10-Q 1 a2046033z10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-58693 ------------------------ LOGIX COMMUNICATIONS ENTERPRISES, INC. (Exact name of registrant as specified in its charter) OKLAHOMA 73-1533356 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3555 NW 58TH 73112 TENTH FLOOR (zip code) OKLAHOMA CITY, OKLAHOMA (Address of principal executive offices)

(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 / / As of April 25, 2001, there were 71,250,000 shares of the registrant's $.01 par value Class A Common Stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- LOGIX COMMUNICATIONS ENTERPRISES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS

1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated balance sheets. 2 LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 LOGIX COMMUNICATIONS ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (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 of Dobson Communications' shareholders. Logix is a 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: incumbent local exchange carrier ("ILEC") operations and integrated communications provider ("ICP") operations. As of December 31, 2000, the Company had operations in Kansas, 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 exchange, intrastate and interstate services, enterprise network, enhanced data, Internet and intranet services, private line, integration services and long-haul transport services. The Company currently provides these services primarily to customers in markets in Kansas, Missouri, Oklahoma 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 31.7% of the Company's revenue from its ILEC operations for the quarter ended March 31, 2001 and 2000, respectively, was from these two sources. 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. 5 The significant accounting policies followed in the preparation of the quarterly financial statements are the same as those disclosed in the 2000 Logix Communications Enterprises, Inc. Annual Report on Form 10-K. Reference is made herein to the "Notes to Consolidated Financial Statements" under Item 8 of the 2000 Form 10-K for additional disclosure. SEVERANCE COSTS As a result of the changes in executive officers and a reduction in force during 2000, the Company incurred approximately $2.6 million in severance costs for the quarter ended March 31, 2000. USE OF ESTIMATES The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. RECENTLY ADOPTED OR ISSUED PRONOUNCEMENTS The Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by Statements 137 and 138, was adopted by the Company on January 1, 2001. This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those financial instruments at fair value. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and its resulting designation. The adoption of this standard did not have a material effect on the Company's consolidated financial statements. In February 2001, the Financial Accounting Standards Board issued a revised exposure draft for a proposed Statement of Financial Accounting Standards entitled "Business Combinations and Intangible Assets-Accounting for Goodwill." The proposed Statement would prohibit the use of pooling of interests method of accounting for business combinations for transactions initiated after issuance of the final Statement. It would also eliminate amortization of goodwill acquired in a business combination and would establish a new method of testing goodwill for impairment. Under this new standard, goodwill would be reviewed for impairment when an event or series of events occur indicating that the goodwill might be impaired. Goodwill impairment losses would be aggregated and presented as a separate line item in the operating section of the income statement. If adopted, the proposed Statement would have a material effect on our consolidated financial statements by eliminating goodwill amortization from its income statement and from the calculations of net income per common share. 2. FINANCIAL CONDITION AND FUTURE PLANS: Prior to 2000, Logix had employed a strategy of rapid expansion in terms of markets served and products offered across the southwestern United States and other parts of the country. This strategy proved to be unprofitable. Additionally, the Company was reliant on long distance revenue for the majority of revenue during 1999. In the ICP business segment, the Company experienced higher than expected customer churn rates, reduced minutes of use and declines in long distance rates, which did not permit the Company to attain its profitability goals. Early in 2000, Logix changed this strategy to focus on a more concentrated geographic footprint in Oklahoma, Texas and a few markets in neighboring states, where the Company could offer local service more cost effectively. The emphasis of the Company changed to serving customers better and executing the fundamental tasks of the business 6 as efficiently as possible. During 2000, the Company disposed of unprofitable business lines, substantially reduced staffing levels to match the business needs, replaced most of the top management team members, aggressively reduced expenses, renegotiated contracts, reduced debt levels and disposed of assets that were not important to this strategy. At the same time, Logix refocused its sales efforts on its target market, which is small and medium size businesses, and, in particular, focused on growing the local component of the revenue stream, thereby reducing the emphasis on long distance revenue. The execution of the new strategy has resulted in improved performance for Logix. Local revenue has increased, operating expenses have been reduced, and earnings before interest expense, income taxes, depreciation and amortization, other income (expense) and extraordinary items ("Adjusted EBITDA") losses have decreased substantially from January 1, 2000 through March 31, 2001. However, the Company has not been able to generate net income and cash flow from operations that are sufficient to fund its current strategy. Presently, the Company estimates that it may require $40-$50 million in outside funding during 2001 to continue deploying its current strategy, however there can be no assurance that this funding will be available at all or, if available, on terms satisfactory to us, that this strategy will be successful, or that our estimated funding requirements will not change if our strategy is not successful. During 2000, Dobson CC Limited Partnership, or DCCLP, provided the Company substantial funds for operating, investing and financing activities through the purchase of preferred stock and the DCCLP senior loans. These advances totaled $157.9 million for the year ended December 31, 2000. Additionally, during the first quarter of 2001, DCCLP provided $6.0 million through additional senior loans and converted $2.0 million of accrued interest to senior loans. However, DCCLP is uncertain about its ability and willingness to continue to provide the required funding for 2001 and has made no commitment in this regard. Accordingly, there can be no assurance that this financing will be available on acceptable terms or at all. Additionally, the Company may seek to restructure the terms of some of its outstanding Senior Notes to reduce its cash requirements related to interest payments during 2001. If the company is unsuccessful in obtaining the required funding or securities restructuring, it expects that it may have to significantly revise its business and operating strategy, which may adversely affect the prospects for the business and its continuing operations. The Company's independent public accountants issued an opinion on our December 31, 2000 financial statements that included an explanatory paragraph expressing uncertainty about our ability to continue as a going concern. Additionally, the Company has been advised by its independent public accountants that, if this contingency has not been resolved prior to the completion of their audit of the Company's financial statements for the year ending December 31, 2001, their auditors report on those financial statements will be qualified as being subject to the ultimate outcome of that contingency. 3. REPORT OF BUSINESS SEGMENTS: The Company operates in two reportable segments: ILEC and ICP. These 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 described in the summary of significant accounting policies in Note 1. The Company evaluates and measures performance of each segment based on Adjusted EBITDA. 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 and income taxes to both segments. The segments do not 7 have significant non-cash items other than depreciation and amortization in reported profit or loss. A summary of the Company's operations by segment is as follows:

------------------------ (1) The intersegment eliminations were included to reconcile reportable segment activities to the Company's consolidated totals. (2) Included in interest expense is amortization expense of deferred financing costs and dividend expense for the Senior Exchangeable Preferred Stock. 4. 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 totaling $8.3 million, subject to upward adjustment. In January 2000, the Company amended its agreement to reduce its minimum commitment to $7.4 million. Of this commitment, $1.7 million remained at March 31, 2001. 5. SUBSEQUENT EVENTS: Subsequent to March 31, 2001, the Company incurred an additional $2.0 million of DCCLP senior loans. The proceeds were used for general corporate purposes. 9 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, Oklahoma City, St. Louis, San Antonio, 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 three months ended March 31, 2001, we provided our services to over 26,000 local and long distance customers, had 91,621 access lines equivalents and generated revenues of $26.1 million. REVENUE ICP OPERATIONS. Our ICP operation generates revenue from local exchange, intrastate and interstate services, enterprise network, enhanced data, Internet and intranet services, private line, integration services and long-haul transport services. As of March 31, 2001, our ICP operations served 78,152 access line equivalents compared to 57,355 access line equivalents as of March 31, 2000. This increase was mainly due to our growth and expansion into Kansas. We began offering local facilities-based ICP services in October 1997 and currently provide these services to customers in major markets in Kansas, Missouri, 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 have declined. We believe that this trend is likely to continue and may have a negative effect on our gross margins that may not be offset completely by savings from the decrease in our cost of service. Current industry statistics demonstrate that there is a significant turnover of customers within the 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. 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 and east of the Oklahoma City metropolitan area. As of March 31, 2001 our ILEC operations served 13,469 access line equivalents compared to 13,444 access line equivalents as of March 31, 2000. Our ILEC revenues consist of: - end user revenue, which includes charges for local service and enhanced services such as call waiting and call forwarding; 10 - 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 low 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:

The Telecommunications Act 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, termination and access services provided through ILECs and other telecommunications companies. We have deployed several digital switching platforms with local and long distance capability and we lease fiber trunking capacity from incumbent local exchange carriers and other ICPs to connect our switches with our transmission equipment collocated in ILEC central offices. 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." 11 Our SG&A includes all infrastructure costs such as selling, customer support, corporate administration, personnel, and network maintenance. Selling expenses include commissions for our sales program. We pay commissions to direct sales persons for new business generated with additional incentives for monthly recurring revenue contributions. As our customer base grows, and if we expand into new geographic markets, add new sales offices and facilities and enlarge our current product offerings, the cost of service and SG&A would be expected to increase. As we grow, over time we expect SG&A to decrease as a percentage of our revenues. 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. 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 MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 REVENUE. For the three months ended March 31, 2001, total revenue decreased $.9 million, or 3.2% to $26.1 million from $27.0 million in the corresponding period in 2000. The following table sets forth the segments of our revenue for the three months ended March 31:

ICP. Our ICP revenue decreased $1.8 million, or 7.5%, to $21.9 million for the three months ended March 31, 2001, from $23.7 million for the corresponding period in 2000. We experienced a decline of $4.2 million in our long distance revenue. This was primarily attributable to reduced long distance rates and reduced minutes of use from customer churn and changing usage patterns. Also, we had a $1.5 million decrease in our customer premise equipment, or CPE, revenue due to the disposition of our CPE division in July 2000. These decreases were partially offset by an increase in local revenue of $1.3 million, which was due to access line growth. Our ICP segment served 78,152 access lines as of March 31, 2001, compared to 57,355 access lines as of March 31, 2000. In addition, we reduced the amount of credits issued due to billing errors by approximately $2.6 million for the three months ended March 31, 2001 compared to the same period a year ago. This is partially attributable to a billing system conversion that was completed in December 2000. ILEC. ILEC revenue increased $.9 million, or 27.3%, to $4.2 million for the three months ended March 31, 2001, from $3.3 million for the three months ended March 31, 2000. The reduced revenue in the first quarter of 2000 was caused by one-time charges to revenue of $.7 million primarily relating to the cumulative impact of retroactively applied carrier access billing re-rates and the effect of a lowered rate base for support fund revenue. Excluding these one-time charges, revenue remained consistent from period to period with access lines of 13,469 as of March 31, 2001, and 13,444 as of March 31, 2000. COST OF SERVICE. For the three months ended March 31, 2001, the total cost of service decreased $5.0 million, or 19.8%, to $19.9 million from $24.9 million in the corresponding period in 2000. These costs primarily consist of costs associated with wholesale charges from third party service providers relating to our ICP segment. The decrease is primarily due to decreased rates relating to long distance 12 and the sale of our CPE division. In addition, we experienced decreases in our operating salary and benefit expenses due to reductions in force. The following table sets forth the segments of the Company's cost of service for the three months ended March 31:

SELLING, GENERAL AND ADMINISTRATIVE. For the three months ended March 31, 2001, our SG&A costs decreased $3.7 million, or 23.6%, to $12.0 million compared to $15.7 million for the corresponding period in 2000. The decrease is primarily due to reduced salary and benefit expenses and related operating expenses due reductions in force and the sale of our CPE division. SEVERANCE COSTS. During the three months ended March 31, 2000, we incurred $2.6 million of severance costs as a result of changes in executive officers and a reduction in force within the Company. DEPRECIATION AND AMORTIZATION EXPENSE. For the three months ended March 31, 2001, depreciation and amortization expense increased $.1 million to $6.3 million from $6.2 million for the three months ended March 31, 2000. INTEREST EXPENSE. Interest expense for the three months ended March 31, 2001 decreased $9.2 million, to $5.3 million from $14.5 million for the corresponding period in 2000. The decrease related to a decrease in our 12.25% senior notes due 2008 outstanding due to the repurchase of $263.1 million of senior notes during the third quarter of 2000. In addition, we converted $90 million of DCCLP senior loans to preferred stock on March 30, 2000. INTEREST INCOME. Interest income decreased $.8 million to $.2 million for the three months ended March 31, 2001 from $1.0 million for the three months ended March 31, 2000. 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 senior notes. The decrease in funds held in escrow was related to interest payments made during the year and the repurchase of senior notes. See "--Liquidity and Capital Resources." LIQUIDITY AND CAPITAL RESOURCES FINANCIAL CONDITION AND FUTURE PLANS Prior to 2000, we had employed a strategy of rapid expansion in terms of markets served and products offered across the southwestern United States and other parts of the country. This strategy proved to be unprofitable. Additionally, we were reliant on long distance revenue for the majority of revenue during 1999. In our ICP business segment, we experienced higher than expected customer churn rates, reduced minutes of use and declines in long distance rates, which did not permit us to attain our profitability goals. Early in 2000, we changed this strategy to focus on a more concentrated geographic footprint in Oklahoma, Texas and a few markets in neighboring states, where we could offer local service more cost effectively. Our emphasis changed to serving customers better and executing the fundamental tasks of the business as efficiently as possible. During 2000, we disposed of unprofitable business lines, substantially reduced staffing levels to match the business needs, replaced most of the top management team members, aggressively reduced expenses, renegotiated contracts, reduced debt levels and disposed of assets that were not important to this strategy. At the same time, we refocused our sales efforts on our target market, which is small and medium size businesses, and, in particular, 13 focused on growing the local component of the revenue stream, thereby reducing the emphasis on long distance revenue. The execution of the new strategy has resulted in our improved performance. Local revenue has increased, operating expenses have been reduced and Adjusted EBITDA losses have decreased substantially from January 1, 2000 through March 31, 2001. However, we have not been able to generate net income and cash flow from operations that are sufficient to fund our current strategy. Presently, we estimate that we may require $40 to $50 million in outside funding during 2001 to continue deploying our current strategy; however, there can be no assurance that this funding will be available at all or, if available, on terms satisfactory to us, that this strategy will be successful, or that our estimated funding requirements will not change if our strategy is not successful. During 2000, Dobson CC Limited Partnership, or DCCLP provided us substantial funds for operating, investing and financing activities through the purchase of preferred stock and the DCCLP senior loans. These advances totaled $157.9 million for the year ended December 31, 2000. Additionally, during the first quarter of 2001, DCCLP provided $6.0 million through additional senior loans and converted $2.0 million of accrued interest to senior loans. However, DCCLP is uncertain about its ability and willingness to continue to provide the required funding for 2001 and has made no commitment in this regard. Accordingly, there can be no assurance that financing will be available on acceptable terms or at all. Additionally, we may seek to restructure the terms of our outstanding senior notes to reduce our cash requirements related to interest payments during 2001. If we are unsuccessful in obtaining the required funding or securities restructuring, we expect that we may have to significantly revise our business and operating strategy, which may adversely affect the prospects for the business and our continuing operations. The Company's independent public accountants issued an opinion on our December 31, 2000 financial statements that included an explanatory paragraph expressing uncertainty about our ability to continue as a going concern. Additionally, the Company has been advised by its independent public accountants that, if this contingency has not been resolved prior to the completion of their audit of the Company's financial statements for the year ending December 31, 2001, their auditors report on those financial statements will be qualified as being subject to the ultimate outcome of that contingency. 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 have experienced and expect to continue to experience negative cash flows and losses before income taxes and Adjusted EBITDA losses at least through 2001. Additionally, subsequent to June 15, 2001, the last date that interest on the senior notes will be paid by the funds held in escrow, our cash flow from operations may not be sufficient to provide us with adequate funds to pay the interest required by our indebtedness. To the extent that our internally generated funds are insufficient to meet these requirements, we will need to obtain funds from other sources. In addition, our ILEC segment received support revenue from federal and state agencies that accounted for approximately 29.2% and 31.7% of our ILEC revenue for the three months ended March 31, 2001 and 2000, 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 $4.7 million and $19.6 million for the three months ended March 31, 2001 and 2000, respectively. 14 Our net cash used in investing activities was $1.1 million and $2.4 million for the three months ended March 31, 2001 and 2000, respectively. Investing activities for the first quarter of 2001 primarily related to capital expenditures and an increase in affiliate receivables. During 2000, our first quarter investing activities primarily related to capital expenditures offset by a decrease in affiliate receivables. Our net cash provided by financing activities was $5.8 million and $33.4 million for the three months ended March 31, 2001 and 2000, respectively. The net cash provided by financing activities during the first quarter of 2001 primarily related to the execution of an additional $6.0 million of DCCLP senior loans. During 2000, our first quarter financing activities related to the increase in the DCCLP credit facility and issuance of preferred stock (see Capital Resources). This increase was offset by the repayment of the $50 million senior bank credit facility. CAPITAL RESOURCES On March 30, 2000, we issued to DCCLP, 90,000 shares of 15% Class A Senior Exchangeable Preferred Stock manditorily redeemable in 2010 at a redemption price of $1,000 per share. The net proceeds from the sale of the preferred stock were used to repay our senior bank 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 bank credit facility. This appears as an extraordinary item in our statement of operations for 2000. 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 our 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 purchase price of $81.6 million. Funding for the senior notes repurchased and operating capital was provided by $65.5 million of DCCLP senior loans due 2004, and the release of $30.8 million held in escrow as collateral for the payment of interest on our senior notes. The DCCLP senior loans bear interest equal to the prime rate plus two percent (10.0% at March 31, 2001), interest payable quarterly through December 31, 2001, and we are obligated to pay principal and interest quarterly beginning March 31, 2002 through December 31, 2004. We realized an extraordinary pre-tax gain of $181.5 million as a result of our 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 are shown net of tax, which resulted in the recognition of a tax benefit associated with losses from continuing operations for the year ended December 31, 2000. As of March 31, 2001, 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 indenture governing the senior notes contains restrictive covenants that place limitations on our various activities to include indebtedness, asset sales, liens and transactions with stockholders and affiliates. As of March 31, 2001, we were in compliance with our restrictive covenants. When we issued the senior notes in 1998, we used $122 million of the proceeds to purchase securities that were pledged to secure the first six semi-annual, scheduled interest payments on our senior notes. The pledged securities have decreased as a result of our repurchase of senior notes. The restricted cash and investment principal balance at March 31, 2001, relating to these purchased securities, was $5.4 million, and will be utilized to fund our June 15, 2001 interest payment on the senior notes. We have funded our ILEC operations through Rural Utilities Service/Rural Telephone Bank, or RUS/RTB, loans. The RUS/RTB existing loans have scheduled maturities between 2001 and 2028. In 15 October 1998, RUS/RTB approved an additional 17 year loan facility that will provide us with $16.9 million in loan funds. As of March 31, 2001, we had borrowed $12.0 million under this additional facility. Under the RUS/RTB 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 March 31, 2001, we were in compliance with our covenants. As of March 31, 2001, we had $202.9 million of indebtedness and a stockholders' deficit of $82.2 million. Our indebtedness at that date included $86.9 million of senior notes, $36.6 million of secured indebtedness under our RUS/RTB facility and $79.4 million from the DCCLP senior loans. CAPITAL COMMITMENTS Our capital expenditures for the three months ended March 31, 2001 and 2000 were $.9 million and $2.5 million, respectively. We expect our capital expenditures to total approximately $10-$15 million for 2001. Our planned expenditures for 2001 will be primarily for customer equipment and to upgrade switches 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 commitment, $1.7 million remained at March 31, 2001. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 2001, the Financial Accounting Standards Board issued a revised exposure draft for a proposed Statement of Financial Accounting Standards entitled "Business Combinations and Intangible Assets-Accounting for Goodwill." The proposed Statement would prohibit the use of pooling of interests method of accounting for business combinations for transactions initiated after issuance of the final Statement. It would also eliminate amortization of goodwill acquired in a business combination and would establish a new method of testing goodwill for impairment. Under this new standard, goodwill would be reviewed for impairment when an event or series of events occur indicating that the goodwill might be impaired. Goodwill impairment losses would be aggregated and presented as a separate line item in the operating section of the income statement. If adopted, the proposed Statement would have a material effect on our consolidated financial statements by eliminating goodwill amortization from its income statement and from the calculations of net income per common share. FORWARD-LOOKING STATEMENTS The description of our plans set forth herein, including our plans and strategies, our financing requirements, 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 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 16 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 financing strategy, 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, 2000. 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not currently aware of any pending of 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 18 INDEX TO EXHIBITS

-------------------------- (1) Previously filed as an exhibit to the Company's Registration Statement on Form S-4 (Registration No. 333-58693), as the exhibit number indicated in brackets, and incorporated herein by reference; (2) Filed as an exhibit to the Registration Statement on Form S-4 (Registration No. 333-23769), as the exhibit number indicated in brackets, by Dobson Communications Corporation, the Registrant's former parent, and incorporated herein by reference; (3) Filed as an exhibit to Current Report on Form 8-K on June 30, 1998, of Dobson Communications Corporation, the Registrant's former parent (File No. 333-23769), as the exhibit number indicated in brackets, and incorporated herein by reference; (4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1998, of Dobson Communications Corporation, the Registrant's former parent, as the exhibit number indicated in brackets, and incorporated herein by reference; (5) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, as the exhibit number indicated in brackets, and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, as the exhibit number indicated in brackets, and incorporated herein by reference; (7) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as the exhibit number indicated in brackets, and incorporated herein by reference; (8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as the exhibit number indicated in brackets, and incorporated herein by reference; 20 (9) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000, as the exhibit number indicated in brackets, and incorporated herein by reference; (10) Filed herewith. * Management contract or compensatory plan or arrangement. (b) Form 8-K filings None. 21 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. LOGIX COMMUNICATIONS ENTERPRISES, INC. By: /s/ LEIGH ANN IHRIG ----------------------------------------- Leigh Ann Ihrig VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)

Date: May 11, 2001 22

LOGIX COMMUNICATIONS ENTERPRISES INC 10-Q