<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 333-58693
------------------------
LOGIX COMMUNICATIONS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OKLAHOMA 73-1533356
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3555 NW 58TH, TENTH FLOOR 73112
OKLAHOMA CITY, OKLAHOMA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(405) 516-8400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO 12(G) OF THE ACT: NONE
------------------------
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 / /
As of October 31, 2000, there were 71,250,000 shares of the registrant's
$.01 par value Class A Common Stock outstanding, of which 1,752,242 shares were
beneficially owned by persons not affiliated with the registrant. There is no
established market value for the registrant's Class A Common Stock.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
------ --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
1 Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999................................. 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999.... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999................... 5
Notes to Condensed Consolidated Financial Statements........ 6
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 12
3 Quantitative and Qualitative Disclosure About Market Risk... 20
PART II. OTHER INFORMATION
1 Legal Proceedings........................................... 21
2 Changes in Securities and Use of Proceeds................... 21
3 Defaults Upon Senior Securities............................. 21
4 Submission of Matters to a Vote of Security Holders......... 21
5 Other Information........................................... 21
6 Exhibits and Reports on Form 8-K............................ 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,135 $ 672
Restricted cash and investments........................... 10,483 40,079
Accounts receivable, net.................................. 16,586 21,792
Receivables--affiliates................................... 1,888 1,376
Prepaid expenses.......................................... 1,887 3,269
Other current assets...................................... 554 1,581
-------- ---------
Total current assets.................................... 32,533 68,769
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 118,806 121,136
-------- ---------
OTHER ASSETS:
Restricted cash and investments........................... -- 21,062
Goodwill, net............................................. 112,128 121,279
Deferred financing costs, net............................. 4,130 13,345
Excess of cost over original cost of assets acquired,
net..................................................... 2,415 2,486
Other intangibles, net.................................... 3,726 4,698
Other..................................................... 1,836 1,886
-------- ---------
Total other assets...................................... 124,235 164,756
-------- ---------
Total assets............................................ $275,574 $ 354,661
======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,019 $ 23,776
Accrued expenses.......................................... 14,349 9,086
Deferred revenue and customer deposits.................... 2,030 2,346
Current portion of long-term debt......................... 1,370 1,404
-------- ---------
Total current liabilities............................... 27,768 36,612
-------- ---------
LONG-TERM DEBT, net of current portion...................... 187,593 438,330
INVESTMENT TAX CREDITS...................................... 92 99
COMMITMENTS (Note 7)
SENIOR EXCHANGEABLE PREFERRED STOCK......................... 98,483 --
STOCKHOLDERS' DEFICIT:
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.......................................... (50,523) (132,541)
-------- ---------
Total stockholders' deficit............................. (38,362) (120,380)
-------- ---------
Total liabilities and stockholders' deficit................. $275,574 $ 354,661
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE................................... $ 26,573 $ 28,619 $ 82,821 $ 85,360
OPERATING EXPENSES:
Cost of service......................... 18,959 23,330 65,572 64,877
Selling, general and administrative..... 13,132 15,796 44,843 43,261
Loss on disposition..................... -- -- 3,847 --
Depreciation and amortization........... 6,695 4,772 19,469 14,249
----------- ----------- ----------- -----------
Total operating expenses.............. 38,786 43,898 133,731 122,387
----------- ----------- ----------- -----------
OPERATING LOSS............................ (12,213) (15,279) (50,910) (37,027)
OTHER INCOME (EXPENSES):
Interest income......................... 584 1,310 2,483 4,593
Interest expense........................ (7,849) (11,897) (33,424) (35,092)
Other................................... (3) 8 166 90
----------- ----------- ----------- -----------
Total other expenses, net............. (7,268) (10,579) (30,775) (30,409)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEMS................................... (19,481) (25,858) (81,685) (67,436)
INCOME TAX BENEFIT........................ 31,040 -- 31,040 --
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS.............................. 11,559 (25,858) (50,645) (67,436)
EXTRAORDINARY ITEMS, net of income tax
expense of $32,640 (Note 3 and
Note 4)................................. 142,186 -- 139,654 --
----------- ----------- ----------- -----------
NET INCOME (LOSS)......................... $ 153,745 $ (25,858) $ 89,009 $ (67,436)
DIVIDENDS ON PREFERRED STOCK.............. (3,560) -- (6,991) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS............................ $ 150,185 $ (25,858) $ 82,018 $ (67,436)
=========== =========== =========== ===========
BASIC NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS PER COMMON SHARE:
Before extraordinary item............... $ .11 $ (.36) $ (.81) $ (.95)
Extraordinary item...................... 2.00 -- 1.96 --
----------- ----------- ----------- -----------
BASIC NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS PER COMMON SHARE.... $ 2.11 $ (.36) $ 1.15 $ (.95)
=========== =========== =========== ===========
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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 89,009 $(67,436)
Adjustments to reconcile net income (loss) to net cash
used in operating activities--
Depreciation and amortization........................... 19,469 14,249
Amortization of bond premium and financing costs........ 1,117 1,537
Loss on disposition of business......................... 3,847 --
Deferred investment tax credits......................... (7) 2
Gain (loss) on disposition of assets.................... -- (67)
Other................................................... 3 (91)
Extraordinary gain on early extinguishment of debt...... (181,530) --
Extraordinary loss on financing costs................... 9,236 --
Changes in current assets and liabilities--
Accounts receivable..................................... 4,759 (5,632)
Prepaid expenses........................................ 1,382 (356)
Other current assets.................................... 122 (415)
Accounts payable........................................ (13,757) (10,504)
Accrued expenses........................................ 5,808 14,124
Other current liabilities............................... (279) 779
--------- --------
Net cash used in operating activities................. (60,821) (53,810)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (9,346) (37,687)
Purchase of other assets.................................. (382) (687)
Receivable--affiliates, net............................... (512) 4,179
Proceeds on sale of assets................................ 450 --
Other..................................................... (150) 12
--------- --------
Net cash used in investing activities................. (9,940) (34,183)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 112,650 44,668
Repayments of long-term debt.............................. (50,856) (805)
Retirement of long-term debt.............................. (81,580) --
Sale of senior exchangeable preferred stock............... 41,492 --
Interest on restricted investments........................ (1,736) (893)
Maturities of restricted investments...................... 21,438 18,348
Retirement of restricted investments...................... 30,789 --
Deferred financing costs.................................. (973) (2,461)
--------- --------
Net cash provided by financing activities............. 71,224 58,857
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 463 (29,136)
CASH AND CASH EQUIVALENTS, beginning of period.............. 672 31,675
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,135 $ 2,539
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)....... $ 36,638 $ 24,452
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Dividends issued on Senior Exchangeable Preferred Stock... $ 6,991 --
Accrued interest converted to Senior Exchangeable
Preferred Stock........................................... $ 545 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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 former parent company,
Dobson Communications Corporation ("Dobson Communications"). Its name was
changed to Logix Communications Enterprises, Inc. in October 1998. On
January 24, 2000, Dobson Communications distributed Logix's stock to certain
Dobson Communications' shareholders.
Logix is a leading provider of integrated local, long distance, data and
other telecommunications services to small and medium-sized business customers
throughout its region. The Company provides these services through two business
segments: integrated communications provider ("ICP") operations and incumbent
local exchange carrier ("ILEC") operations. The Company has operations in
Arkansas, Colorado, Missouri, Oklahoma and Texas.
ICP
The Company commenced its ICP operations in December 1997 through its
subsidiary, Logix Communications Corporation ("LCC"). The Company's ICP
operations generate revenue from local, long distance, Internet, enhanced data
services and long-haul transport services. The Company currently provides these
services primarily to customers in markets in Arkansas, Colorado, Missouri,
Oklahoma and Texas. As of September 30, 2000, the Company's ICP operations
served 65,847 access lines equivalents compared to 50,181 access lines
equivalents as of September 30, 1999. The increase was mainly due to the
Company's internal growth and expansion into additional cities in Arkansas,
Missouri and Texas.
The Company has a 20% interest in and manages the Forte of Colorado, General
Partnership which provides fiber optic telecommunication service between
Springfield, Colorado and Colorado Springs, Colorado. The entity which holds the
20% interest is Dobson Fiber/FORTE of Colorado, Inc.
ILEC
The Company, through Dobson Telephone Company, Inc. ("Dobson Telephone"),
provides wireline telephone service to nine adjoining exchanges in western
Oklahoma and three adjoining exchanges adjacent to the eastern Oklahoma City
metropolitan area. Dobson Telephone operates under the authority of the Federal
Communications Commission ("FCC"). Rates charged by Dobson Telephone are
regulated by the FCC and the Oklahoma Corporation Commission. Dobson Telephone,
like other wireline companies that operate in rural areas where the cost to
provide service is higher than normal, receives high cost support funds from
state jurisdictions and the federal universal service fund. Approximately 29.2%
and 28.5%, or $1.1 million and $1.2 million, for the three months ended
September 30, 2000 and 1999, respectively, and 32.2% and 30.4%, or $3.7 million
and $3.5 million, for the nine months ended September 30, 2000 and 1999,
respectively, of the Company's ILEC revenue was from these two sources. The
Company's ILEC operations served 13,583 access lines as of September 30, 2000
and 13,686 access lines as of September 30, 1999.
6
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
CAPITAL RESOURCES AND GROWTH
LCC's operations are affected by the competitive environment in which LCC
operates. LCC's performance will be further affected by its ability to develop a
sufficient customer base, attract, retain, and motivate qualified personnel,
lease adequate trunking capacity from ILECs or other ICPs, manage long distance
price compression and complete the integration of its operations support systems
and other back office systems. LCC's network and telecommunication services are
subject to significant regulation at the federal, state and local levels. Delays
in receiving required regulatory approvals or the enactment of new regulation or
regulatory requirements may have an adverse effect upon LCC. Although management
believes that LCC will be able to successfully mitigate these risks, there is no
assurance that LCC will be able to do so or that LCC will operate profitably in
the near future. Expenses are expected to exceed revenues in each location in
which LCC offers service until a sufficiently large customer base is established
to generate substantial additional revenues.
The Company's successful implementation of its strategy, including the
further expansion of its customer base is dependent upon securing adequate
capital resources. Although the Company cannot provide any assurance, it
believes that borrowings under its mortgage notes payable, financing previously
provided by Dobson CC Limited Partnership ("DCCLP"), cash flow from operations
and certain shareholder assistance will be sufficient to satisfy current year
expected operating expenses, capital expenditures, working capital and debt
service obligations. DCCLP is committed to assisting the Company in obtaining
funds to support the Company's operations, as needed, if needed, in 2000. In
addition, the Company expects to pursue additional financing, which may include
commercial bank borrowings, vendor financing and the sale of equity or debt
securities, in the near term. The Company cannot provide any assurance that such
financing will be available on acceptable terms or at all.
The Company's ability to manage future growth will depend upon its continued
ability to monitor operations, control costs and maintain effective quality
controls which could result in higher operating expenses. Any failure to
adequately manage these areas and to implement and improve such systems,
procedures and controls in an efficient manner at a pace consistent with the
growth of the Company's business could have an adverse effect on the Company's
business, financial condition and results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements of the Company include the accounts of
Logix, LCC, Dobson Telephone and Dobson Fiber/FORTE of Colorado, Inc. For
financial reporting purposes, the Company consolidates each subsidiary and
partnership in which it has a controlling interest. All significant intercompany
accounts and transactions have been eliminated. Investments in unconsolidated
partnerships where the Company does not have a controlling interest are
accounted for under the equity method. 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 1999 Logix
Communications Enterprises, Inc. Annual Report on
7
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
Form 10-K. Reference is made herein to the "Notes to Consolidated Financial
Statements" under Item 8 of the 1999 Form 10-K for additional disclosure.
EARNINGS PER SHARE
Basic net income (loss) applicable to common stockholders per common share
is computed by using the weighted average number of common stock shares
outstanding during the year. The Company has not presented diluted earnings per
share as the average market price of the common stock during the period is below
the exercise price of the outstanding stock options, thus causing the
outstanding stock options to have an antidilutive effect.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101") on revenue
recognition presentation and disclosure in the financial statements.
Subsequently, the SEC released SAB 101A and SAB 101B which delayed the required
implementation date of SAB 101 to the fourth quarter of 2000. The Company
believes its existing revenue recognition policies and procedures are in
compliance with SAB 101 and, therefore, SAB 101's adoption will have no material
impact on the Company's consolidated financial position, results of operations
or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the previously presented 1999
balances to conform them to the 2000 presentation.
3. SENIOR EXCHANGEABLE PREFERRED STOCK:
On March 30, 2000, the Company issued to DCCLP 90,000 shares of 15% Class A
Senior Exchangeable Preferred Stock manditorily redeemable in 2010 for $1,000
per share ("Preferred Stock"). The net proceeds from the sale of the Preferred
Stock were used to retire the $75 million revolving credit facility ("Senior
Credit Facility"). The $50 million outstanding under the DCCLP Credit Facility
on March 30, 2000 was converted to Preferred Stock, and for cash flow purposes
is a non-cash financing activity. Logix recognized an extraordinary loss of
$2.5 million as a result of writing off previously capitalized financing costs
associated with the Senior Credit Facility. The holder of the Preferred Stock is
entitled to cumulative dividends from the date of issuance and a liquidation
preference of $1,000 per share with rights over the other classes of capital
stock. Additionally, the Preferred Stock is redeemable at the Company's option.
The holder of the Preferred Stock has no voting rights.
4. FINANCING ACTIVITY:
During the third quarter of 2000, the Company repurchased $263.1 million of
its 12.25% Senior Notes due 2008 ("Senior Notes") for an aggregate price of
$81.6 million. Funding for the Senior Notes repurchase and operating capital was
provided by $65.5 million of senior loans from DCCLP due 2004 ("Senior Loans")
and the release of $30.8 million held in escrow as collateral for the payment of
interest on the Senior Notes. The Senior Loans bear interest equal to the prime
rate plus two percent
8
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
(11.5% at September 30, 2000), and interest is paid quarterly beginning
September 30, 2000 through December 31, 2001. The Company will pay principal
quarterly beginning March 31, 2002 through December 31, 2004.
The Company realized an extraordinary pre-tax gain of $181.5 million as a
result of the Senior Notes repurchase. The Company also recognized an
extaordinary pre-tax loss of $6.7 million as a result of writing off previously
capitalized financing costs associated with our Senior Notes. The extraordinary
items have been shown net of tax in the condensed consolidated statements of
operations which has resulted in the recognition of a tax benefit associated
with income from continuing operations for the nine months ended September 30,
2000, all of which was recorded in the third quarter of 2000.
5. CUSTOMER PREMISE EQUIPMENT DIVISION DISPOSITION:
On July 21, 2000, the Company completed the sale of its customer premise
equipment division. The Company sold the division for $450,000 to Interconnect
Consolidation Group, an unrelated Oklahoma-based company. As a result of the
sale, the Company recognized a $3.8 million loss in the second quarter of 2000
relating to the write-off of certain capitalized costs associated with the
division. The Company experienced a reduction in force of 65 employees in the
third quarter 2000 as a result of this transaction.
6. REPORT OF BUSINESS SEGMENTS:
The Company operates in two reportable segments: ICP and ILEC. These
segments are strategic business units that offer different products and
services. These segments are managed separately because the ICP segment is a
competitive communications provider and the ILEC segment is a regulated public
utility. The accounting policies of the segments are the same as those of the
Company. The Company evaluates and measures performance of each segment based on
Adjusted EBITDA, which is defined by the Company as earnings before interest
expense, income taxes, depreciation and amortization, other income (expense) and
extraordinary items. The Company accounts for intersegment sales and transfers
as if the sales or transfers were arm's length transactions with third parties
at current market prices. The Company allocates corporate overhead and income
taxes to both segments. The segments do not have significant non-cash items
other than depreciation and amortization. A summary of the Company's operations
for the three and nine months ended September 30, 2000 and September 30, 1999 by
segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------
ICP ILEC TOTAL
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue--
External............................................ $ 22,742 $3,831 $ 26,573
Intersegment........................................ 1,064 -- 1,064
Intersegment revenue(1)............................. -- -- (1,064)
-------- ------ --------
Total operating revenue........................... $ 23,806 $3,831 $ 26,573
-------- ------ --------
Adjusted EBITDA(2)...................................... $ (7,566) 2,048 $ (5,518)
Depreciation and amortization........................... $ (5,787) $ (908) $ (6,695)
Interest expense, net(3)................................ (6,819) (446) (7,265)
Other income (expense), net............................. (3) -- (3)
-------- ------ --------
Income (loss) before extraordinary items............ $(20,175) $ 694 $(19,481)
======== ====== ========
</TABLE>
9
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------------------
ICP ILEC TOTAL
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue--
External............................................ $ 24,583 $4,036 $ 28,619
Intersegment........................................ 2,096 18 2,114
Intersegment revenue(1)............................. -- -- (2,114)
-------- ------ --------
Total operating revenue........................... $ 26,679 $4,054 $ 28,619
-------- ------ --------
Adjusted EBITDA(2)...................................... $(13,069) $2,562 $(10,507)
Depreciation and amortization........................... (4,031) (741) (4,772)
Interest expense, net(3)................................ (10,384) (203) (10,587)
Other income (expense), net............................. 8 -- 8
-------- ------ --------
Income (loss) before extraordinary items.......... $(27,476) $1,618 $(25,858)
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------
ICP ILEC TOTAL
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue--
External............................................... $ 71,476 $11,345 $ 82,821
Intersegment........................................... 3,307 -- 3,307
Intersegment revenue(1)................................ -- -- (3,307)
-------- ------- --------
Total operating revenue................................ $ 74,783 $11,345 $ 82,821
-------- ------- --------
Adjusted EBITDA(2)..................................... $(37,499) $ 6,058 $(31,441)
Depreciation and amortization.......................... (17,013) (2,456) (19,469)
Interest expense, net(3)............................... (30,128) (813) (30,941)
Other income (expense), net............................ 816 (650) 166
-------- ------- --------
Income (loss) before extraordinary items......... $(83,824) $ 2,139 $(81,685)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------------------
ICP ILEC TOTAL
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INFORMATION:
Operating revenue--
External........................................... $ 73,851 $11,509 $ 85,360
Intersegment....................................... 4,269 18 4,287
Intersegment revenue(1)............................ -- -- (4,287)
-------- ------- --------
Total operating revenue.......................... $ 78,120 $11,527 $ 85,360
-------- ------- --------
Adjusted EBITDA(2)..................................... $(30,344) $ 7,566 $(22,778)
Depreciation and amortization.......................... (12,073) (2,176) (14,249)
Interest expense, net(3)............................... (29,622) (877) (30,499)
Other income (expense), net............................ 90 -- 90
-------- ------- --------
Income (loss) before extraordinary items........... $(71,949) $ 4,513 $(67,436)
======== ======= ========
</TABLE>
10
<PAGE>
LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
INVESTMENT INFORMATION:
Segment assets--
ICP..................................................... $217,760 $300,846
ILEC.................................................... 59,964 55,965
Intersegment receivables(1)............................. (2,150) (2,150)
-------- --------
Total segment assets.................................. $275,574 $354,661
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- --------------
<S> <C> <C>
OTHER INFORMATION:
Capital expenditures--
ICP.................................................... $6,076 $26,882
ILEC................................................... 3,270 10,805
------ -------
Total capital expenditures........................... $9,346 $37,687
====== =======
</TABLE>
------------------------
1) The intersegment eliminations were included to reconcile reportable segment
activities to the Company's consolidated totals.
2) Adjusted EBITDA is defined by the Company as earnings before interest
expense, income taxes, depreciation and amortization, other income (expense)
and extraordinary items.
3) Included in interest expense is amortization expense of deferred financing
costs.
7. COMMITMENTS:
In May 1998, the Company entered into a three year carrier service agreement
with Sprint for long distance capacity which provided for a minimum commitment
of $8.3 million, subject to upward adjustment depending on actual use. In
January 2000, the Company amended its agreement to reduce its total minimum
commitment to $7.4 million. Of this commitment, $2.2 million remained
outstanding at September 30, 2000.
In June 1998, the Company entered into an agreement with MCI WorldCom to
lease long distance capacity for three years with an aggregate minimum
commitment during the term of the lease of $18 million, or $.5 million per
month. In December 1999, the Company amended the agreement to reduce its minimum
monthly commitment from $.5 million to $.4 million and its total minimum
commitment to $15.6 million, effective January 2000 through the end of the
agreement. Of this commitment, it is estimated that $2.4 million remains
outstanding as of September 30, 2000.
On January 24, 2000, Dobson Communications distributed the stock of Logix to
its stockholders. Dobson Communications executed an agreement with DCCLP under
which DCCLP agreed not to take any action which may result in Dobson
Communications recognizing taxable income because of the Logix spin-off unless
DCCLP causes Logix to execute an agreement to indemnify Dobson Communications
for any income tax, together with any penalties or interest thereon, incurred by
Dobson Communications solely attributable to the distribution of Logix stock and
arising as a result of the actions of the Logix shareholders. In connection with
the distribution, the tax sharing agreement with Dobson Communications was
terminated. As a result of the termination, Logix may owe Dobson Communications
a net tax settlement. However, Logix does not expect any tax settlement to be
material to its results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis presents factors we believe are
relevant to an assessment and understanding of our consolidated financial
position and results of operation. This financial and business analysis should
be read in conjunction with our condensed consolidated financial statements and
notes thereto in Item 1.
OVERVIEW
We are an integrated communications provider, or ICP, and an incumbent local
exchange carrier, or ILEC. We were incorporated as an Oklahoma corporation in
December 1997. We have network facilities in the southwestern United States and
serve small and medium-sized businesses in Amarillo, Austin, Corpus Christi,
Dallas, El Paso, Ft. Worth, Houston, Kansas City, Little Rock, Oklahoma City,
San Antonio, St. Louis, Tulsa, and in other cities in Oklahoma and Texas. We are
a provider of integrated communications services with a core suite of voice and
data communications services including local, long distance, Internet, enhanced
data services and long-haul transport services. We are continually evaluating
additional products and services to add to our offerings. For the nine months
ended September 30, 2000, we provided our services to approximately 28,000 local
and long distance customers, had 79,430 revenue-producing access line
equivalents and generated revenues of $82.8 million.
REVENUE
ICP OPERATIONS. Our ICP operation generates revenue from local, long
distance, Internet, enhanced data services, and long-haul transport services. As
of September 30, 2000, our ICP operations had 65,847 revenue-producing access
line equivalents compared to 50,181 access line equivalents as of September 30,
1999. During the first quarter of 2000, we modified our definition of an access
line equivalent to be a revenue producing end user. As a result of this change,
we restated the number of access line equivalents in prior periods. The increase
in access lines was mainly due to our growth and expansion into additional
cities in Arkansas, Missouri and Texas. We began offering local facilities-
based ICP services in October 1997 and currently provide these services to
customers in major markets in Oklahoma and Texas.
We offer ICP services at prices that are competitive to the incumbent local
exchange carriers. We believe that while pricing is an important element of our
marketing, small and medium-sized businesses are also focused on 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,
such as long distance, 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 decreases in our cost of service.
Current industry statistics demonstrate that there is a significant turnover
of customers within our industry. We believe 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 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 gross margins than do our
resale customers. 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 Companies, or RBOCs. As a result, some of our
resale customers terminated our services. In July 1999, we began converting our
resale customers to our
12
<PAGE>
unbundled network element platform, or UNE-P facilities-based services. We
expect to maintain a base of resale customers for the foreseeable future due to
some product offerings that are available via resale but are not available, or
are prohibitively costly to offer, via facilities-based service.
INCUMBENT LOCAL EXCHANGE CARRIER 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 the eastern Oklahoma City metropolitan area. As of September 30, 2000, our
ILEC operations served 13,583 access lines compared to 13,686 access lines as of
September 30, 1999.
Our ILEC revenues consist of:
- end user revenue, which includes charges for local service and enhanced
services such as call waiting and call forwarding;
- 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 represented for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Support revenue............................. $1,118 $1,155 $3,656 $3,508
Percentage of ILEC revenue.................. 29.2% 28.5% 32.2% 30.4%
</TABLE>
The Telecommunications Act of 1934, as amended in 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 to achieve
economies of scale.
COSTS AND EXPENSES
Our primary 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 and termination and access
services provided through ILECs and other telecommunications companies. We have
deployed several digital switching platforms with local and long distance
capability. In addition, we lease fiber trunking capacity from ILECs and other
ICPs to connect our switches with our transmission equipment collocated in ILEC
central offices.
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<PAGE>
Depending on the type of services we provide, we may deploy high capacity
digital connections, including the lease of unbundled loops from the ILEC 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 monthly recurring fee for use of their central offices for
collocation.
We will use our own fiber network, where available, to carry long distance
traffic and will also 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. See "--Liquidity and Capital Resources."
Our SG&A includes all infrastructure costs such as personnel, selling,
customer support, corporate administration and network maintenance. Selling
expenses include commissions for our sales program. We pay commissions to direct
sales persons for new business generated with incentives for the number of
access lines sold and revenues billed. We also pay commissions to independent
sales agents for generating new sales and ongoing sales to existing customers.
Our depreciation and amortization represents the costs associated with the
depreciation of our fixed assets and the amortization of our intangible assets,
primarily goodwill related to our 1998 acquisition of American Telco, Inc.
RESULTS OF OPERATIONS
In the text below, financial statement numbers have been rounded; however,
the percentage changes are based on the actual financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE. For the three months ended September 30, 2000, total revenue
decreased $2.0 million, or 7.1%, to $26.6 million from $28.6 million in 1999.
The following table sets forth the components of our revenue for the three
months ended September 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
ICP....................................................... $22,742 $24,583
ILEC...................................................... 3,831 4,036
------- -------
$26,573 $28,619
======= =======
</TABLE>
ICP. Our ICP revenue decreased $1.9 million, or 7.5%, to $22.7 million for
the three months ended September 30, 2000, from $24.6 million for 1999. The
majority of the decline in revenue related to $3.8 million in decreased long
distance revenue due to reduced long distance rates and minutes of use. Local,
data and other revenue increased by $3.3 million, which was offset by a decrease
of $1.3 million in customer premise equipment, or CPE, revenue due to the
disposition of our CPE division in July 2000. ICP revenue also includes fiber
long-haul transport services provided to both third parties and to our
affiliates.
ILEC. Our ILEC revenue decreased $.2 million, or 5.1%, to $3.8 million for
the three months ended September 30, 2000, compared to $4.0 million for the
three months ended September 30, 1999. The decrease in revenue primarily related
to decreased access service revenue offset slightly by
14
<PAGE>
additional support revenue from the interstate access pool. Access lines were
13,583 as of September 30, 2000 compared to 13,686 as of September 30, 1999.
COST OF SERVICE. For the three months ended September 30, 2000, our total
cost of service decreased $4.3 million, or 18.7%, to $19.0 million from
$23.3 million in the comparable period of 1999. These costs consisted primarily
of wholesale charges from third party service providers relating to our ICP
segment. Wholesale costs decreased due to decreased rates relating to long
distance and the divestiture of the CPE division. The following table sets forth
the components of our cost of service for the three months ended September 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
ICP....................................................... $18,368 $23,006
ILEC...................................................... 591 324
------- -------
Total................................................. $18,959 $23,330
======= =======
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended
September 30, 2000, our SG&A costs decreased $2.7 million, or 16.9%, to
$13.1 million compared to $15.8 million for the three months ended
September 30, 1999. This is primarily due to reduced headcount in our ICP
segment partially related to the sale of our CPE division and also reductions in
force.
DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended
September 30, 2000, our depreciation and amortization expense increased
$1.9 million, or 40.3%, to $6.7 million from $4.8 million for the same period of
1999. Our ICP segment's depreciation and amortization expense increased
$1.8 million, to $5.8 million from $4.0 million. This increase is primarily a
result of depreciation and amortization on assets placed into service during the
year. Our ILEC segment's depreciation and amortization increased $.1 million, or
22.5%, to $.9 million from $.8 million for the three months ended September 30,
2000 and 1999, respectively, also as a result of assets placed into service
during the year.
INTEREST INCOME. Our interest income decreased $.7 million to $.6 million
for the three months ended September 30, 2000, from $1.3 million for the same
period in 1999. The decrease in interest income was a result of a decrease of
funds held in escrow as collateral for the payment of interest on our 12.25%
senior notes due 2008. The decrease in escrow was related to the repurchase of
the senior notes. See "--Liquidity and Capital Resources."
INTEREST EXPENSE. Our interest expense for the three months ended
September 30, 2000 decreased $4.1 million, to $7.8 million from $11.9 million
for the three months ended September 30, 1999. Our ICP segment's interest
expense decreased $4.3 million to $7.4 million in 2000, from $11.7 million in
1999. The decrease is a result of the decrease in senior notes outstanding due
to the repurchase activity. Our ILEC segment's interest expense increased
$.2 million to $.4 million from $.2 million for the three months ended
September 30, 2000 and 1999, respectively, due to additional borrowings under
mortgage notes payable.
EXTRAORDINARY ITEMS. During the three months ended September 30, 2000, we
repurchased $263.1 million of our 12.25% senior notes for an aggregate price of
$81.6 million. As a result of the transaction, we realized a net extraordinary
gain of $142.2 million net of tax due to the senior note repurchase, which was
offset by writing off previously capitalized financing costs associated with our
senior notes. See "--Liquidity and Capital Resources."
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE. For the nine months ended September 30, 2000, our total revenue
decreased $2.6 million to $82.8 million from $85.4 million in 1999. The
following table sets forth the components of our revenue for the nine months
ended September 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
ICP....................................................... $71,476 $73,851
ILEC...................................................... 11,345 11,509
------- -------
$82,821 $85,360
======= =======
</TABLE>
ICP. Our ICP revenue decreased $2.4 million, or 3.2%, to $71.5 million for
the nine months ended September 30, 2000, from $73.9 million for the comparable
period of 1999. Although we experienced increased sales by our fiber operations
and facilities-based access line growth, additional customer credits, reduced
long distance rates, declining minutes of use and the divestiture of our CPE
division were the primary factors relating to the decrease in revenue. Our ICP
revenue also includes fiber long-haul transport services provided to both third
parties and to our affiliates.
ILEC. Our ILEC revenue decreased $.2 million to $11.3 million for the nine
months ended September 30, 2000 compared to $11.5 million for the nine months
ended September 30, 1999. The decrease in revenue primarily related to decreased
access service revenue offset slightly by additional support revenue from the
interstate access pool.
COST OF SERVICE. For the nine months ended September 30, 2000, our total
cost of service increased $.7 million, or 1.0%, to $65.6 million from
$64.9 million in the comparable period of 1999. These costs consisted primarily
of wholesale charges from third party service providers relating to our ICP
segment. The following table sets forth the components of our cost of service
for the nine months ended September 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
ICP....................................................... $63,869 $64,092
ILEC...................................................... 1,703 785
------- -------
Total................................................. $65,572 $64,877
======= =======
</TABLE>
SELLING, GENERAL AND ADMINISTRATIVE. For the nine months ended
September 30, 2000, our SG&A costs increased $1.5 million, or 3.7%, to
$44.8 million compared to $43.3 million for the nine months ended September 30,
1999. The primary reason for the increase is due to increases in our reserves
for uncollectible accounts of $2.4 million and severance costs of $2.7 million.
These costs were offset by a reduction in headcount in our ICP segment partially
related to the sale of our CPE division and also reductions in force.
LOSS ON DISPOSITION. On July 21, 2000, we completed the sale of our
customer premise equipment division. We sold the division for $450,000 to
Interconnect Consolidation Group, an unrelated Oklahoma Company. As a result of
the sale, we recognized a $3.8 million loss for the three months ended June 30,
2000 relating to the write-off of certain capitalized costs associated with the
division. The loss was recognized in Adjusted EBITDA because the disposition
created an impairment of certain long-lived assets.
DEPRECIATION AND AMORTIZATION EXPENSE. For the nine months ended
September 30, 2000, our depreciation and amortization expense increased
$5.3 million, or 36.6%, to $19.5 million from
16
<PAGE>
$14.2 million for the same period of 1999. Our ICP segment's depreciation and
amortization expense increased $4.9 million, to $17.0 million from
$12.1 million. This increase is primarily a result of depreciation and
amortization on assets placed into service during the year. Our ILEC segment's
depreciation and amortization increased $.3 million, or 12.9%, to $2.5 million
from $2.2 million for the nine months ended September 30, 2000 and 1999,
respectively, also as a result of assets placed into service during the year.
INTEREST INCOME. Interest income decreased $2.1 million to $2.5 million for
the nine months ended September 30, 2000, from $4.6 million for the same period
in 1999. Decreased interest income was a result of a decrease of funds held in
escrow as collateral for the payment of interest on our senior notes. See
"--Liquidity and Capital Resources."
INTEREST EXPENSE. Our interest expense for the nine months ended
September 30, 2000 decreased $1.7 million, to $33.4 million from $35.1 million
for the nine months ended September 30, 1999. Our ICP segment's interest expense
decreased $1.6 million, or 4.7%, to $32.6 million in 2000, from $34.2 million in
1999. Our decrease related to decreased interest expense as a result of interest
expense incurred during the nine months ending September 30, 1999 on our
$50 million senior credit facility which was fully repaid in the first quarter
of 2000. Our ILEC segment's interest expense remained relatively consistent from
period to period at $.8 million and $.9 million for the nine months ended
September 30, 2000 and 1999, respectively.
EXTRAORDINARY ITEMS. During the nine months ended September 30, 2000, we
repurchased $263.1 million of our 12.25% senior notes for an aggregate price of
$81.6 million. As a result of the transaction, we realized a net extraordinary
gain of $142.2 million net of tax due to the senior note repurchase, which was
slightly offset with an extraordinary loss caused by writing off previously
capitalized financing costs associated with our senior notes. See "--Liquidity
and Capital Resources."
We also issued to DCCLP 90,000 shares of 15% Class A Preferred Stock
manditorily redeemable in 2010 for $1,000 per share. The net proceeds from the
sale of the preferred stock were used to repay our senior credit facility. We
recognized an extraordinary loss of approximatley $2.5 million as a result of
writing off previously capitalized financing costs associated with our senior
credit facility. See "--Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
We have required, and will continue to require, substantial capital,
including additional debt and/or equity, to successfully implement our business
plan. We have financed our operations through cash flows from operating
activities, as well as through debt and equity financing. Significant sustained
growth in our cash flows is necessary to meet our debt service requirements,
including our obligations on our senior notes. We expect negative cash flows and
losses before income taxes and extraordinary items to continue at least through
2001. In addition, our ILEC segment receives support revenue from federal and
state agencies that accounted for approximately 32.2% and 30.4% of our ILEC
revenue for the nine months ended September 30, 2000 and 1999, respectively. A
decrease in support revenue, although unforeseen, could negatively affect our
ILEC revenue and liquidity.
NET CASH FLOW
Our net cash used in operating activities was $60.8 million and
$53.8 million for the nine months ended September 30, 2000 and 1999,
respectively.
Our net cash used in investing activities was $9.9 million and
$34.2 million for the nine months ended September 30, 2000 and 1999,
respectively. Investing activities for the nine months ended September 30, 2000
primarily related to capital expenditures. During the nine months ended
17
<PAGE>
September 30, 1999, our investing activities primarily related to capital
expenditures offset by a decrease in receivables from our affiliates.
Our net cash provided by financing activities was $71.2 million and
$58.9 million for the nine months ended September 30, 2000 and 1999,
respectively. During the nine months ended September 30, 2000, our financing
activities consisted of increases in long-term debt, the sale of senior
exchangeable preferred stock and maturities of investments held in escrow. This
increase was offset by the repayment of our $50 million senior credit facility.
The net cash provided by financing activities during the nine months ended
September 30, 1999 primarily resulted from borrowings against our $50 million
senior credit facility and maturities of restricted investments relating to the
senior notes.
CAPITAL RESOURCES
On March 30, 2000, we issued to DCCLP 90,000 shares of 15% Class A preferred
stock manditorily redeemable in 2010 for $1,000 per share. The net proceeds from
the sale of the preferred stock were used to repay our senior credit facility.
The $50 million outstanding under the DCCLP credit facility was converted to
preferred stock. We recognized an extraordinary loss of approximately
$2.5 million as a result of writing off previously capitalized financing costs
associated with our senior credit facility. This appears as an extraordinary
item in the statement of operations. The holder of our preferred stock is
entitled to cumulative dividends from the date of issuance and a liquidation
preference of $1,000 per share with rights over the other classes of our capital
stock and junior to our senior notes. Our preferred stock is redeemable at our
option at any time and must be redeemed by April 1, 2010. The holder of the
preferred stock has no voting rights.
During the third quarter of 2000, we repurchased $263.1 million of our
12.25% senior notes for an aggregate price of $81.6 million. Funding for the
senior notes repurchased and operating capital was provided by $65.5 million of
senior loans from Dobson CC Limited Partnership due 2004, our controlling
shareholder, and the release of $30.8 million held in escrow as collateral for
the payment of interest on our senior notes. The senior loans bear interest
equal to the prime rate plus two percent (11.5% at September 30, 2000), and
interest is paid quarterly beginning September 30, 2000 through December 31,
2001. We will pay principal quarterly beginning March 31, 2002 through
December 31, 2004. We realized an extraordinary pre-tax gain of $181.5 million
as a result of the senior note repurchase. This extraordinary pre-tax gain was
slightly offset by a $6.7 million extraordinary pre-tax loss as a result of
writing off previously capitalized financing costs associated with our senior
notes. The extraordinary items have been shown net of tax which has resulted in
the recognitioin of a tax benefit associated with income from continuing
operations for the nine months ended September 30, 2000, all of which was
recorded in the third quarter of 2000.
As of September 30, 2000, we had outstanding $86.9 million aggregate
principal senior notes that mature in 2008. The senior notes bear interest at an
annual rate of 12.25%, payable semi-annually on each June 15 and December 15.
The senior notes indenture contains restrictive covenants that place limitations
on our various activities to include indebtedness, asset sales, liens and
transactions with stockholders and affiliates. As of September 30, 2000, we were
in compliance with our restrictive covenants. Of the net proceeds from the sale
of our senior notes, we used $122 million to purchase securities that were
pledged to secure the first six semi-annual interest payments on our senior
notes. The pledged securities have decreased as a result of the senior notes
repurchased. The restricted cash and investment principal balance at
September 30, 2000, relating to these purchased securities, was $10.2 million.
We have funded our ILEC operations through several RUS/RTB loans. The
RUS/RTB existing loans have scheduled maturities between 2000 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, 2000, we had
borrowed $11.1 million under this additional facility. Under the RUS/RTB
18
<PAGE>
facility, we must maintain certain financial ratios, and our failure to maintain
these ratios would constitute an event of default, notwithstanding our ability
to meet our debt service obligations. As of September 30, 2000, we were in
compliance with our covenants.
CAPITAL COMMITMENTS
Our capital expenditures for the nine months ended September 30, 2000 were
$9.3 million and for the nine months ended September 30, 1999, were
$37.7 million. We expect our capital expenditures to total approximately
$12-$15 million for 2000. Our planned capital expenditures for 2000 are
primarily to upgrade switch and outside plant facilities.
In May 1998, we entered into a three year carrier service agreement with
Sprint for long distance capacity which provides for a minimum commitment of
$8.3 million, subject to upward adjustment depending on actual use. In
January 2000, we amended our agreement to reduce our total minimum commitment to
$7.4 million. Of this committment, $2.2 million remained outstanding at
September 30, 2000.
In June 1998, we entered into an agreement with MCI WorldCom to lease long
distance capacity for three years with an aggregate minimum commitment during
the term of the lease of $18 million, or $.5 million per month. In
December 1999, we amended our agreement to reduce our minimum monthly commitment
from $.5 million to $.4 million and our total minimum commitment to
$15.6 million, effective January 2000 through the end of the agreement. Of this
commitment, we estimate that $2.4 million remains outstanding as of
September 30, 2000.
Although we cannot provide any assurance, we believe that borrowings under
our RUS/RTB facility, financing previously provided by DCCLP, cash flows from
operations and certain shareholder assistance will be sufficient to satisfy our
current year expected operating expenses, capital expenditures, working capital
and debt service obligations. 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. We currently expect to pursue additional financing in
the near term. DCCLP is committed to assisting us in obtaining funds to support
our operations, as needed, if needed, in 2000. Sources of additional financing
may include commercial bank borrowings, vendor financing and the sale of equity
or debt securities. We cannot assure you that any such financing will be
available on acceptable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," ("SAB 101") on revenue
recognition presentation and disclosure in the financial statements.
Subsequently, the SEC released SAB 101A and SAB 101B which delayed the required
implementation date of SAB 101 to the fourth quarter of 2000. The Company
believes its existing revenue recognition policies and procedures are in
compliance with SAB 101 and, therefore, SAB 101's adoption will have no material
impact on the Company's consolidated financial position, results of operations
or cash flows.
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. These 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
19
<PAGE>
ability to satisfy the financial covenants of our existing debt instruments and
to raise additional capital; our ability to manage our rapid growth successfully
and to compete effectively in our 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 ours; our ability to
successfully market our services to current and new customers, interconnect with
ILECs, expand or replace our operational 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. We cannot assure that the future results will be achieved; actual
events or results may differ materially as a result of risks we face. 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
There has been no change in our assessment of quantitative and qualitative
disclosures about market risk since December 31, 1999.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently aware of any pending or threatened litigation against
us or our subsidiaries that could have a material adverse affect on our
financial condition, results of operations or cash flows. We are party to
routine filings and customary regulatory proceedings relating to our operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- ------------------------------------------------------------
<C> <S>
27 Financial Data Schedule for the Nine Months Ended September
30, 2000
</TABLE>
(b) Form 8-K filings
None.
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> <C>
LOGIX COMMUNICATIONS ENTERPRISES, INC.
By: /s/ CRAIG T. SHEETZ
-----------------------------------------
Craig T. Sheetz
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: November 13, 2000 (PRINCIPAL FINANCIAL OFFICER)
</TABLE>
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