<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 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
incorporation or organization) Identification No.)
3555 N.W. 58th 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 May 10, 1999, there were 71,250,000 shares of the registrant's $.01
par value Class A Common Stock outstanding.
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998... 3
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998............................................................ 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998............................................................ 6
Notes to Condensed Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk............................. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 25
Item 2. Changes in Securities and Use of Proceeds............................................. 25
Item 3. Defaults Upon Senior Securities....................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................... 25
Item 5. Other Information..................................................................... 25
Item 6. Exhibits and Reports on Form 8-K...................................................... 25
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,002 $ 31,675
Restricted cash and investments 39,262 37,572
Accounts receivable, net 18,303 16,837
Receivables-affiliates 873 5,081
Other current assets 2,757 2,330
--------- ---------
Total current assets 70,197 93,496
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 96,402 89,508
--------- ---------
OTHER ASSETS:
Restricted cash and investments 61,379 61,988
Goodwill, net 124,973 126,244
Excess purchase cost over original cost of assets acquired, net 2,558 2,581
Deferred financing costs, net 10,568 10,869
Other intangibles, net 4,835 5,214
Investment in unconsolidated partnership and other 2,567 2,521
--------- ---------
Total other assets 206,880 209,418
--------- ---------
Total assets $373,479 $392,421
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 20,159 $ 29,477
Accrued expenses 14,544 4,337
Current portion of long-term debt 1,181 1,171
Deferred revenue and customer deposits 401 424
--------- ---------
Total current liabilities 36,285 35,410
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<S> <C> <C>
LONG-TERM DEBT, net of current portion 375,953 376,327
DEFERRED CREDITS 105 108
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 (51,025) (31,585)
--------- ---------
Total stockholder's deficit (38,864) (19,424)
--------- ---------
Total liabilities and stockholder's deficit $373,479 $392,421
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
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<S> <C> <C>
REVENUE $28,554 $ 5,290
OPERATING EXPENSES:
Cost of service 20,370 1,638
Selling, general and administrative 13,224 3,744
Depreciation and amortization 4,538 1,297
----------- -----------
Total operating expenses 38,132 6,679
----------- -----------
OPERATING LOSS: (9,578) (1,389)
OTHER INCOME (EXPENSE):
Equity in income of unconsolidated partnership 46 25
Interest income 1,776 5
Interest expense (11,681) (321)
Other (4) 10
----------- -----------
Total other expense, net (9,863) (281)
----------- -----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (19,441) (1,670)
INCOME TAX BENEFIT - 635
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (19,441) (1,035)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of income tax
benefit of $429 in 1998 - (699)
----------- -----------
NET LOSS $(19,441) $(1,734)
=========== ===========
BASIC NET LOSS APPLICABLE TO COMMON STOCKHOLDER
PER COMMON SHARE
Before cumulative effect of change in accounting
principle $(.27) $(.02)
Cumulative effect of change
in accounting principle - (.01)
----------- -----------
BASIC NET LOSS APPLICABLE TO COMMON
STOCKHOLDER PER COMMON SHARE $(.27) $(.03)
=========== ===========
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 71,250,000 71,250,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,441) $ (1,735)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 4,538 1,297
Amortization of bond premium and financing cost 515 -
Deferred income taxes and investment tax credits, net (2) (571)
Cumulative effect of change in accounting principle - 1,128
Accrued interest on restricted investments (1,275) -
Equity in income of unconsolidated partnership (46) (25)
Changes in current assets and liabilities-
Accounts receivable (1,466) (258)
Other current assets (428) 411
Accounts payable (9,318) (416)
Accrued expenses 10,207 285
Deferred revenue and customer deposits (23) 55
----------- -----------
Net cash provided by (used in) operating activities (16,739) 172
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,893) (2,335)
Acquisitions of businesses 171 -
Purchase of customer lists (37) (125)
Acquisition escrow deposit - (5,000)
Decrease in receivables - affiliates, net 4,208 8,704
Investments in unconsolidated subsidiaries and other - (17)
----------- -----------
Net cash provided by (used in) investing activities (5,551) 1,227
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (365) (276)
Deferred financing costs (18) -
----------- -----------
Net cash used in financing activities (383) (276)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22,673) 1,123
CASH AND CASH EQUIVALENTS, beginning of period 31,675 254
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 9,002 $ 1,377
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. ORGANIZATION
Logix was incorporated as an Oklahoma corporation under the name
"Dobson Wireline Company" in December 1997, as part of a reorganization by its
parent company, Dobson Communications Corporation ("Dobson Communications"). Its
name was changed to Logix Communications Enterprises, Inc. in October 1998.
Logix is a wholly owned subsidiary of Dobson Communications 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. 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
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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 quarters ended March 31,
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 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>
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31, 1999 MARCH 31, 1998
------------------------------------
(UNAUDITED)
<S> <C> <C>
Operating revenue $28,554 $23,727
Loss before cumulative effect $(19,441) $(8,520)
Net loss $(19,441) $(9,219)
Basic net loss per share $(.27) $(.19)
</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 MARCH 31, 1999
(In thousands)
----------------------------------
ILEC ICP TOTAL
------- -------- ---------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External .......................................... $ 4,002 $ 24,552 $ 28,554
Intersegment ...................................... - 912 912
Intersegment revenue(1) ........................... - - (912)
------- -------- ---------
Total operating revenue ......................... $ 4,002 $ 25,464 $ 28,554
------- -------- ---------
Adjusted EBITDA(2) .................................. $ 2,900 $ (7,940) $ (5,040)
Depreciation and amortization ....................... (718) (3,820) (4,538)
Interest expense, net ............................... (443) (9,462) (9,905)
Other Income, net ................................... - 42 42
------- -------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle....... $ 1,739 $(21,180) $(19,441)
======= ========= =========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
(In thousands)
----------------------------------
ILEC ICP TOTAL
------- -------- ---------
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue
External .......................................... $ 3,769 $ 1,521 $ 5,290
Intersegment ...................................... - 101 101
Intersegment revenue(1) ........................... - - (101)
------- -------- --------
Total operating revenue ......................... $ 3,769 $ 1,622 $ 5,290
------- -------- --------
Adjusted EBITDA(2) ................................. $ 2,021 $(2,113) $ (92)
Depreciation and amortization ...................... (817) (480) (1,297)
Interest income (expense), net ..................... (316) - (316)
Other income, net .................................. 10 25 35
------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle ...... $ 898 $(2,568) $(1,670)
======= ======== ========
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(In thousands)
-------------------------------
<S> <C> <C>
INVESTMENT INFORMATION:
Segment Assets
ILEC .............................. $ 45,010 $ 47,978
ICP ............................... 330,618 351,231
Intersegment receivables(1) ....... (2,149) (6,788)
--------- ---------
Total segment assets ........... $373,479 $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, $7.7 million remained at March
31, 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 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
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commitment, $16.0 million remained at March 31, 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 recently launched ICP
operations. Of this commitment, $10.3 million remained at March 31, 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, $10.3 million
remained at March 31, 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.
6. SUBSEQUENT EVENTS
On April 8, 1999, LCC closed on a $75 million revolving Credit
Facility. Borrowings under the Credit Facility will be secured by all current
and future assets of LCC. Interest on borrowings under the Credit Facility will
accrue at variable rates. Commencing with the quarter ended June 30, 2002 the
borrowings under the Credit Facility will reduce quarterly at a rate of 8.3%.
The total commitment will be fully reduced by March 31, 2005. Upon closing the
Credit Facility, the Company has availability of $30 million, with increased
availability upon satisfaction of certain conditions established in the Credit
Agreement. The Credit Facility will require the Company to maintain certain
financial ratios. Failure to maintain such ratios would constitute an event of
default, notwithstanding the Company's ability to meet its debt service
obligations. Borrowings under the Credit Facility will be used to fund general
corporate operations, capital expenditures and future acquisitions, as the
Company continues to enhance its existing market presence.
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<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
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 March 31, 1999 and
1998 the ILEC operations served 13,588 and 12,812 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 29.6% and 32.3% of Logix's revenue from its ILEC
operations, or $1.2 million for each of the three months ended March 31, 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.
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 March 31, 1999 and 1998, the Company's ICP operations serviced
44,232 and 1,195 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
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is declining in the industry generally. 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 changes in
accounting principles ("Adjusted EBITDA") related to its ICP services in 1998
and the three months ended March 31, 1999. Such negative cash flows from
operations and negative Adjusted 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.
COST AND EXPENSES
The Company's primary operating expense categories include: cost of
service; SG&A; and depreciation and amortization.
Cost of service for Logix's ICP operations consist 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; however, in the event it underestimates its
need for
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<PAGE>
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 infrastructure costs such as selling, customer
support, corporate administration, personnel and internal network maintenance.
Selling expenses include commissions for the Company's sales program.
Commissions are paid to direct sales persons for new business generated with
additional incentives for multiple service offerings and long-term contracts.
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, the facilities
administration and maintenance and SG&A are expected to increase substantially.
Depreciation and amortization relates primarily to switching equipment,
facilities, computers and software, and is expected to increase as the Company
incurs significant capital expenditures to install additional switches.
Depreciation and amortization includes amortization of goodwill acquired in the
American Telco Acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
REVENUE. For the three months ended March 31, 1999, total revenue
increased $23.3 million, or 439.8%, to $28.6 million from $5.3 million in the
first three months of 1998. The following table sets forth the components of the
Company's revenue for the three months ended March 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
ILEC ......................................... $ 4,002 $ 3,769
ICP........................................... 24,552 1,521
------- -------
Total.................................... $28,554 $ 5,290
======= =======
</TABLE>
ILEC. ILEC revenue increased $.2 million, or 6.2%, to $4.0 million for
the three months ended March 31, 1999, compared to $3.8 million for the three
months ended March 31, 1998, due primarily to increased support revenue.
ICP. ICP revenue increased $23.1 million to $24.6 million for the three
months ended March 31, 1999, from $1.5 million for the three months ended March
31, 1998, due primarily to the acquisition of American Telco and internal
growth. ICP revenue for the three months ended March 31, 1999, consist primarily
of charges for local and long-distance service and equipment sales. ICP revenue
includes fiber long-haul transport services and network management services
provided to both third parties and Company affiliates. For the three months
ended March 31, 1999 and 1998, fiber and network management services accounted
for $1.8 million and $1.2 million, respectively,
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<PAGE>
of ICP revenue.
COST OF SERVICE. For the three months ended March 31, 1999, cost of
service increased $18.8 million to $20.4 million from $1.6 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, long distance and
equipment charges as the Company expanded its operations. Excluding the
acquisition of American Telco, cost of service increases were due to growth
in the number of access lines and long distance minutes of use sold combined
with increases in equipment sales. The Company's ICP operations also
experienced increased operations personnel to support the Company's expanded
facilities-based systems.
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended March
31, 1999, SG&A costs increased $9.5 million, or 253.0%, to $13.2 million
compared to $3.7 million in the first three months of 1998. The increase was
primarily due to increased salary costs resulting from additional sales,
administrative and marketing personnel in the Company's ICP operations. Total
employees increased from 140 at March 31, 1998 to 740 at March 31, 1999. The
Company has also experienced an increase of $1.2 million in building rent for
the three months ended March 31, 1999 compared to the three months ended March
31, 1998, related to expanded operations.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended March
31, 1999, depreciation and amortization expense increased $3.2 million, or
249.9%, to $4.5 million from $1.3 million in the first three months of 1998. The
ILEC segment's depreciation and amortization expense remained relatively
consistent between periods at $.7 million for the three months ending March 31,
1999, as compared to $.8 million in the first three months of 1998. The ICP
segment's depreciation and amortization expense increased $3.3 million, to $3.8
million for the three months ended March 31, 1999. 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.
OPERATING LOSS. As a result of the items discussed above, operating
income for the three months ended March 31, 1999, increased $8.2 million to a
loss of $9.6 million from a loss of $1.4 million in the first three months of
1998.
INTEREST INCOME. Interest income for the three months ended March 31,
1999 increased to $1.8 million from a minimal 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 March 31,
1999 increased $11.4 million, to $11.7 million from $.3 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 EFFECTS OF CHANGES IN
ACCOUNTING PRINCIPLES. As a result of the items discussed above, loss before
income taxes and extraordinary items for the three months ended March 31, 1999,
increased $17.7 million to $19.4 million from $1.7 million in the first three
months of 1998.
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<PAGE>
ILEC. Income before income taxes and cumulative effect of change in
accounting principle from the Company's ILEC operations increased $.8 million to
$1.7 million for the three months ended March 31, 1999 from $.9 million in the
three months ended March 31, 1998.
ICP. Loss before income taxes and cumulative effect of change in
accounting principle from the Company's ICP operations increased $18.5 million
to $21.1 million for the three months ended March 31, 1999 from $2.6 million in
the three months ended March 31, 1998.
IMPACT OF YEAR 2000 ISSUE
In April 1998, Logix Communications, in conjunction with Dobson
Communications, established a multi-disciplined team to perform a Year 2000
Impact Analysis for the corporation. Subsequent to the Impact Analysis, the
Company 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, Logix Communications has completed an inventory of Logix's
automated systems and services and an impact analysis that identified
significant risk areas by line of business, identified specific compliance
requirements, and estimated costs and completion dates for affected systems.
The Company 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 does not have large scale legacy applications used by
many telecommunications providers. From an information systems standpoint,
the Company has historically relied on outsourcing relationships for most of
its business and operational support applications. Those applications that
have not been outsourced to service providers have been deployed using
packaged software from outside vendors. 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 before the end of 1999. Management
has also focused on evaluating software systems of acquired companies.
Management has determined that American Telco's OSS is not Year 2000
compliant; however, the Company expects its new operations support system
("OSS") which will replace American Telco's, to be Year 2000 compliant and
will be in place before the end of 1999. The total costs identified to
upgrade or replace those systems that are not Year 2000 compliant and will
not be upgraded through existing maintenance or service agreements are
approximately $1.3 million. 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.
-15-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow from
operations and Adjusted EBITDA in its ILEC business and historically financed
its ILEC business through government loans. The Company's 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 29.6%
and 32.3% of its revenues for the three months ended March 31, 1999, and 1998,
respectively. This support revenue contributes significantly to the ILEC's
positive cash flow from operations, Adjusted EBITDA and income before income
taxes and cumulative effect of change in accounting principle.
The Company has experienced negative cash flow from operations and
Adjusted EBITDA and loss before income taxes and cumulative effect of change in
accounting principle in the first three months of 1999 and for the year ended
1998 in its ICP business. These negative cash flows from operations and Adjusted
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 Adjusted 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, extraordinary items and
cumulative effect of change in accounting principle on a consolidated basis for
the remainder of 1999 and to continue as the Company expands its ICP operations.
Net cash provided by (used in) operating activities was $(16.7) million
for the three months ended March 31, 1999, compared to $.2 million for the same
period of 1998. The increase in net cash used in operating activities during
first quarter 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 provided by (used in) investing activities totaled $(5.6)
million and $1.2 million for the three months ended March 31, 1999, and 1998,
respectively. The first quarter 1999 investing activities primarily related to
capital expenditures offset by a decrease in affiliate receivables. In the first
quarter of 1998, investing activities related to capital expenditures and the
funding of an escrow deposit relating to the Acquisition of American Telco
offset by a decrease in affiliate receivables.
Net cash used in financing activities was $.4 million and $.3 million
for the three months ended March 31, 1999, and 1998, respectively. The net cash
used in financing activities during the three months ended March 31, 1999
primarily resulted from interest earned on the restricted investments purchased
to finance the Senior Note offering and repayments of long-term debt. The net
cash used in financing activities during the three months ended March 31, 1998
primarily resulted from repayments of long-term debt.
Capital expenditures for the three months ended March 31, 1999 and
1998 were $9.9 million and $2.3 million, respectively. The Company expects its
capital expenditures (excluding cost of acquisitions) to total approximately
$41 million for 1999, of which $31 million relates to the ICP operations. The
capital expenditures will be primarily for the purchase of: 1) remote switching
equipment for the ILEC to enable switching of the ILEC off of the Oklahoma City
DMS 500; 2) customer premise equipment channel banks required to service Direct
T customers; 3) switches and related equipment and infrastructure enhancements,
including expenditures for limited co-location equipment and space
("co-locates"); 4) expenditures related to the replacement of OSS and back
office
-16-
<PAGE>
systems. The Company may also expand its rollout and expenditures for
co-locates in 1999, which could add up to an additional $30 million in capital
expenditures depending upon certain regulatory decisions regarding co-locates
and timing. The Company currently does not plan to add any significant amount of
fiber optic mileage to its long-haul network through construction, although it
will seek to expand to additional cities through interconnection agreements with
other carriers and/or long-term buying arrangements of fiber optic capacity.
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 co-locates. The amount and timing of
capital expenditures may differ materially from the foregoing estimate depending
on numerous factors, including the rate at which the Company expands and
develops its networks and customer base, the Company's ability to negotiate
favorable prices for purchases of equipment and to acquire and integrate
necessary OSS and other back office systems, whether the Company consummates
additional acquisitions and factors beyond the Company's control, such as
economic conditions, competition, market and regulatory developments and
availability of capital.
In May 1998 the Company entered into a two year carrier service
agreement with Sprint for long distance capacity which provides for a minimum
commitment of $9.75 million, subject to upward adjustment depending on actual
use. In connection with the Zenex Acquisition, the Company entered into an
agreement with WorldCom whereby the Company will lease long distance capacity
for thirty-six months with an aggregate minimum commitment during the term of
the lease of $18 million. On June 30, 1998, the Company agreed to purchase $25.2
million of switching equipment prior to June 30, 2000 for the Company's recently
launched ICP operations. Also on June 30, 1998, the Company agreed to purchase
certain customer support services over a 60 month period ending in July 2000 for
$13.7 million.
Upon consummation of the 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
March 31, 1999, the Company had restricted investments of $100.6 million.
As of March 31, 1999, the Company had $377.1 million of indebtedness
(including $27.1 million of secured indebtedness under the Rural Utility Service
("RUS")/Rural Telephone Bank ("RTB") Facility) and stockholder's deficit of
$51.0 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, of which
$10.7 million and $6.2 million is being provided by the RUS and RTB,
respectively. As of March 31, 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 NationsBanc, N.A. being the administrative agent for the Credit
Facility. Borrowings under the Credit Facility will be used to fund general
corporate operations, capital expenditures and future acquisitions, as the
Company continues to enhance its existing market presence. Although there can be
no assurance, management believes that cash flow from operations and borrowings
under the RUS/RTB Facility and the Credit Facility will be sufficient to fund
the replacement of its OSS and the expansion of its business as currently
planned through 1999, including its negative cash flow from its ICP operations.
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
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<PAGE>
Dobson Communications, capital contributions to the Company by Dobson
Communications will be limited or prohibited.
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.
The estimated fair values of our total long-term fixed rate debt are shown in
Note 13 to the 1998 Consolidated Financial Statements. Based on our market risk
sensitive instruments outstanding at March 31, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
-18-
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as a part of this report:
Exhibit Number Description
27.1 Financial Data Schedule- Three Months Ended
March 31, 1999
(b) Reports on Form 8-K
- Not applicable.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 18, 1999 Logix Communications Enterprises, Inc.
Geoffrey M. Boyd
Executive Vice President and Chief Financial Officer
(principal financial officer)
-20-
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