<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 333-58693
------------------------
LOGIX COMMUNICATIONS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1533356
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
3555 N.W. 58TH STREET
TENTH FLOOR 73112
OKLAHOMA CITY, OKLAHOMA
(Address of principal executive offices) (Zip Code)
(405) 516-8400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
At August 9, 1999, there were 71,250,000 shares of the registrant's $.01 par
value Class A Common Stock outstanding.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.................. 3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999
and 1998......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and
1998............................................................................................. 5
Notes to Condensed Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk........................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 20
Item 2. Changes in Securities and Use of Proceeds........................................................ 20
Item 3. Defaults Upon Senior Securities.................................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 20
Item 5. Other Information................................................................................ 20
Item 6. Exhibits and Reports on Form 8-K................................................................. 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 2,698 $ 31,675
Restricted cash and investments...................................................... 38,928 37,572
Accounts receivable, net............................................................. 21,088 16,837
Receivables-affiliates............................................................... 581 5,081
Other current assets................................................................. 3,084 2,330
---------- ------------
Total current assets............................................................... 66,380 93,496
---------- ------------
PROPERTY, PLANT AND EQUIPMENT, net..................................................... 107,317 85,883
---------- ------------
OTHER ASSETS:
Restricted cash and investments...................................................... 41,542 61,988
Goodwill, net........................................................................ 127,999 129,869
Excess purchase cost over original cost of assets acquired, net...................... 2,534 2,581
Deferred financing costs, net........................................................ 11,226 10,869
Other intangibles, net............................................................... 4,909 5,214
Investment in unconsolidated partnership and other................................... 2,605 2,521
---------- ------------
Total other assets................................................................. 187,190 209,418
---------- ------------
Total assets....................................................................... $ 364,512 $ 392,421
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 24,958 $ 29,477
Accrued expenses..................................................................... 5,510 4,337
Current portion of long-term debt.................................................... 1,190 1,171
Deferred revenue and customer deposits............................................... 594 424
---------- ------------
Total current liabilities.......................................................... 32,252 35,410
---------- ------------
LONG-TERM DEBT, net of current portion................................................. 393,159 376,327
DEFERRED CREDITS....................................................................... 103 108
STOCKHOLDER'S DEFICIT:
Class A Common Stock, $.01 par value, 100,000,000 shares authorized and 71,250,000
shares issued and outstanding...................................................... 713 713
Paid-in capital...................................................................... 11,448 11,448
Retained deficit..................................................................... (73,163) (31,585)
---------- ------------
Total stockholder's deficit........................................................ (61,002) (19,424)
---------- ------------
Total liabilities and stockholder's deficit...................................... $ 364,512 $ 392,421
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUE............................................. $ 28,187 $ 9,345 $ 56,741 $ 14,635
OPERATING EXPENSES:
Cost of service................................... 21,252 4,434 41,547 6,072
Selling, general and administrative............... 14,166 5,171 27,466 8,916
Depreciation and amortization..................... 4,939 1,833 9,477 3,129
------------- ------------- ------------- -------------
Total operating expenses........................ 40,357 11,438 78,490 18,117
------------- ------------- ------------- -------------
OPERATING LOSS:..................................... (12,170) (2,093) (21,749) (3,482)
OTHER INCOME (EXPENSE):
Equity in income of unconsolidated partnership.... 38 40 84 66
Interest income................................... 1,507 309 3,282 314
Interest expense.................................. (11,515) (2,400) (23,194) (2,721)
Other............................................. 2 7 (2) 16
------------- ------------- ------------- -------------
Total other expense, net........................ (9,968) (2,044) (19,830) (2,325)
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.................... (22,138) (4,137) (41,579) (5,807)
INCOME TAX BENEFIT.................................. -- 83 -- 718
------------- ------------- ------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.............................. (22,138) (4,054) (41,579) (5,089)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
net of income tax benefit of $429 in 1998......... -- -- -- (699)
------------- ------------- ------------- -------------
NET LOSS............................................ $ (22,138) $ (4,054) $ (41,579) $ (5,788)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER
COMMON SHARE
Before cumulative effect of change in accounting
principle....................................... $ (.31) $ (.06) $ (.58) $ (.07)
Cumulative effect of change in accounting
principle....................................... -- -- -- (.01)
------------- ------------- ------------- -------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER
COMMON SHARE...................................... $ (.31) $ (.06) $ (.58) $ (.08)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 71,250,000 71,250,000 71,250,000 71,250,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
<S> <C> <C>
1999 1998
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................ $ (41,579) $ (5,788)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities
Depreciation and amortization..................................................... 9,477 3,129
Amortization of bond premium and financing cost................................... 985 --
Deferred income taxes and investment tax credits, net............................. (5) (1,212)
Cumulative effect of change in accounting principle............................... -- 1,128
Accrued interest on restricted investments........................................ 365 --
Equity in income of unconsolidated partnership.................................... (84) (66)
Changes in current assets and liabilities
Accounts receivable............................................................... (4,251) (855)
Other current assets.............................................................. (1,322) 231
Accounts payable.................................................................. (4,519) 3,960
Accrued expenses.................................................................. 1,173 728
Deferred revenue and customer deposits............................................ 170 133
---------- -----------
Net cash provided by (used in) operating activities............................. (39,590) 1,390
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................ (27,791) (6,140)
Acquisitions of businesses.......................................................... 171 (136,588)
Purchase of customer lists.......................................................... (552) --
Decrease in receivables--affiliates, net............................................ 4,500 6,114
Investments in unconsolidated subsidiaries and other................................ -- (317)
---------- -----------
Net cash used in investing activities........................................... (23,672) (136,932)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt........................................................ (649) (635)
Issuance of senior notes............................................................ -- 350,000
Borrowings under credit facility.................................................... 17,500 --
Purchase of restricted investments.................................................. -- (120,976)
Premium on restricted investments, net.............................................. -- (810)
Maturities of restricted investments................................................ 18,348 --
Deferred financing costs............................................................ (914) (10,565)
---------- -----------
Net cash provided by financing activities....................................... 34,285 217,014
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (28,977) 81,472
CASH AND CASH EQUIVALENTS, beginning of period........................................ 31,675 254
---------- -----------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 2,698 $ 81,726
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. ORGANIZATION
Logix Communications Enterprises, Inc. ("Logix" or the "Company") was
incorporated as an Oklahoma corporation under the name "Dobson Wireline Company"
in December 1997, as part of a reorganization by its parent company, Dobson
Communications Corporation ("Dobson Communications"). Its name was changed to
Logix Communications Enterprises, Inc. in October 1998. Logix is a wholly owned
subsidiary of Dobson Communications and is a leading provider of integrated
local and long distance, data and other telecommunications services to small and
medium-sized business customers throughout its region. The Company provides
these services through two business segments: incumbent local exchange carrier
("ILEC") operations and integrated communications provider ("ICP") operations.
2. PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of
Logix Communications Enterprises, Inc., Dobson Telephone Company, Inc. ("Dobson
Telephone"), Logix Communications Corporation, ("LCC") and Dobson Fiber/FORTE of
Colorado, Inc. All significant intercompany accounts and transactions have been
eliminated. In the opinion of management, the consolidated financial statements
reflect all normal recurring adjustments necessary for a fair presentation of
the financial position and results of operations for the periods presented.
The significant accounting policies followed in the preparation of the
quarterly financial statements are the same as those disclosed in the 1998 Logix
Communications Enterprises, Inc. Annual Report on Form 10-K. Reference is made
to the "Notes to Consolidated Financial Statements" under Item 8 of the 1998
Form 10-K for additional disclosure.
3. ACQUISITIONS
On June 15, 1998, the Company purchased the common stock of American Telco,
Inc. and American Telco Network Servies, Inc. (collectively, "American Telco")
for $131.5 million (the "ATI Acquisition"). The ATI Acquisition expanded the
Company's ICP operations to five major Texas markets: Houston, Dallas, Fort
Worth, San Antonio and Austin.
On June 22, 1998, the Company purchased certain long distance customers and
related assets of Zenex Long Distance, Inc. d/b/a Zenex Communications, Inc. for
$4.7 million ("the Zenex Acquisition"). The Zenex Acquisition increased the
Company's customer base in Oklahoma City.
On November 20, 1998, the Company purchased substantially all of the assets
of SysComm Design, Inc. ("SysComm") for $4.1 million (the "SysComm
Acquisition"). The SysComm Acquisition increased the Company's customer base and
direct sales force in Dallas, Corpus Christi, Austin and Houston and expanded
the Company's customer premise equipment product line offerings.
The acquisition transactions were accounted for as purchases, and
accordingly, their results of operations have been included in the accompanying
consolidated statements of operations from the respective dates of acquisition.
The unaudited pro forma information set forth below includes all acquisitions
for the periods ended June 30, 1999, and 1998, as if the purchases occurred at
the beginning of the respective periods. The unaudited pro forma information is
presented for informational purposes only
6
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisitions been consummated at that time:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue........................... $ 28,187 $ 25,764 $ 56,741 $ 49,491
Loss before cumulative effect............... (22,138) (18,468) (41,579) (26,988)
Net loss.................................... (22,138) (18,468) (41,579) (27,687)
Basic net loss per share.................... $ (.31) $ (.26) $ (.58) $ (.39)
</TABLE>
4. REPORT OF BUSINESS SEGMENTS
The Company operates in two reportable segments: ILEC and ICP. The segments
are strategic business units that offer different products and services. These
segments are managed separately because the ILEC segment is a regulated public
utility and the ICP segment is a competitive communications provider. 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 EBITDA,
defined below, and 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 costs to each segment. The segments do
not have significant non-cash items other than depreciation and amortization in
reported net loss. A summary of the Company's operations by segment is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1999
---------------------------------
ILEC ICP TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING INFORMATION:
Operating revenue
External...................................................................... $ 3,471 $ 24,716 $ 28,187
Intersegment.................................................................. -- 1,261 1,261
Intersegment revenue(1)....................................................... -- -- (1,261)
--------- ---------- ----------
Total operating revenue....................................................... $ 3,471 $ 25,977 $ 28,187
--------- ---------- ----------
EBITDA(2)....................................................................... $ 2,104 $ (9,335) $ (7,231)
Depreciation and amortization................................................... (715) (4,224) (4,939)
Interest expense, net........................................................... (232) (9,776) (10,008)
Other income, net............................................................... -- 40 40
--------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle........................................................ $ 1,157 $ (23,295) $ (22,138)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
7
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
4. REPORT OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1998
-------------------------------
ILEC ICP TOTAL
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING INFORMATION:
Operating revenue
External......................................................................... $ 4,095 $ 5,250 $ 9,345
Intersegment..................................................................... -- 158 158
Intersegment revenue(1).......................................................... -- -- (158)
Total operating revenue.......................................................... $ 4,095 $ 5,408 $ 9,345
--------- --------- ---------
EBITDA(2).......................................................................... $ 2,303 $ (2,563) $ (260)
--------- --------- ---------
Depreciation and amortization...................................................... (748) (1,085) (1,833)
Interest income (expense), net..................................................... (223) (1,868) (2,091)
Other income, net.................................................................. 6 41 47
--------- --------- ---------
Income (loss) before income taxes and cumulative effect of change in accounting
principle...................................................................... $ 1,338 $ (5,475) $ (4,137)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
---------------------------------
ILEC ICP TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING INFORMATION:
Operating revenue
External...................................................................... $ 7,473 $ 49,268 $ 56,741
Intersegment.................................................................. -- 2,173 2,173
Intersegment revenue(1)....................................................... -- -- (2,173)
--------- ---------- ----------
Total operating revenue....................................................... $ 7,473 $ 51,441 $ 56,741
--------- ---------- ----------
EBITDA(2)....................................................................... $ 5,004 $ (17,276) $ (12,272)
Depreciation and amortization................................................... (1,434) (8,043) (9,477)
Interest expense, net........................................................... (675) (19,237) (19,912)
Other income, net............................................................... -- 82 82
--------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle........................................................ $ 2,895 $ (44,474) $ (41,579)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
8
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
4. REPORT OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
-------------------------------
ILEC ICP TOTAL
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING INFORMATION:
Operating revenue
External........................................................................ $ 7,864 $ 6,771 $ 14,635
Intersegment.................................................................... -- 259 259
Intersegment revenue(1)......................................................... -- -- (259)
--------- --------- ---------
Total operating revenue......................................................... $ 7,864 $ 7,030 $ 14,635
--------- --------- ---------
EBITDA(2)......................................................................... $ 4,324 $ (4,677) $ (353)
Depreciation and amortization..................................................... (1,563) (1,566) (3,129)
Interest income (expense), net.................................................... (539) (1,868) (2,407)
Other income, net................................................................. 16 66 82
--------- --------- ---------
Income (loss) before income taxes and cumulative effect of change in accounting
principle..................................................................... $ 2,238 $ (8,045) $ (5,807)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
(IN THOUSANDS)
INVESTMENT INFORMATION:
Segment Assets
ICP.................................................................................... $ 314,101 $ 351,231
ILEC................................................................................... 52,560 47,978
Intersegment receivables(1)............................................................ (2,149) (6,788)
---------- ------------
Total segment assets................................................................. $ 364,512 $ 392,421
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(1) The intersegment eliminations were included to reconcile reportable segment
activities to the Company's consolidated totals.
(2) EBITDA, as defined by the Company, represents earnings before interest,
income taxes, depreciation and amortization, other income (expense),
extraordinary items and cumulative effect of changes in accounting
principle.
5. COMMITMENTS
In May 1998, the Company entered into a carrier service agreement with a
minimum commitment totaling $9.8 million for a period of 24 months. Under this
agreement, the Company purchased 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, $7.2 million remained at June 30, 1999.
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
9
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
5. COMMITMENTS (CONTINUED)
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 $36.0 million or reaching the end of
the agreement. Of this commitment, $15.0 million remained at June 30, 1999.
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 ICP operations. Of this
commitment, $10.9 million remained at June 30, 1999.
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, $9.2 million remained at
June 30, 1999.
Effective September 1, 1998, Dobson Communications entered into a consulting
agreement with Russell L. Dobson. Under the terms of the agreement, Mr. Dobson
will be retained by Dobson Communications from September 1, 1998 through August
31, 2008. In exchange for Mr. Dobson's services to the Company, the Company will
provide monthly compensation of $15,000 and insurance benefits commensurate with
the Company's employee plan. Mr. Dobson's responsibilities will include duties
consistent with the responsibilities of a former Chief Executive Officer of
Dobson Communications, including the development of goodwill for Dobson
Communications and the Company.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
Logix is a 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
incumbent local exchange carrier ("ILEC") services in Oklahoma. In addition,
Logix operates long-haul fiber optic facilities in Oklahoma, Texas, and
Colorado, providing wholesale long-haul services. Logix currently offers
switch-based services as an integrated communications provider ("ICP") in
Oklahoma City, Tulsa, Houston, Dallas, Ft. Worth, San Antonio, and Austin.
REVENUE
ICP OPERATIONS. The Company began offering facilities-based ICP services in
October 1997 and currently provides these services to customers in major markets
in Oklahoma and Texas. The Company's ICP operation generates revenue from local
exchange, long distance, enhanced data, Internet, intranet and extranet
services, private line, integration services and fiber operation services. As of
June 30, 1999 and 1998, the Company's ICP operations serviced 48,483 and 22,735
access lines. The Company typically obtains a one-year contract with minimum
monthly usage from its business ICP customers.
Although the Company currently has excess capacity and does not currently
plan to construct any significant amount of additional fiber optic mileage, 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 for its route
may decline over the next few years as pricing is generally declining in the
industry. However, the Company believes that pricing declines will be modest on
its route due to its short distance and unique nature with relatively few
competing providers.
The Company incurred operating losses and negative cash flows from
operations and negative earnings before interest expense, income taxes,
depreciation and amortization, other income, extraordinary items and cumulative
effect of change in accounting principle ("EBITDA") related to its ICP services
in 1998 and the three months ended June 30, 1999. Such negative cash flows from
operations and negative EBITDA are expected to continue until Logix develops and
expands its ICP operations and subscriber base. These losses were primarily a
result of selling, general and administrative ("SG&A") expenses. As a result of
the continued expansion of its ICP operations the Company will continue to incur
significant increases in expenses associated with these activities. Also, the
Company expects that the addition of ICP services will have an adverse impact on
its combined gross margins, because the gross margins on the ICP services are
expected to be lower than the gross margins on its ILEC operations.
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.
11
<PAGE>
ILEC OPERATIONS. The Company through its predecessors began providing ILEC
services in 1936, and the Company currently owns and operates nine contiguous
exchanges in western Oklahoma and three contiguous exchanges adjacent to and
east of the Oklahoma City metropolitan area. As of June 30, 1999 and 1998 the
ILEC operations served 13,629 and 12,932 access lines, respectively. 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.
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 33.7% and 30.9% of Logix's revenue from its ILEC
operations, or $1.2 million and $2.4 million for the three months ended June 30,
1999 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.
COSTS AND EXPENSES
The Company's primary operating expense categories include: cost of service;
SG&A; and depreciation and amortization.
Cost of service for Logix's ICP operations consists primarily of the fixed
costs for leased lines, the variable costs of origination, termination and
access services provided through ILECs and other telecommunications companies
and administration and maintenance costs associated with operating and
maintaining the Company's facilities. The Company has deployed several digital
switching platforms with local and long distance capability and leases fiber
trunking capacity from ILECs and competitive local exchange carriers ("CLECs")
to connect the Company's switches with its transmission equipment co-located in
ILEC central offices. The Company intends to deploy similar switching platforms
and strategic Tier II and Tier III cities in Oklahoma and Texas. 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 under-utilization charges in
the event it over-estimates its requirements; additionally, 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 advanced network
presence ("ANP") devices and switches as market demand warrants.
SG&A includes all corporate infrastructure costs such as selling, customer
support, corporate administration, personnel and internal network maintenance.
Selling expenses include commissions for the
12
<PAGE>
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 expands into new geographic markets, adds new
sales offices and facilities and enlarges its current product offerings, SG&A is
expected to increase substantially.
Depreciation and amortization relates primarily to switching equipment,
facilities, computers and software, and is expected to increase as the Company
incurs significant capital expenditures to install additional switches.
Depreciation and amortization also includes amortization of goodwill acquired in
the acquisition of American Telco.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statements.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30,
1998
REVENUE. For the three months ended June 30, 1999, total revenue increased
$18.9 million, or 201.6%, to $28.2 million from $9.3 million in the same period
of 1998. The following table sets forth the components of the Company's revenue
for the three months ended June 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
ICP...................................................................... $ 24,716 $ 5,250
ILEC..................................................................... 3,471 4,095
--------- ---------
Total.................................................................. $ 28,187 $ 9,345
--------- ---------
--------- ---------
</TABLE>
ICP. ICP revenue increased $19.4 million to $24.7 million for the three months
ended June 30, 1999, from $5.3 million for the three months ended June 30, 1998,
due primarily to the acquisition of American Telco and, to a lesser extent,
internal growth. ICP revenue for the three months ended June 30, 1999, consisted
primarily of charges for local and long-distance telecommunications service and
equipment sales. ICP revenue includes fiber long-haul transport services and
network management services provided to both third parties and Company
affiliates. For the three months ended June 30, 1999, and 1998, the total number
of leased fiber lines for our long haul transport services was 124 and 73 DS3
equivalents, respectively.
ILEC. ILEC revenue decreased $.6 million, or 15.2%, to $3.5 million for the
three months ended June 30, 1999, compared to $4.1 million for the three months
ended June 30, 1998. The decrease related to decreased support revenue, offset
by an increase in the number of access lines. Access lines were 13,629 at June
30, 1999, as compared to 12,932 at June 30, 1998.
COST OF SERVICE. For the three months ended June 30, 1999, cost of service
increased $16.9 million to $21.3 million from $4.4 million in the comparable
period in 1998. These costs primarily consisted of costs associated with
wholesale charges from third party service providers relating to the ICP
segment. The increase was primarily due to the acquisition of American Telco
combined with increases in wholesale local service and leased copper loops. The
Company increased access lines, and increased long distance minutes of use and
equipment sold as the Company expanded its operations and increased ICP
personnel to support an expanded facilities based system.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended June 30,
1999, SG&A costs increased $9.0 million, or 174.0%, to $14.2 million compared to
$5.2 million in the first three months of
13
<PAGE>
1998. The increase was primarily due to increased salary costs resulting from
additional sales, administrative and marketing personnel in the Company's ICP
operations. The Company has also experienced an increase of $.6 million in
building rent for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998, related to expanded operations.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended June 30,
1999, depreciation and amortization expense increased $3.1 million, or 169.4%,
to $4.9 million from $1.8 million in the first three months of 1998. The ICP
segment's depreciation and amortization expense increased $3.1 million, to $4.2
million for the three months ended June 30, 1999, as compared to $1.8 million in
the same period of 1998. This increase is primarily a result of depreciation and
amortization on assets purchased for its ICP business and assets acquired,
including goodwill, in its acquisition of American Telco. The ILEC segment's
depreciation and amortization expense remained consistent between periods at $.7
million for both the three months ended June 30, 1999, and 1998.
OPERATING LOSS. As a result of the items discussed above, operating income
for the three months ended June 30, 1999, increased $10.1 million to a loss of
$12.2 million from a loss of $2.1 million in the comparable period of 1998.
INTEREST INCOME. Interest income for the three months ended June 30, 1999
increased to $1.2 million from a nominal amount earned for the same period in
1998. Interest income relates primarily to interest earned on the funds held in
escrow and cash on hand from the issuance of the 12 1/4% Senior Notes due in
2008 ("Senior Notes") issued in June 1998.
INTEREST EXPENSE. Interest expense for the three months ended June 30, 1999
increased $9.1 million, to $11.5 million from $2.4 million for the same period
in 1998. The increase in interest expense is a result of the issuance of the
Senior Notes.
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE. As a result of the items discussed above, loss before income taxes
and cumulative effect of change in accounting principle for the three months
ended June 30, 1999, increased $18.0 million to a loss of $22.1 million from a
loss of $4.1 million in the first three months of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE. For the six months ended June 30, 1999, total revenue increased
$42.1 million, or 287.7%, to $56.7 million from $14.6 million in the first six
months of 1998. The following table sets forth the components of the Company's
revenue for the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ICP....................................................... $ 49,268 $ 6,771
ILEC...................................................... 7,473 7,864
--------- ---------
Total..................................................... $ 56,741 $ 14,635
--------- ---------
--------- ---------
</TABLE>
ICP. ICP revenue increased $42.5 million to $49.3 million for the three months
ended June 30, 1999, from $6.8 million for the six months ended June 30, 1998,
due primarily to the acquisition of American Telco, and to a lesser extent,
internal growth. ICP revenue for the six months ended June 30, 1999, consisted
primarily of charges for local and long-distance telecommunications service and
equipment sales. ICP revenue includes fiber long-haul transport services and
network management services provided to both third parties and Company
affiliates. For the six months ended June 30, 1999 and 1998, the total number of
leased fiber lines for our long-haul transport services was 124 and 73 DS3
equivalents, respectively.
14
<PAGE>
ILEC. ILEC revenue decreased $.4 million, or 5.0%, to $7.5 million for the six
months ended June 30, 1999, compared to $7.9 million for the comparable period
of 1998. The decrease related to decreased support revenue, offset by an
increase in the number of access lines. Access lines were 13,629 at June 30,
1999, as compared to 12,932 at June 30, 1998.
COST OF SERVICE. For the six months ended June 30, 1999, cost of service
increased $35.5 million to $41.5 million from $6.0 million in the comparable
period in 1998. These costs primarily consisted of costs associated with
wholesale charges from third party service providers relating to the ICP
segment. The increase was primarily due to the acquisition of American Telco
combined with increases in wholesale local service and leased copper lines. The
Company increased access lines, and increased long distance minutes of use and
equipment sold as the Company expanded its operations.
SELLING, GENERAL AND ADMINISTRATIVE. For the six months ended June 30,
1999, SG&A costs increased $18.6 million, or 208.1%, to $27.5 million compared
to $8.9 million for the six months ended June 30, 1998. The increase was
primarily due to increased salary costs resulting from additional sales,
administrative and marketing personnel in the Company's ICP operations. The
Company has also experienced an increase of $1.8 million in building rent for
the six months ended June 30, 1999 compared to the six months ended June 30,
1998, related to expanded operations.
DEPRECIATION AND AMORTIZATION EXPENSE. For the six months ended June 30,
1999, depreciation and amortization expense increased $6.3 million, or 202.9%,
to $9.5 million from $3.1 million for the comparable period of 1998. The ICP
segment's depreciation and amortization expense increased $6.4 million, to $8.0
million for the three months ended June 30, 1999, from $1.6 million in the
comparable period of 1998. This increase is primarily a result of depreciation
and amortization on assets purchased for its ICP business and assets acquired,
including goodwill, in its acquisition of American Telco. The ILEC segment's
depreciation and amortization expense remained relatively consistent between
periods at $1.4 million for the three months ending June 30, 1999, as compared
to $1.6 million in the same period of 1998.
OPERATING LOSS. As a result of the items discussed above, operating income
for the six months ended June 30, 1999, increased $18.3 million to a loss of
$21.8 million from a loss of $3.5 million for the six months ended June 30,
1998.
INTEREST INCOME. Interest income for the six months ended June 30, 1999
increased $3.0 million to $3.3 million from $.3 million earned for the same
period in 1998. Interest income relates primarily to interest earned on the
funds held in escrow and cash on hand from the issuance of the 12 1/4% Senior
Notes due in 2008 ("Senior Notes") issued in June 1998.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
increased $20.5 million, to $23.2 million from $2.7 million for the same period
in 1998. The increase in interest expense is a result of the issuance of the
Senior Notes.
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE. As a result of the items discussed above, loss before income taxes
and cumulative effect in accounting principle for the six months ended June 30,
1999, increased $35.8 million to a loss of $41.6 million from a loss of $5.8
million in the comparable period of 1998.
ILEC. Income before income taxes and cumulative effect of change in accounting
principle from the Company's ILEC operations increased $.7 million to $2.9
million for the six months ended June 30, 1999 from $2.2 million in the six
months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow from operations
and positive EBITDA in its ILEC business and historically financed its ILEC
business through government loans. The Company's
15
<PAGE>
ILEC business has also historically generated income before income taxes 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 33.7% and 30.9% of its revenues for the three months ended June
30, 1999, and 1998, respectively. This support revenue contributes significantly
to the ILEC's positive cash flow from operations, EBITDA and income before
income taxes and cumulative effect of change in accounting principle.
The Company has experienced negative cash flow from operations and EBITDA
and loss before income taxes and cumulative effect of change in accounting
principle in the first six months of 1999 and for the year ended 1998 in its ICP
business. These negative cash flows from operations and EBITDA and loss before
income taxes and cumulative effect of change in accounting principle are
primarily the result of selling, general and administrative expenses incurred as
the Company works to expand the ICP business. The Company will continue to incur
losses before income taxes and cumulative effect of change in accounting
principle and will continue to generate negative cash flow from operations and
EBITDA until it develops and expands its ICP operations and customer base. 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 Senior Notes. The Company expects
negative cash flow and loss before income taxes and cumulative effect of change
in accounting principle on a consolidated basis as it continues to expand its
ICP operations.
In addition, after June 13, 2000, the last date of interest on the Senior
Notes will be paid by the pledged U.S. government securities, cash flow from
operations may not be sufficient to provide adequate funds to pay interest under
existing indebtedness. To the extent internally generated funds are insufficient
to meet the requirements, the Company will need to obtain funds from other
sources.
Net cash provided by (used in) operating activities was $(40.0) million for
the six months ended June 30, 1999, compared to $1.4 million for the same period
of 1998. The increase in net cash used in operating activities during the six
months ended June 30, 1999, primarily related to increased operating expenses
and increased interest expense as a result of the Senior Note offering
consummated in June 1998, offset by depreciation and amortization.
Net cash used in investing activities totaled $23.7 million and $136.9
million for the six months ended June 30, 1999, and 1998, respectively.
Investing activities for the six months ended June 30, 1999, primarily related
to capital expenditures offset by a decrease in affiliate receivables. For the
comparable period of 1998, investing activities related to the funding of the
acquisition of American Telco.
Net cash provided by financing activities was $34.3 million and $217.0
million for the six months ended June 30, 1999, and 1998, respectively. The net
cash provided by financing activities during the six months ended June 30, 1999
primarily resulted from borrowings under the $75 million credit facility
("Credit Facility"). The Credit Facility closed on April 8, 1999, with
NationsBank, N.A. serving as the administrative agent. The net cash provided by
financing activities also was a result of maturities of restricted investments
relating to the offering of Senior Notes. The net cash provided by financing
activities during the six months ended June 30, 1998, primarily resulted from
the issuance of the Senior Notes.
Capital expenditures for the three months ended June 30, 1999 and 1998 were
$27.8 million and $6.1 million, respectively. The Company's existing capital
plan contemplates approximately $41 million for 1999; however, the Company also
recently announced the following plan:
- construct a data center in the southwest region;
- expand its asynchronous transfer mode network into additional cities in
the U.S.;
- develop its digital subscriber line-equipped collocation presence in Texas
and Oklahoma.
16
<PAGE>
- expand its fiber network through the purchase of Indefeasaible Rights of
Use (IRUs) in Texas and Oklahoma
If the Company obtains financing to undertake these expanded efforts, capital
expenditures for 1999 will substantially increase. The Company expects to expand
its fiber-optic network through the acquisition of IRUs which are ownership
interests in fiber to reduce the Company's network transport costs. Continued
significant capital expenditures for the ICP operations are expected to be made
after 1999, primarily for customer premise equipment, maintenance, switch
expansion and/or upgrades and collocates. 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 $9.8 million, subject to upward adjustment depending on actual use. In June
1998, the Company entered into an agreement with MCI 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 $18 million. On
June 30, 1998, the Company agreed to purchase $25.2 million of switching
equipment from Northern Telecom prior to June 30, 2000 for the ICP operations.
Also on June 30, 1998, the Company agreed to purchase $13.7 million of customer
support services over a 60 month period ending in July 2000.
Upon consummation of the Senior Note offering, the Company purchased $122.0
million of restricted investments, consisting of U.S. government securities,
that are held as security for the payment of the first six scheduled payments of
interest on the Senior Notes. The restricted investments are held by a trustee
as security for the benefit of the holders of the Senior Notes. As of June 30,
1999, the Company had restricted investments of $80.5 million.
As of June 30, 1999, the Company had $394.3 million of indebtedness
(including $350.0 million of Senior Notes and $26.8 million of secured
indebtedness under the Rural Utility Service ("RUS")/Rural Telephone Bank
("RTB") Facility) and stockholder's deficit of $61.0 million. The RUS/RTB
existing loans have scheduled maturities between 1999 and 2028. On October 14,
1998, RUS/RTB approved an additional 17 year loan facility to the Company that
will provide $16.9 million in loan funds. As of June 30, 1999, no new loan funds
were borrowed against this new facility.
On April 8, 1999, the Company closed on a $75 million Credit Facility with
NationsBank, N.A. as the administrative agent. Borrowings under the Credit
Facility will be used to fund general corporate operations and capital
expenditures, as the Company continues to enhance its existing market presence.
As of June 30, 1999, the Company had $30 million of availability under the
Credit Facility.
The RUS/RTB Facility and the Credit Facility will require the Company to
maintain certain financial ratios. The failure to maintain such ratios would
constitute an event of default, notwithstanding the Company's ability to meet
its debt service obligations. The Credit Facility will begin to amortize in 2002
and terminate in 2005. The actual amount and timing of the Company's future
capital requirements may differ materially from the Company's estimates as a
result of, among other things, the demand for the Company's services and
regulatory, technological and competitive developments. Sources of additional
financing may include commercial bank borrowings, vendor financing and the sale
of equity or debt securities. Because of the restrictions in the lending
agreements and note indentures of Dobson Communications, capital contributions
to the Company by Dobson Communications will be limited or prohibited.
17
<PAGE>
IMPACT OF YEAR 2000 ISSUE
In April 1998, Logix, in conjunction with Dobson Communications, established
a multi-disciplined team to perform a Year 2000 impact analysis for Logix's
operations. Following the impact analysis, Logix established a separate team to
address the Year 2000 matters. 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 at
$1.3 million and completion dates for affected systems.
The Company has retained the services of a third party to be the primary
consulting services provider for Year 2000 readiness. The third party is serving
as the project management office resource for continued planning, execution of
plans and assistance with the implementation of Year 2000 related activities and
tasks.
The Company's switching systems are believed to be Year 2000 compliant. From
an information systems standpoint, the Company has historically relied on
outsourcing relationships for most of its business and operational support
applications. Applications that have not been outsourced to service providers
have been deployed using packaged software from outside vendors. 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 part of existing maintenance and/or service agreements at a nominal cost to
the Company. These updates will be in place and will have been tested by
November 30, 1999.
Management has also focused on evaluating software systems of acquired
companies. The Company is in the process of replacing several billing systems.
Management has determined that the Legacy billing system acquired in the
American Telco acquisition is not Year 2000 compliant. The third-party vendor of
Ace*Comm, the primary replacement for the Company's billing and customer care
system, has warranted that this system is fully Year 2000 compliant. The Company
expects the system will replace the Legacy billing system acquired from American
Telco by November 30, 1999, and expect the new operations support system to be
Year 2000 compliant and fully operational and integrated with the existing
billing platforms by November 30, 1999.
The total costs identified to upgrade or replace those systems that are not
Year 2000 compliant and that will not be upgraded through existing maintenance
or service agreements are approximately $1.3 million, of which $.2 million has
been spent to date. However, the Company believes the costs could decrease as
they continue to assess Year 2000 matters, and as they continue to upgrade and
replace the existing system. Additionally, such costs incurred will be expensed
as incurred, which could 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, if a critical vendor does not
provide adequate assurance that its product is Year 2000 compliant through test
plans, test results or third party audit results, the Company will either
replace the product with one that has provided proof of compliance or will
conduct its own Year 2000 tests. In addition, the Company will conduct its own
Year 2000 tests on mission critical systems as their Year 2000 compliant
versions are released by vendors. The Company has been in contact with vendors
of products
18
<PAGE>
and services that the Company believes are critical to operations and these
vendors have provided satisfactory assurances as to their products' and
services' Year 2000 compliance. If the Company's automated systems and those of
our vendors are not Year 2000 compliant, interruptions in services provided by
and to the Company could be experienced, which could materially reduce cash flow
from operations.
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 manage its rapid growth successfully and to
compete effectively in its ILEC 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, integrate 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
prices and rates, including interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The objective of our financial risk management is to minimize the negative
impact of interest rate fluctuations on our earnings and equity.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. Based
on our market risk sensitive instruments outstanding at June 30, 1999, we have
determined that there was no material market risk exposure to our consolidated
financial position, results of operations or cash flows as of such date.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- ------------------------------------------------------------------
<C> <S> <C>
27.1 Financial Data Schedule--Six Months Ended June 30, 1999
</TABLE>
(b) Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
Date: August 13, 1999 LOGIX COMMUNICATIONS ENTERPRISES, INC.
/s/ GEOFFREY M. BOYD
---------------------------------------------
Geoffrey M. Boyd
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,698
<SECURITIES> 0
<RECEIVABLES> 21,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,380
<PP&E> 107,317
<DEPRECIATION> 9,477
<TOTAL-ASSETS> 364,512
<CURRENT-LIABILITIES> 32,252
<BONDS> 393,159
0
0
<COMMON> 713
<OTHER-SE> (61,715)
<TOTAL-LIABILITY-AND-EQUITY> 364,512
<SALES> 56,741
<TOTAL-REVENUES> 56,741
<CGS> 41,547
<TOTAL-COSTS> 41,547
<OTHER-EXPENSES> 19,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,194
<INCOME-PRETAX> (41,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (41,579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,579)
<EPS-BASIC> (.58)
<EPS-DILUTED> 0
</TABLE>
