<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 SEPTEMBER 30, 1999
/ / 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. 58(TH) STREET
TENTH FLOOR
OKLAHOMA CITY, OKLAHOMA 73112
(Address of principal executive offices) (Zip Code)
(405) 516-8400
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
At November 1, 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
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998............. 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998.................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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........................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 21
Item 2. Changes in Securities and Use of Proceeds........................................................ 21
Item 3. Defaults Upon Senior Securities.................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 21
Item 5. Other Information................................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................................. 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 2,539 $ 31,675
Restricted cash and investments................................................... 40,186 37,572
Accounts receivable, net.......................................................... 22,470 16,838
Receivables-affiliates............................................................ 1,305 5,081
Other current assets.............................................................. 2,454 2,330
----------- ----------
Total current assets.......................................................... 68,954 93,496
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net.................................................. 115,469 85,883
----------- ----------
OTHER ASSETS:
Restricted cash and investments................................................... 41,382 61,988
Goodwill, net..................................................................... 125,386 129,869
Excess purchase cost over original cost of assets acquired, net................... 2,510 2,581
Deferred financing costs, net..................................................... 12,403 10,869
Other intangibles, net............................................................ 4,939 5,214
Investment in unconsolidated partnership and other................................ 2,127 2,521
----------- ----------
Total other assets............................................................ 188,747 213,042
----------- ----------
Total assets.................................................................... $ 373,170 $ 392,421
=========== ==========
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 18,973 $ 29,477
Accrued expenses.................................................................. 18,461 4,337
Current portion of long-term debt................................................. 1,200 1,171
Deferred revenue and customer deposits............................................ 1,125 425
----------- ----------
Total current liabilities....................................................... 39,759 35,410
LONG-TERM DEBT, net of current portion.............................................. 420,161 376,327
DEFERRED CREDITS.................................................................... 110 108
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.................................................................. (99,021) (31,585)
----------- ----------
Total stockholder's deficit..................................................... (86,860) (19,424)
----------- ----------
Total liabilities and stockholder's deficit................................... $ 373,170 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE.................................................. $ 28,619 $ 25,541 $ 85,360 $ 40,176
OPERATING EXPENSES:
Cost of service........................................ 23,330 16,226 64,877 22,329
Selling, general and administrative.................... 15,796 11,891 43,261 20,775
Depreciation and amortization.......................... 4,772 4,556 14,249 7,686
------------ ------------ ------------ ------------
Total operating expenses............................. 43,898 32,673 122,387 50,790
------------ ------------ ------------ ------------
OPERATING LOSS........................................... (15,279) (7,132) (37,027) (10,614)
OTHER INCOME (EXPENSE):
Interest income........................................ 1,310 2,978 4,593 3,292
Interest expense....................................... (11,897) (11,631) (35,092) (14,352)
Other, net............................................. 8 72 90 154
------------ ------------ ------------ ------------
Total other expense, net............................. (10,579) (8,581) (30,409) (10,906)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE................................ (25,858) (15,713) (67,436) (21,520)
INCOME TAX BENEFIT....................................... -- 179 -- 897
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.............................................. (25,858) (15,534) (67,436) (20,623)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net
of income tax benefit of $429 in 1998.................. -- -- -- (699)
------------ ------------ ------------ ------------
NET LOSS................................................. $ (25,858) $ (15,534) $ (67,436) $ (21,322)
============ ============ ============ ============
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER
COMMON SHARE
Before cumulative effect of change in accounting
principle............................................ $ (.36) $ (.22) $ (.95) $ (.29)
Cumulative effect of change in accounting principle.... -- -- -- (.01)
------------ ------------ ------------ ------------
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER PER
COMMON SHARE........................................... $ (.36) $ (.22) $ (.95) $ (.30)
============ ============ ============ ============
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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (67,437) $ (21,322)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization........................................................ 14,249 7,686
Amortization of investment premium and financing cost................................ 1,537 226
Accrued interest on restricted investments........................................... (893) (2,005)
Deferred income taxes and investment tax credits, net................................ 2 (1,392)
Gain (loss) on disposition of assets................................................. (67) 3
Cumulative effect of change in accounting principle.................................. -- 1,128
Equity in income of unconsolidated partnership....................................... (91) (105)
Changes in current assets and liabilities--
Accounts receivable.................................................................. (5,632) (2,174)
Other current assets................................................................. (771) 21
Accounts payable..................................................................... (10,504) 3,115
Accrued expenses..................................................................... 14,124 11,669
Deferred revenue and customer deposits............................................... 780 201
---------- -----------
Net cash provided by (used in) operating activities................................ (54,703) (2,949)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................... (37,700) (17,735)
Acquisitions of businesses............................................................. -- (137,550)
Purchase of customer lists............................................................. (552) (13)
Purchase of other assets............................................................... (135) --
Decrease in receivables/payables--affiliates, net...................................... 4,179 8,759
Proceeds on sale of assets............................................................. 13 --
Investments in unconsolidated subsidiaries and other................................... 12 (506)
---------- -----------
Net cash used in investing activities............................................ (34,183) (147,045)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................................................... 44,668 350,000
Repayments of long-term debt........................................................... (805) (872)
Purchase of restricted investments..................................................... -- (121,786)
Maturities of restricted investments................................................... 18,348 --
Deferred financing costs............................................................... (2,461) (11,324)
---------- -----------
Net cash provided by financing activities.......................................... 59,750 216,018
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (29,136) 66,024
CASH AND CASH EQUIVALENTS, beginning of period........................................... 31,675 254
---------- -----------
CASH AND CASH EQUIVALENTS, end of period................................................. 2,539 66,278
========== ===========
</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
SEPTEMBER 30, 1999
(UNAUDITED)
1. ORGANIZATION
Logix Communications Enterprises, Inc. (the "Company" or "Logix") was
incorporated as an Oklahoma corporation under the name "Dobson Wireline Company"
in December 1997, as part of a reorganization by its parent company, Dobson
Communications Corporation ("Dobson Communications"). Its name was changed to
Logix Communications Enterprises, Inc. in October 1998. Logix is a wholly owned
subsidiary of Dobson Communications 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. As of September 30, 1999,
the Company had operations in Oklahoma and Texas. 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. RECENT 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 September 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
6
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
3. RECENT ACQUISITIONS (CONTINUED)
purposes only 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 NINE MONTHS ENDED
-------------------------------------- --------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue................. $ 28,619 $ 27,031 $ 85,360 $ 76,522
Loss before cumulative effect..... (25,858) (15,294) (67,437) (40,494)
Net loss.......................... (25,858) (15,294) (67,437) (41,194)
Basic net loss per share.......... $ (.36) $ (.21) $ (.95) $ (.58)
</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 Adjusted
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 cost 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
SEPTEMBER 30, 1999
---------------------------------
ILEC ICP TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External...................................................................... $ 4,036 $ 24,583 $ 28,619
Intersegment.................................................................. 18 2,096 2,114
Intersegment revenue(1)....................................................... -- -- (2,114)
--------- ---------- ----------
Total operating revenue....................................................... 4,054 26,679 28,619
--------- ---------- ----------
Adjusted EBITDA(2).............................................................. 2,562 (13,069) (10,507)
Depreciation and amortization................................................... (741) (4,031) (4,772)
Interest expense, net........................................................... (203) (10,384) (10,587)
Other income, net............................................................... -- 8 8
--------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle........................................................ $ 1,618 $ (27,476) $ (25,858)
========= ========== ==========
</TABLE>
7
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. REPORT OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1998
---------------------------------
ILEC ICP TOTAL
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External..................................................................... $ 3,702 $ 21,839 $ 25,541
Intersegment................................................................. -- 263 263
Intersegment revenue(1)...................................................... -- -- (263)
--------- ---------- ----------
Total operating revenue...................................................... $ 3,702 $ 22,102 $ 25,541
--------- ---------- ----------
Adjusted EBITDA(2)............................................................. $ 1,616 $ (4,192) $ (2,576)
Depreciation and amortization.................................................. (782) (3,774) (4,556)
Interest expense, net.......................................................... (389) (8,264) (8,653)
Other income, net.............................................................. 4 68 72
--------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle....................................................... $ 449 $ (16,162) $ (15,713)
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
----------------------------------
ILEC ICP TOTAL
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External.................................................................... $ 11,509 $ 73,851 $ 85,360
Intersegment................................................................ 18 4,269 4,287
Intersegment revenue(1)..................................................... -- -- (4,287)
---------- ---------- ----------
Total operating revenue..................................................... 11,527 78,120 85,360
---------- ---------- ----------
Adjusted EBITDA(2)............................................................ 7,566 (30,346) (22,780)
Depreciation and amortization................................................. (2,176) (12,073) (14,249)
Interest expense, net......................................................... (877) (29,621) (30,498)
Other income, net............................................................. -- 90 90
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle...................................................... $ 4,513 $ (71,950) $ (67,437)
========== ========== ==========
</TABLE>
8
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
4. REPORT OF BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
----------------------------------
ILEC ICP TOTAL
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External.................................................................... $ 11,566 $ 28,610 $ 40,176
Intersegment................................................................ -- 522 522
Intersegment revenue(1)..................................................... -- -- (522)
---------- ---------- ----------
Total operating revenue..................................................... $ 11,566 $ 29,132 $ 40,176
---------- ---------- ----------
Adjusted EBITDA(2)............................................................ $ 5,940 $ (8,868) $ (2,928)
Depreciation and amortization................................................. (2,346) (5,340) (7,686)
Interest income (expense), net................................................ (928) (10,132) (11,060)
Other income, net............................................................. 20 134 154
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle...................................................... $ 2,686 $ (24,206) $ (21,520)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
INVESTMENT INFORMATION:
Segment Assets
ICP................................................................................. $ 317,212 $ 351,231
ILEC................................................................................ 58,107 47,978
Intersegment receivables(1)......................................................... (2,149) (6,788)
----------- ----------
Total segment assets.............................................................. $ 373,170 $ 392,421
=========== ==========
</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.
5. 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, $6.3 million remained at
September 30, 1999.
9
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
5. COMMITMENTS (CONTINUED)
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,
$12.0 million remained at September 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, $10.8 million remained at September 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, $8.0 million remained at
September 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 until 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.
6. SUBSEQUENT EVENT
Subsequent to September 30, 1999, the Company engaged Lehman Brothers to
evaluate strategic alternatives, including the potential merger of the Company
with another entity. In addition, Dobson CC Limited Partnership, or DCCLP, has
agreed to invest up to $20 million under certain circumstances. The Company
believes that proceeds from its existing credit facility and potential funding
from DCCLP will be sufficient to fund the Company's operations through the end
of 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are a leading integrated communications provider, or ICP, and an
incumbent local exchange carrier, or ILEC. We have network facilities in the
southwest United States serving small and medium-sized businesses in Austin,
Dallas, Fort Worth, Houston, Oklahoma City, San Antonio, Tulsa, Amarillo and
Corpus Christi and in other cities in Texas and Oklahoma. We have become a
"one-stop" provider of integrated communications services with a comprehensive
suite of voice and data communications services including local, long distance,
long-haul transport, enhanced data and high speed Internet access. We are
continually evaluating additional products and services to add to our offerings.
As of September 30, 1999, we had 67,982 access lines in service and we generated
revenues of $85.4 million. As of June 15, 1998, we acquired American Telco,
Inc., or American Telco, for $131.5 million. American Telco is included in our
operations from the date of its acquisition. As we have expanded our corporate
and administrative staff to support our operations, we have increased our number
of personnel from 685 at September 30, 1998 to 750 at September 30, 1999.
REVENUE
ICP OPERATIONS. Our ICP operation generates revenue from local exchange,
long distance, enhanced data, Internet, intranet and extranet services, private
line, integration services and fiber operation services. We began offering
facilities-based ICP services in October 1997 and currently provide these
services to customers in major markets in Oklahoma and Texas. At September 30,
1999, our ICP operations had 54,296 local access lines compared to 31,200 access
lines at September 30, 1998.
We offer ICP services at prices that are competitive to the incumbent local
exchange carriers. While pricing is an important element of our marketing, we
believe that 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 recent years, the market prices for many telecommunications services
have declined. We believe that this trend is likely to continue and may have a
negative effect on our gross margins that may not be offset completely by
savings from the decrease in our cost of service.
Current industry statistics demonstrate that there is significant customer
turnover within the industry. Our experience indicates that the turnover is
especially high when customers are buying resold services or only long distance
services. We believe that by offering an integrated package of bundled
telecommunications and data services, and by providing superior customer care,
we will be able to enhance our customer retention rate.
Our facilities-based customers provide higher operating margins than do our
resale customers. As a result, beginning in December 1998, we initiated a plan
to focus on providing only facilities-based services. In March 1999, as part of
this strategy, we increased the rates for all resale services to equal those
charged by the Regional Bell Operating Company. As a result, many of our resale
customers terminated our services and some subscribed to our facilities-based
services.
The decision to significantly reduce our reliance on a resale strategy has
initially adversely impacted our revenue growth. We experienced an increase in
the turnover rate of our resale base. As we replace our resale customers with
new facilities-based customers, revenue is impacted due to a delay in
provisioning newly ordered services. In addition, there is generally a period of
several months until a newly provisioned customer achieves the same level of
revenue as an existing customer. Finally, the revenue per access line for a
facilities-based customer is typically lower than that for a resale customer due
to the discount on aggregate prices offered with bundled services. Ultimately,
we believe the impact of this strategy will
11
<PAGE>
favorably impact our operating performance. Access line detail for the periods
indicated, including our ILEC operations, is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1999 1998 1998
------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ACCESS LINES
Facilities-Based............................. 49,362 32,015 25,339 20,249 17,803
Resale....................................... 18,620 30,097 32,481 32,016 26,579
--------- --------- --------- --------- ---------
TOTAL ACCESS LINES............................. 67,982 62,112 57,820 52,265 44,382
NET ADDITIONS
Facilities-Based............................. 17,347 6,676 5,090 2,446 2,232
Resale....................................... (11,477) (2,384) 465 5,437 6,483
--------- --------- --------- --------- ---------
TOTAL NET ADDITIONS TO ACCESS LINES............ 5,870 4,292 5,555 7,883 8,715
PERCENTAGE OF NET ADDITIONS
Facilities-Based............................. 100% 100% 91.6% 31.0% 25.6%
Resale....................................... -- -- 8.4% 69.0% 74.4%
</TABLE>
ILEC OPERATIONS. Through our predecessors, we began providing ILEC services
in 1936. We currently own and operate nine adjoining exchanges in western
Oklahoma and three adjoining exchanges adjacent to and east of the Oklahoma City
metropolitan area.
Our ILEC revenues consist of:
- end user revenue, which includes charges for local service and enhanced
services such as call waiting and call forwarding and long distance
revenue;
- access revenue, which is paid by long distance carriers for providing
access from the long distance carrier's point of presence to the end user
who makes or receives a long distance call; and
- support revenue, which is paid by federal and state agencies to companies,
such as us, which operate in areas where factors such as geographic
conditions and/or subscriber density increase the cost of providing
service.
Support revenue consists of high cost funds, or HCF, from state agencies and
universal service funds, or USF, from federal and state agencies.
The following table reflects the amount of support funds we received and the
share of our ILEC revenue it represents for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Support revenue............................... $ 1.2 $ 1.2 $ 3.5 $ 3.6
Percentage of ILEC revenue.................... 28.5% 32.8% 30.4% 31.5%
</TABLE>
The Telecommunications Act of 1996 potentially impacts our 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. We will continue to pursue
our strategy to lessen the impact of any future regulatory changes by reducing
our operating costs through consolidation of operational functions in order to
achieve economies of scale.
12
<PAGE>
COST AND EXPENSES
Our primary operating expense categories include cost of service, selling,
general and administrative expenses, or SG&A, and depreciation and amortization.
Cost of service for our ICP operations consists primarily of fixed costs for
leased lines, the variable costs of origination, termination and access services
provided through ILECs and other telecommunications companies. We have deployed
several digital switching platforms with local and long distance capability and
we lease fiber trunking capacity from ILECs and other ICPs to connect our
switches with our transmission equipment collocated in ILEC central offices. We
intend to deploy similar switching platforms in additional cities in Oklahoma
and Texas.
Depending on the type of services we provide, we may deploy high capacity
digital connections, including the lease of unbundled loops from the ILECs to
connect our customers' and other carriers' networks to our network. The lease
charges for unbundled loops 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.
We will continue to use our own fiber network, where available, to carry
long distance traffic and will also continue to enter into resale agreements
with long distance carriers for transmission services. These agreements
typically provide for the resale of long distance services on a per-minute basis
and may contain minimum volume commitments. We may be obligated to pay
under-utilization charges in the event we over-estimate our requirements;
however, in the event we underestimate our need for transmission capacity, we
may be required to obtain capacity through more expensive means.
Our SG&A includes all infrastructure costs such as selling, customer
support, corporate administration, personnel and internal network maintenance.
Selling expenses include commissions for our sales program. We pay commissions
to direct sales persons for new business generated with additional incentives
for multiple service offerings and long-term contracts. We also pay commissions
to independent sales agents for generating new sales and ongoing sales to
existing customers. As we increase our market penetration in our existing
markets, we expect SG&A to decrease as a percentage of our revenues.
Depreciation and amortization relates primarily to switching equipment,
facilities, computers and software, and is expected to increase as we continue
to expand our operating systems and network facilities. Depreciation and
amortization also includes amortization of goodwill related to our acquisition
of American Telco.
EBITDA
We incurred operating losses and negative EBITDA related to our ICP services
for the three and nine months ended September 30, 1999. These losses were
primarily a result of increased wholesale costs related to our ICP operations
and higher costs associated with increased personnel. Our negative cash flows
from operations and negative EBITDA are expected to continue until we further
expand customer base. Also, we expect that growth in ICP services will have an
adverse impact on our combined gross margins, because the gross margins on the
ICP services are expected to be lower than the gross margins on our ILEC
operations.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statements.
13
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUE. For the three months ended September 30, 1999, our total revenue
increased $3.1 million, or 12.1%, to $28.6 million from $25.5 million for the
three months ended September 30, 1998. The following table sets forth the
components of our revenue for the three months ended September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ICP..................................................................... $ 24,583 $ 21,839
ILEC.................................................................... 4,036 3,702
--------- ---------
Total................................................................. $ 28,619 $ 25,541
========= =========
</TABLE>
ICP. Our ICP revenue increased $2.8 million or 12.6%, to $24.6 million for
the three months ended September 30, 1999 from $21.8 million for the three
months ended September 30, 1998 due primarily to access line growth, increased
long distance minutes of use, increased equipment sales and increased sales by
our fiber operations. For the three months ended September 30, 1999, fiber and
network management services accounted for $1.6 million, and $1.3 million for the
three months ended September 30, 1998.
ILEC. Our ILEC revenue decreased $.3 million, or 9.0%, to $4.0 million for
the three months ended September 30, 1999 compared to $3.7 million for the three
months ended September 30, 1998.
COST OF SERVICE. For the three months ended September 30, 1999, our total
cost of service increased $7.1 million, or 43.8%, to $23.3 million from
$16.2 million in the comparable period of 1998. The following table sets forth
the components of our cost of service for the three months ended September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ICP..................................................................... $ 23,006 $ 15,797
ILEC.................................................................... 324 429
--------- ---------
Total................................................................. $ 23,330 $ 16,226
========= =========
</TABLE>
ICP. Cost of our ICP service increased $7.2 million to $23.0 million for
the three months ended September 30, 1999 from $15.8 million for the comparable
period of 1998 due primarily to increases in the number of access lines and long
distance minutes of use, the expansion of our network and increases in our
equipment sales.
ILEC. Cost of our ILEC service decreased $.1 million, or 24.5%, to
$.3 million for the three months ended September 30, 1999 from $.4 million for
the three months ended September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended
September 30, 1999, our SG&A costs increased $3.9 million, or 32.8%, to
$15.8 million compared to $11.9 million in the comparable period of 1998. The
increase was primarily due to increased salary costs resulting from increased
ICP personnel to support our facilities-based system and additional sales,
administrative and marketing personnel in our ICP operations. Building rent
increased $.8 million for the three months ended September 30, 1999 from the
same period in 1998.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended
September 30, 1999, our depreciation and amortization expense increased
$.2 million to $4.8 million from $4.6 million in the three months ended
September 30, 1998. Our ICP segment's depreciation and amortization expense
increased $.3 million, to $4.0 million for the three months ended September 30,
1999. This increase is primarily a result of assets acquired, including
goodwill, from our acquisition of American Telco and depreciation and
14
<PAGE>
amortization on other assets purchased for our ICP and ILEC operations. Our ILEC
segment's depreciation and amortization expense was consistent between periods
at $.8 million for the three months ended September 30, 1999 and 1998.
OPERATING LOSS. As a result of the items discussed above, our operating
loss for the three months ended September 30, 1999, increased $8.2 million to a
loss of $15.3 million from a loss of $7.1 million for the comparable period of
1998.
INTEREST INCOME. Our interest income for the three months ended
September 30, 1999 decreased $1.7 million to $1.3 million from $3.0 million
earned in the same period of 1998. Interest income primarily relates to interest
earned on the funds held to secure the first six scheduled interest payments on
our 12 1/4% Senior Notes due 2008, or senior notes, and cash on hand from the
issuance of the senior notes.
INTEREST EXPENSE. Interest expense for the three months ended
September 30, 1999 increased $.3 million to $11.9 million from $11.6 million for
the three months ended September 30, 1998. Interest expense relates to the
issuance of the senior notes in 1998.
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE. As a result of the items discussed above, our loss before income
taxes and cumulative effect of change in accounting principle for the three
months ended September 30, 1999, increased $10.2 million to a loss of
$25.9 million from a loss of $15.7 million in the comparable period of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Our results of operations have been significantly affected by our
acquisition of American Telco on June 15, 1998. This acquisition was accounted
for as a purchase and the results of the operations of American Telco are
included since the date of acquisition. As a result of this acquisition, our
results of operations for prior periods are not comparable.
REVENUE. For the nine months ended September 30, 1999, our total revenue
increased $45.2 million, or 112.5%, to $85.4 million from $40.2 million for the
nine months ending September 30, 1998. The following table sets forth the
components of our revenue for the nine months ended September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
ICP..................................................................... $ 73,851 $ 28,610
ILEC.................................................................... 11,509 11,566
--------- ---------
Total................................................................. $ 85,360 $ 40,176
========= =========
</TABLE>
ICP. ICP revenue increased $45.3 million to $73.9 million for the nine
months ended September 30, 1999 from $28.6 million for the nine months ended
September 30, 1998 due primarily to the acquisition of American Telco in
June 1998 combined with access line growth, increased long distance minutes of
use, increased equipment sales and increased sales by our fiber operations.
ILEC. Our ILEC revenue decreased $.1 million to $11.5 million for the nine
months ended September 30, 1999 compared to $11.6 million for the nine months
ended September 30, 1998. Access lines increased to 13,686 as of September 30,
1999 from 13,182 as of September 30, 1998.
15
<PAGE>
COST OF SERVICE. For the nine months ended September 30, 1999, our total
cost of service increased $42.6 million, or 190.6%, to $64.9 million from
$22.3 million in comparable period of 1998. The following table sets forth the
components of our cost of service for the nine months ended September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ICP..................................................................... $ 64,092 $ 20,883
ILEC.................................................................... 785 1,446
--------- ---------
Total................................................................. $ 64,877 $ 22,329
========= =========
</TABLE>
ICP. Our cost of ICP service increased $43.2 million to $64.1 million for
the nine months ended September 30, 1999 from $20.9 million for the first nine
months of 1998 due primarily to our acquisition of American Telco combined with
increases in the number of access lines and long distance minutes of use, the
expansion of our network and increases in our equipment sales.
ILEC. Our cost of ILEC service decreased $.6 million to $.8 million for the
nine months ended September 30, 1999 from $1.4 million for the nine months ended
September 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. For the nine months ended
September 30, 1999, our SG&A costs increased $22.5 million, or 108.2%, to
$43.3 million compared to $20.8 million in the first nine months of 1998. The
increase was primarily due to increased salary costs resulting from increased
ICP personnel as a result of our acquisition of American Telco to support our
expanded facilities-based system and additional sales, administrative and
marketing personnel in our ICP operations. Building rent increased $2.7 million
for the nine months ended September 30, 1999 compared the same period in 1998,
related to expanded operations and the acquisition of American Telco.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended
September 30, 1999, depreciation and amortization expense increased
$6.6 million, or 85.4%, to $14.3 million from $7.7 million in the first nine
months of 1998. Our ICP segment's depreciation and amortization expense
increased $6.7 million, to $12.1 million for the nine months ended
September 30, 1999. This increase is primarily a result of assets acquired,
including goodwill, from our acquisition of American Telco and depreciation and
amortization on other assets purchased for our ICP business. Our ILEC segment's
depreciation and amortization expense remained consistent between periods at
$2.2 million and $2.3 million for the nine months ended 1999 and 1998,
respectively.
OPERATING LOSS. As a result of the items discussed above, our operating
income for the nine months ended September 30, 1999, increased $26.4 million to
a loss of $37.0 million from a loss of $10.6 million in the first nine months of
1998.
INTEREST INCOME. Our interest income for the nine months ended
September 30, 1999 increased $1.3 million to $4.6 million from $3.3 million
earned for the same period in 1998. Interest income relates primarily to
interest earned on the funds held to secure the first six scheduled interest
payments on the senior notes and cash on hand from the issuance of the senior
notes.
INTEREST EXPENSE. Our Interest expense for the nine months ended
September 30, 1999 increased $20.7 million to $35.1 million from $14.4 million
for the same period of 1998. The increase in interest expense is a result of the
issuance senior notes in June 1998.
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE. As a result of the items discussed above, our loss before income
taxes and cumulative effect of change in accounting principle for the nine
months ended September 30, 1999, increased $45.9 million to a loss of
$67.4 million from a loss of $21.5 million in the first nine months of 1998.
16
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of
change in accounting principle in the nine months ended September 30, 1998
reflects the charge taken as a result of implementation of AICPA Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities" on January 1,
1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have generated positive cash flow from operations and
positive EBITDA in our ILEC business and have financed our ILEC business through
government loans. Our ILEC business historically has generated income before
income taxes and cumulative effect of change in accounting principle. Our ILEC
business receives support revenue from federal and state agencies that accounted
for approximately 30.4% and 31.5% of our ILEC revenue for the nine months ended
September 30, 1999 and 1998, respectively. This support revenue contributes
significantly to our ILEC's positive cash flow from our ILEC operations, EBITDA
and income before income taxes and cumulative effect of change in accounting
principle.
We experienced negative cash flow from operations and negative EBITDA and
loss before income taxes and cumulative effect of change in accounting principle
for the year ended 1998 and in the nine months ended September 30, 1999 in our
ICP business. The negative cash flows from operations, negative 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
we expanded our ICP business. We will continue to incur losses before income
taxes and cumulative effect of change in accounting principle and will continue
to generate negative cash flows from operations and negative EBITDA as we
enhance our ICP operations and expand our customer base. The successful
implementation of our strategy, including the expansion of our customer base and
significant and sustained growth in our cash flows, is necessary for us to meet
our debt service requirements, including our obligations on the senior notes. We
expect negative cash flows from operations and negative EBITDA on a consolidated
basis at least through the fourth quarter of 2000 and to continue as we enhance
our ICP operations and expand our customer base.
Net cash used in operating activities was $54.7 million for the nine months
ended September 30, 1999 compared to $2.9 million for the same period of 1998.
The increase is primarily due to increased operating losses.
Net cash used in investing activities totaled $34.2 million and
$147.0 million for the nine months ended September 30, 1999 and 1998,
respectively. Investing activities during these periods primarily related to
capital expenditures and in 1998, to the acquisition of American Telco.
Net cash provided by financing activities was $59.8 million and
$216.0 million for the nine months ended September 30, 1999 and 1998,
respectively. The net cash provided by financing activities during the nine
months ended September 30, 1999 primarily resulted from borrowings against our
credit facility and maturities of restricted investments relating to the senior
notes. The net cash provided by financing activities during the nine months
ended September 30, 1998 was primarily from the issuance of the senior notes net
of the funds used to purchase the restricted investments.
Capital expenditures for the nine months ended September 30, 1999 and 1998
were $37.7 million and $17.7 million, respectively. We expect our capital
expenditures to total approximately $46.0 million for 1999.
In May 1998, we 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, we entered into a an agreement with MCI WorldCom to 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, we agreed to
purchase $25.2 million of switching equipment from
17
<PAGE>
Northern Telecom prior to June 30, 2000 for our ICP operations. Also on
June 30, 1998, we agreed to purchase $13.7 million of customer support services
over a 60 month period ending in July 2003.
Upon consummation of our senior note offering, we purchased $122.0 million
of U.S. government securities, that are held to secure the first six scheduled
payments on our senior notes.
In addition, after June 13, 2001, the last date interest on the senior notes
will be paid by the pledged U.S. government securities, our cash flow from
operations may not be sufficient to provide us with adequate funds to pay the
interest required by our indebtedness. To the extent that our internally
generated funds are insufficient to meet these requirements we will need to
obtain funds from other sources.
As of September 30, 1999, we had $421.4 million of indebtedness, including
$350.0 million of senior notes and $34.4 million of secured indebtedness under
the RUS/RTB Facility, and stockholder's deficit of $99.0 million. The RUS/RTB
loans have scheduled maturities between 1999 and 2028. In October 1998, RUS/RTB
approved an additional 17 year loan facility that will provide us with
$16.9 million in loan funds. As of September 30, 1999, $7.7 million of loan
funds were borrowed against this new facility.
On April 8, 1999, we established a senior credit facility, or credit
facility, with Bank of America, as the administrative agent. On September 13,
1999, we amended and restated the credit facility to increase the availability
$20 million by December 31, 1999, for a total commitment of $50 million.
Borrowings under the credit facility are for general corporate purposes and to
fund capital expenditures.
Under the RUS/RTB Facility and the credit facility, we must maintain certain
financial ratios, and our failure to maintain these such ratios would constitute
an event of default, notwithstanding our ability to meet our debt service
obligations. The credit facility will begin to amortize in 2002 and terminate in
2005.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand for
our services and regulatory, technological and competitive developments. Sources
of additional financing may include commercial bank borrowings, vendor financing
and the sale of equity or debt securities. In addition, we have engaged Lehman
Brothers to evaluate strategic alternatives, including the potential merger of
the Company with another entity. In addition, Dobson CC Limited Partnership, or
DCCLP, agreed to invest up to $20 million under certain circumstances. We
believe that proceeds from the Credit Facility and potential funding from DCCLP
will be sufficient to fund our operations through the end of 1999. Because of
the restrictions in the lending agreements and note indentures of Dobson
Communications, capital contributions to us by Dobson Communications will be
limited or prohibited.
IMPACT OF YEAR 2000 ISSUE
In April 1998, we, in conjunction with Dobson Communications, established a
multi-disciplined team to perform a Year 2000 impact analysis for our
operations. Following the impact analysis, we established a separate team to
address the Year 2000 matters. Our team consists of representatives from each of
our 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, we have:
- completed an inventory of our automated systems and services;
- completed an impact analysis that identified significant risk areas by
line of business;
- identified specific compliance requirements; and
- revised estimated costs to $1.5 million and updated completion dates for
affected systems.
18
<PAGE>
We have confirmed that our switching systems are Year 2000 compliant. From
an information systems standpoint, we have historically relied on outsourcing
relationships for most of our 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, our
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 our 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
us. These updates will be in place and will have been tested by November 30,
1999.
Our management has also focused on evaluating software systems of companies
we have acquired. We are in the process of replacing our billing systems. Our
management has determined that the legacy billing system acquired in our
acquisition of American Telco was not Year 2000 compliant. The third-party
vendor of ACE*COMM, the primary replacement for our billing and customer care
system, is fully Year 2000 compliant. ACE*COMM has replaced one of our Oklahoma
third-party billing systems and will replace the second third-party system by
November 30, 1999. The legacy billing system we acquired from American Telco has
been fully tested and remediated and is now Year 2000 compliant.
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 $1.5 million, of which $1.1 million has
been spent to date. We believe the costs will remain in this range, as we
complete our assessment of Year 2000 matters, and as we finalize existing system
upgrades and replacements. Additionally, such costs incurred will be expensed as
incurred, which could have an adverse effect on our current operating results.
We have continued to analyze systems and services that utilize date embedded
codes that may experience operational problems when the Year 2000 is reached.
Further, we will continue communicating with third-party vendors of systems
software and equipment, suppliers of telecommunications capacity and equipment,
customers and others with which we do 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, we are either replacing the product
with one that has provided proof of compliance or it has been subjected to our
own Year 2000 tests. In addition, we are conducting our own Year 2000 tests on
mission critical systems as our vendors release Year 2000 compliant versions. We
have been in contact with vendors of products and services that we believe are
critical to our operations and these vendors have provided us with satisfactory
assurances as to their products' and services' Year 2000 compliance. If our
automated systems and those of our vendors are not Year 2000 compliant, we could
experience interruptions in services provided by and to us, which could
materially reduce cash flow from operations.
FORWARD-LOOKING STATEMENTS
The description of our plans set forth herein, including our plans and
strategies, our anticipation of revenues from designated markets, the markets
for our 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. Our plans involve a number of
risks and uncertainties. Important factors that could cause actual capital
expenditures, or our performance to differ materially from plans include,
without limitation, our ability to satisfy the financial covenants of its
existing debt instruments and to raise additional capital; our ability to
integrate acquired operations with existing operations, to manage our rapid
growth successfully and to compete effectively in our 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
19
<PAGE>
products that may gain more commercial acceptance than ours; our ability to
successfully market our services to current and new customers, interconnect with
ILECs, expand or replace our office support systems 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 us. You are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. We undertake
no obligation to update or revise these forward-looking statements to reflect
events or circumstances after the date hereof including, without limitation,
changes in our business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
prices and rates, including interest rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes. The objective
of our financial risk management is to minimize the negative impact of interest
rate fluctuations on our earnings and equity.
The fair market value of our 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 September 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.
20
<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
- -------------- -------------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule- Nine Months Ended September 30, 1999
</TABLE>
(b) Reports on Form 8-K
On November 10, 1999, we filed a Form 8-K reporting the issuance of a
press release which announced that Albert H. Pharis, Jr. had been
named Chief Executive Officer.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: November 15, 1999 LOGIX COMMUNICATIONS ENTERPRISES, INC.
/S/ GEOFFREY M. BOYD
------------------------------------------
Geoffrey M. Boyd
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,539
<SECURITIES> 0
<RECEIVABLES> 22,470
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,954
<PP&E> 115,469
<DEPRECIATION> 0
<TOTAL-ASSETS> 373,170
<CURRENT-LIABILITIES> 39,759
<BONDS> 421,361
0
0
<COMMON> 713
<OTHER-SE> (87,573)
<TOTAL-LIABILITY-AND-EQUITY> 373,170
<SALES> 85,360
<TOTAL-REVENUES> 85,360
<CGS> 64,877
<TOTAL-COSTS> 64,877
<OTHER-EXPENSES> (30,409)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,092
<INCOME-PRETAX> (67,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> (67,436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,436)
<EPS-BASIC> (.95)
<EPS-DILUTED> 0
</TABLE>
