1986, respectively. ATI is a provider of local and long distance telephone
services and ATNSI provides related telecommunication services. In 1997, ATI
began to provide local telephone service to commercial customers in certain
major Texas cities. Local service revenues were less than 1% and approximately
10% of total revenues during the three months ended March 31, 1997 and 1998,
respectively.
REVENUE RECOGNITION
The Companies use the full accrual method in recognizing telephone service
income when service is provided. Expenses associated with the cost of
telecommunications are accrued when service is used. Management believes the
Companies are not subject to significant concentrations of credit risk due to
the diverse nature of their customer base.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives; leasehold improvements
are amortized using the straight-line method over the lease term or the
estimated useful life of the related assets, whichever is shorter.
INCOME TAXES
The Companies have elected to be treated as S Corporations for federal
income tax purposes. As such, no provision for federal income taxes has been
presented in those combined financial statements since income taxes are to be
paid by the shareholders individually.
F-39
<PAGE>
AMERICAN TELCO INC. AND AMERICAN TELCO NETWORK SERVICES, INC.
NOTES TO CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
2. INDEBTEDNESS
In September 1996, ATI entered into a credit agreement with a financial
institution. The credit agreement provided for an aggregate of $3,500,000 in
borrowings under a line of credit and under letters of credit. During the three
months ended March 31, 1998, the line of credit was increased to $7,000,000.
Borrowings under the line of credit may not exceed 80% of eligible accounts
receivable and letters of credit outstanding may not exceed $1,000,000. Advances
bear interest at prime, with an adjusted LIBOR rate option, and are secured by
accounts receivable, contract rights, deposit accounts and general intangibles.
At March 31, 1998, the outstanding balance under this facility was $878,000.
At March 31, 1998, ATI had a long-term loan amounting to $393,589. The loan
bears interest at prime. Payments are made monthly and include $8,731 in
principal and related interest accruing during the month. The term of the loan
is 60 months starting in December 1997.
These agreements require that certain restrictive and minimum financial
covenants be maintained.
The Company also have received advances from certain officers/shareholders.
3. SHAREHOLDERS' EQUITY
COMMON STOCK
ATI -- Class A voting common stock, $.01 par value, 100,000 shares
authorized, 100,000 issued and outstanding
ATI -- Class B nonvoting common stock, $.01 par value, 900,000 shares
authorized, 900,000 issued and outstanding
ATNSI -- $.10 par value, 100,000 shares authorized, 1,000 issued and
outstanding
4. COMMITMENT
On March 6, 1998, the Companies' shareholders signed a letter of intent to
sell the Companies' operations to an unrelated third party.
F-40
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Oklahoma General Corporation Act under which the Company
is incorporated, the Company's Amended and Restated Certificate of Incorporation
provides for indemnification of each of the Company's officers and directors
against (a) expenses, including attorney's fees, judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any action, suit or proceeding brought by reason of his being or having been a
director, officer, employee or agent of the Company, or of any other
corporation, partnership, joint venture, or other enterprise at the request of
the Company, other than an action by or in the right of the Company, provided
that he acted in good faith and in a manner he reasonably believed to be in the
best interest of the Company, and with respect to any criminal action, he had no
reasonable cause to believe that his conduct was unlawful and (b) expenses
(including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of any action or suit by or in the
right of the Company brought by reason of his being or having been a director,
officer, employee or agent of the Company, or any other corporation,
partnership, joint venture, or other enterprise at the request of the Company,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interest of the Company; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged liable to the Company, unless and
only to the extent that the court in which such action or suit was decided has
determined that the person is fairly and reasonably entitled to indemnification
for such expenses which the court shall deem proper. The Company's bylaws
provide for similar indemnification. These provisions may be sufficiently broad
to indemnify such persons for liabilities arising under the Securities Act of
1933, as amended.
The Company's directors and officers are also insured against claims arising
out of the performance of their duties in such capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT METHOD OF
NUMBERS DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------- ------------
<C> <S> <C>
3.1 Registrant's Amended and Restated Certificate of Incorporation. (4)
3.2 Registrant's By-laws, as amended (4)
4.1 Telephone Loan Contract dated as of November 7, 1958 between Dobson Telephone
Company, Inc. and United States of America. (1)[4.2]
4.2 Telephone Loan Contract dated as of March 19, 1956 between McLoud Telephone
Company and United States of America. (1)[4.3]
4.3 Telephone Loan Contract dated as of January 15, 1993 between Dobson Telephone
Company, Inc., Rural Telephone Bank and United States of America. (1)[4.4]
4.4 Restated Mortgage, Security Agreement and Financing Statement dated as of May
15, 1993 between Dobson Telephone Company and United States of America. (1)[4.5]
4.5 Indenture dated as of June 12, 1998 between the Registrant, as Issuer, and
United States Trust Company of New York, as Trustee. (4)[4.5]
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT METHOD OF
NUMBERS DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------- ------------
<C> <S> <C>
4.6 Escrow and Security Agreement dated June 12, 1998 among the Registrant as
Pledgor, and Morgan Stanley & Co. Incorporated, Montgomery Securities LLC as
Placement Agents, and United States Trust Company of New York, as Trustee. (4)
4.7 Registration Rights Agreement dated June 12, 1998 between the Registrant and
Morgan Stanley & Co. Incorporated, and NationsBanc Montgomery Securities LLC. (4)
5 Opinion of McAfee & Taft A Professional Corporation. (4)
10.1 Stock Purchase Agreement, dated as of March 26, 1998, between the shareholders
of American Telco Inc. and American Telco Network Services, Inc. and the
Registrant. (2)[2.1]
10.2 First Amendment to Stock Purchase Agreement among American Telco Inc. and
American Telco Network Services, Inc. and the Registrant. (2)[2.2]
10.3* Letter dated September 16, 1997 from Registrant to William J. Hoffman, Jr.,
describing employment arrangement. (3)[10.3.4]
10.4* Registrant's 1998 Stock Option Plan. (4)
11 Statement re computation of per share earnings. (4)
12 Statement re computation of ratios. (4)
21 Subsidiaries
23.1 Consent of McAfee & Taft A Professional Corporation is contained in Exhibit 5
hereto. (4)
23.2 Consent of Arthur Andersen LLP. (5)
23.3 Consent of PricewaterhouseCoopers LLP. (5)
24 Power of Attorney. (4)
25 Statement of eligibility of Trustee. (4)
27 Financial Data Schedule. (4)
99.1 Letter of Transmittal. (4)
99.2 Notice of Guarantee of Delivery. (4)
99.3 Company letter. (4)
99.4 Client letter. (4)
99.5 Guidelines for certification of taxpayer identification number. (4)
</TABLE>
- ------------------------
All exhibits not filed herewith are either:
(1) Filed as an exhibit to the Registration Statement on Form S-4
(Registration No. 33-23769), as the exhibit number indicated in brackets,
by Dobson Communications Corporation, the Registrant's parent, and
incorporated herein by reference;
(2) Filed as an exhibit to Current Report on Form 8-K on June 30, 1998, of
Dobson Communications Company, the Registrant's parent (File No.
333-23769), as the exhibit number indicated in brackets, and incorporated
herein by reference; or
(3) Filed as an exhibit the Annual Report on Form 10-K for the year ended
December 31, 1997, of Dobson Communications Company, the Registrant's
parent, as the exhibit number indicated in brackets, and incorporated
herein by reference.
(4) Previously filed as an exhibit to this Registration Statement
(Registration No. 333-58693).
(5) Filed herewith.
* Management contract or compensatory plan or arrangement.
II-2
<PAGE>
(b) Financial Statement Schedules
None.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registration pursuant to the provisions described under Item 20, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnifications against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Oklahoma City, State of Oklahoma, on the 6th day of November, 1998.
<TABLE>
<S> <C> <C>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
By: /s/ EVERETT R. DOBSON*
-----------------------------------------
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities indicated on the 6th day of November, 1998.
NAME TITLE
- ------------------------------ ----------------------------------------
/s/ EVERETT R. DOBSON* Chairman of the Board and Chief
- ------------------------------ Executive Officer (Principal Executive
Everett R. Dobson Officer)
/s/ STEPHEN T. DOBSON
- ------------------------------ President and Director
Stephen T. Dobson
/s/ BRUCE R. KNOOIHUIZEN*
- ------------------------------ Vice President and Chief Financial
Bruce R. Knooihuizen Officer (Principal Financial Officer)
/s/ TRENTON W. LEFORCE*
- ------------------------------ Corporate Controller (Principal
Trenton W. LeForce Accounting Officer)
/s/ RUSSELL L. DOBSON*
- ------------------------------ Director
Russell L. Dobson
/s/ JUSTIN L. JASCHKE*
- ------------------------------ Director
Justin L. Jaschke
/s/ THADEUS J. MOCARSKI*
- ------------------------------ Director
Thadeus J. Mocarski
<TABLE>
<S> <C> <C> <C>
*By: /s/ STEPHEN T. DOBSON
-------------------------
Stephen T. Dobson
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT METHOD OF
NUMBERS DESCRIPTION FILING
- --------- ------------------------------------------------------------------------------ -------------
<C> <S> <C>
3.1 Registrant's Amended and Restated Certificate of Incorporation, as amended (4)
3.2 Registrant's By-laws, as amended (4)
4.1 Telephone Loan Contract dated as of November 7, 1958 between Dobson Telephone
Company, Inc. and United States of America. (1)[4.2]
4.2 Telephone Loan Contract dated as of March 19, 1956 between McLoud Telephone
Company and United States of America. (1)[4.3]
4.3 Telephone Loan Contract dated as of January 15, 1993 between Dobson Telephone
Company, Inc., Rural Telephone Bank and United States of America. (1)[4.4]
4.4 Restated Mortgage, Security Agreement and Financing Statement dated as of May
15, 1993 between Dobson Telephone Company and United States of America. (1)[4.5]
4.5 Indenture dated as of June 12, 1998 between the Registrant, as Issuer, and
United States Trust Company of New York, as Trustee. (4)
4.6 Escrow and Security Agreement dated June 12, 1998 among the Registrant as
Pledgor, and Morgan Stanley & Co. Incorporated, Montgomery Securities LLC as
Placement Agents, and United States Trust Company of New York, as Trustee. (4)
4.7 Registration Rights Agreement dated June 12, 1998 between the Registrant and
Morgan Stanley & Co. Incorporated, and NationsBanc Montgomery Securities
LLC. (4)
5 Opinion of McAfee & Taft A Professional Corporation. (4)
10.1 Stock Purchase Agreement, dated as of March 26, 1998, between the shareholders
of American Telco Inc. and American Telco Network Services, Inc. and the
Registrant. (2)[2.1]
10.2 First Amendment to Stock Purchase Agreement among American Telco Inc. and
American Telco Network Services, Inc. and the Registrant. (2)[2.2]
10.3* Letter dated September 16, 1997 from Registrant to William J. Hoffman, Jr.,
describing employment arrangement. (3)[10.3.4]
10.4* Registrant's 1998 Stock Option Plan (4)
11 Statement re computation of per share earnings. (4)
12 Statement re computation of ratios. (4)
21 Subsidiaries
23.1 Consent of McAfee & Taft A Professional Corporation is contained in Exhibit 5
hereto. (4)
23.2 Consent of Arthur Andersen LLP. (5)
23.3 Consent of PricewaterhouseCoopers LLP. (5)
24 Power of Attorney. (4)
25 Statement of eligibility of Trustee. (4)
27 Financial Data Schedule. (4)
99.1 Letter of Transmittal. (4)
99.2 Notice of Guarantee of Delivery. (4)
99.3 Company letter. (4)
99.4 Client letter. (4)
99.5 Guidelines for certification of taxpayer identification number. (4)
</TABLE>
- ------------------------
All exhibits not filed herewith are either:
<PAGE>
(1) Filed as an exhibit to the Registration Statement on Form S-4
(Registration No. 33-23769), as the exhibit number indicated in brackets,
by Dobson Communications Corporation, the Registrant's parent, and
incorporated herein by reference;
(2) Filed as an exhibit to Current Report on Form 8-K on June 30, 1998, of
Dobson Communications Company, the Registrant's parent (File No.
333-23769), as the exhibit number indicated in brackets, and incorporated
herein by reference; or
(3) Filed as an exhibit the Annual Report on Form 10-K for the year ended
December 31, 1997, of Dobson Communications Company, the Registrant's
parent, as the exhibit number indicated in brackets, and incorporated
herein by reference.
(4) Previously filed as an exhibit to this Registration Statement
(Registration No. 333-58693).
(5) Filed herewith.
* Management contract or compensatory plan or arrangement.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report as
it relates to Logix Communications Enterprises, Inc. (and to all references to
our Firm) included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
November 5, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Logix Communications Enterprises, Inc.
(formerly named Dobson Wireline Company) of our report dated March 12, 1998
relating to the combined financial statements of American Telco, Inc. and
American Telco Network Services, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
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PricewaterhouseCoopers LLP
Houston, Texas
November 6, 1998
