<PAGE>
As filed with the Securities and Exchange Commission on October 20, 1997.
Registration No. 333-35227
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ELECTRIC LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4825 93-1035711
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation Classification Code Number) Number)
or organization)
</TABLE>
8100 N.E. PARKWAY DRIVE, SUITE 150, VANCOUVER, WASHINGTON 98662
(360) 892-1000
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
ROBERT J. DESANTIS
ELECTRIC LIGHTWAVE, INC.
8100 N.E. PARKWAY DRIVE, SUITE 150
VANCOUVER, WASHINGTON 98662
(360) 892-1000
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
COPIES TO:
JONATHAN H. CHURCHILL, ESQ. VINCENT PAGANO, ESQ.
WINTHROP, STIMSON, PUTNAM & ROBERTS SIMPSON THACHER & BARTLETT
ONE BATTERY PARK PLAZA 425 LEXINGTON AVENUE
NEW YORK, NY 10004 NEW YORK, NY 10017
(212) 858-1000 (212) 455-2000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of each class Proposed maximum
of securities to be maximum offering aggregate offering Amount of
registered Amount to be registered price per unit price registration fee
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Class A $200,000,000* $60,607**
===================================================================================================================
</TABLE>
_______________________
* Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457.
** Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 20, 1997
P R O S P E C T U S [LOGO]
[ ] SHARES
ELECTRIC LIGHTWAVE, INC.
CLASS A COMMON STOCK
___________________
All of the shares of Class A Common Stock, par value $___ per share (the
"Class A Common Stock"), offered hereby (the "Offering") are being sold by
Electric Lightwave, Inc. ("ELI" or the "Company"), a wholly owned subsidiary of
Citizens Utilities Company. Of the ____ shares of Class A Common Stock being
offered hereby, _____ shares are being offered initially in the United States
and Canada (the "U.S. Offering") by the U.S. Underwriters (as defined herein)
and ______ shares are being offered initially outside of the United States and
Canada (the "International Offering") in a concurrent offering by the
International Managers (as defined herein and, together with the U.S.
Underwriters, the "Underwriters"). Such offerings are collectively referred to
herein as the "Offering." See "Underwriting."
The Company has two classes of common stock: Class A Common Stock and
Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and,
collectively with the Class A Common Stock, the "Common Stock"). The shares of
Common Stock are substantially identical, except that holders of Class A Common
Stock are entitled to one vote per share and holders of Class B Common Stock are
entitled to 10 votes per share on all matters submitted to a vote of
stockholders. Each share of Class B Common Stock is exchangeable at the option
of the holder into one share of Class A Common Stock. Upon completion of the
Offering, Citizens, the holder of the Class B Common Stock, will have
approximately ____% of the combined voting power of the outstanding Common Stock
(__% if the Underwriters' overallotment options are exercised in full) and will
have the ability to control all matters requiring stockholder approval,
including the election of directors. See "Description of Capital Stock" and
"Risk Factors--Control by Citizens."
Prior to the Offering, there has been no public market for the Class A
Common Stock. It is currently anticipated that the initial public offering
price will be between $_____ and $_____ per share. The initial public offering
price and the underwriting discount and commission per share are identical for
each of the U.S. and International Offerings. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company will apply for listing the Class A Common Stock on the
Nasdaq National Market under the symbol "ELIX."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Per Share $ $ $
- ----------------------------------------------------------------------------------------------------
Total (3) $ $ $
====================================================================================================
</TABLE>
(1) The Company and Citizens have agreed to indemnify the U.S. Underwriters and
International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $[ ].
(3) The Company has granted the U.S. Underwriters and International Managers
options exercisable within 30 days after the date hereof to purchase up to
[ ] and [ ] additional shares of Class A Common Stock,
respectively, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Commissions and Proceeds to Company will be $[ ], $[ ] and
$[ ], respectively. See "Underwriting."
------------------------------
The shares of Class A Common Stock offered hereby are being offered by the
U.S. Underwriters and International Managers named herein, subject to prior
sale, when, as and if accepted by the U.S. Underwriters and International
Managers, subject to approval of certain legal matters by counsel for the U.S.
Underwriters and International Managers and subject to certain conditions. The
U.S. Underwriters and International Managers reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made at the
offices of Lehman Brothers Inc. in New York, New York on or about [ ],
1997 against payment therefor in immediately available funds.
------------------------------
U.S. Underwriters offering shares in the United States
LEHMAN BROTHERS
International Managers offering shares outside the United States
LEHMAN BROTHERS
[ ], 1997.
<PAGE>
[Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.]
[MAP]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF CLASS A COMMON STOCK
FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE
CLASS A COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE CLASS A
COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. "ELI" and the "Company" refer to Electric
Lightwave, Inc. Unless otherwise indicated, the information set forth in this
Prospectus does not give effect to the exercise of the Underwriters' over-
allotment options. See "Glossary" for definitions of certain terms used in this
Prospectus.
THE COMPANY
ELI is a full-service, facilities-based competitive local exchange carrier
("CLEC") providing a broad range of telecommunications services in five major
market clusters in the western United States. The Company provides state-of-
the-art voice and data communications services to retail customers, primarily
large- and medium-sized communications-intensive businesses, and wholesale
customers, primarily telecommunications service providers. The Company operates
high-quality, extensive digital fiber optic networks based on a switched
broadband platform in each of its five market clusters (comprising six
metropolitan statistical areas ("MSAs"), including 59 municipalities) with
31,060 local access line equivalents, 1,728 route miles and 104,718 fiber miles
installed and 521 on-net buildings connected as of June 30, 1997. The Company
has interconnected its market clusters with facilities-based owned and leased
long-haul fiber optic networks.
The Company currently provides services in five markets: Portland, Oregon;
Seattle, Washington; Salt Lake City, Utah; Sacramento, California; and Phoenix,
Arizona ("hub cities") and their respective surrounding areas (together with the
hub cities, "market clusters" or "clusters"). The Company's clusters include an
extensive fiber optic network. The Company currently provides switched
services, including local dial tone, utilizing five Nortel DMS 500 switches, in
all of its market clusters except Phoenix, where the Company expects to initiate
local dial tone service upon installing an additional switch in the first half
of 1998. The Company's clusters are also served by its extensive frame relay
network, which is comprised of 18 state-of-the-art switches and 30 points-of-
presence ("POPs") in 26 western U.S. cities. The Company has also developed an
Internet backbone network providing Internet connectivity in each of its markets
which includes access on a redundant basis to the three largest Internet service
providers in the United States. The Company's goal is to add or expand its
market presence from six to 14 MSAs and from two to five long-haul networks by
the end of 1998.
The Company offers an extensive portfolio of products and services in four
categories: local telephone, long distance, data and video, and network access.
These products and services include: Local dial tone, with voicemail and
enhanced features; long distance with calling cards; advanced data services,
including frame relay, international frame relay and high-speed Internet access;
video conferencing and dialable wideband services; LAN-to-LAN services with very
high transport speeds; ISDN; and point-to-point communications and dedicated DS-
1s and DS-3s. The Company expects to provide Asynchronous Transfer Mode ("ATM")
services during 1998. The Company's data network expertise allows it to provide
a broader range of telecommunications services to customers, which helps to
maximize the amount of telecommunications traffic on its network.
3
<PAGE>
Deregulation in the telecommunications industry has created an enormous
market opportunity for ELI. Based on Federal Communications Commission ("FCC")
data, the Company estimates that in 1996 total revenues from local and long
distance telecommunications services were approximately $183 billion, of which
approximately $107 billion were derived from business telecommunications
services. The Company estimates that based on industry sources, the total
addressable business telecommunications services market in its current five
market clusters (based on access lines) was approximately $4.3 billion in 1997.
The Company believes that the market in its clusters will grow over the next
decade because of the favorable demographics and an increase in use of
telecommunications services and that its share of this market will increase as a
result of the passage of the Telecommunications Act of 1996 (the "1996 Act"),
the actions of various state commissions and other FCC rulings, which
collectively have essentially opened up the market to competition.
Since its inception, ELI believes that it has been at the forefront of
industry efforts to introduce competition to the local telecommunications
markets. As such, ELI believes that it has achieved significant milestones in
the CLEC industry and is well positioned to benefit from the opening of the
local telecommunications market. Before the passage of the 1996 Act, the
Company pursued regulatory and legislative reforms and consummated certain
interconnection agreements with incumbent local exchange carriers ("ILECs") that
in its view allowed the Company to offer economical and operationally efficient
local exchange services. The Company believes that it was early to market in
Portland, Seattle, Salt Lake City and Sacramento and believes it is the leading
CLEC in Portland, Seattle and Salt Lake City. The Company believes that it was
the first CLEC to receive authority from a state regulatory authority in a state
west of the Mississippi River to operate and to offer a full switch-based
product portfolio.
Since 1990, the Company has been a subsidiary of Citizens Utilities Company
(which, together with its subsidiaries, is referred to herein as "Citizens").
Citizens is a publicly-held communications and public services company which
provides, either directly or through subsidiaries, telecommunications, electric
distribution, natural gas transmission and distribution, and water and
wastewater services to over 1.6 million customer connections in 20 states.
Citizens is one of the nation's leading independent communications companies and
operates an integrated distribution network over which it provides local, long
distance, paging, cellular, network sales and other communications products and
services. At June 30, 1997, Citizens' consolidated assets totaled $4.4 billion
and shareholders' equity totaled $1.6 billion. Citizens' consolidated revenues
for the twelve months ended June 30, 1997 totaled $1.3 billion. The Company has
historically been funded by capital contributions and advances from Citizens and
through a lease agreement guaranteed by Citizens. See "Capitalization" and
"Relationship with Citizens."
BUSINESS STRATEGY
Guided by the business strategy adopted in 1990, the Company has become a
leading facilities-based, full-service CLEC. The key elements of this strategy
include:
. TARGET ATTRACTIVE REGIONAL MARKETS. The Company's focus is on MSAs in the
western United States that the Company believes have few CLEC competitors, a
relatively high proportion of communications-dependent businesses and the
prospect of population and economic growth above the national average. Growth
in these regions has been fueled to a large degree by the computer, software,
semiconductor and aerospace industries and other
4
<PAGE>
telecommunications-intensive businesses such as financial services and
telemarketing call centers. The Company's policy has been and will continue to
be to establish a new market cluster where it expects to become the leading
facilities-based, full-service CLEC in such market in competition with the ILEC.
Due to its superior customer service, advanced network technologies and the
breadth and quality of its networks, the Company believes that it has an
opportunity to capture a significant share of the local market for
communications in its target regions in competition with U S WEST
Communications, Inc. ("U S WEST") and PacBell, which are the ILECs in its target
regions.
. DEVELOP MARKET CLUSTERS. The Company builds facilities and offers services in
market clusters which exist in and around a hub city in the selected MSA. Once
a potential market is identified, the Company establishes a network in the hub
city and then expands the network to adjacent cities and communities of
interest. Through the use of this strategy, the Company is able to leverage and
extend the depth of its management resources, communications network, switch
assets and product portfolio and reduce its dependence on the ILEC. The Company
realizes economies of scale in terms of network build out, switch deployment,
provisioning and servicing from its cluster strategy. Clustering also enables
the Company to (i) optimize its networks' switching capacity through the
ability to place switches anywhere in the cluster, (ii) cost-effectively offer
services to smaller markets adjacent to its existing networks and in which the
Company is less likely to face strong competition from other CLECs, and (iii)
achieve increased gross margins and improved network reliability due to higher
levels of on-net traffic. The Company believes communications traffic is heavy
between a metropolitan area and its outlying markets and its cluster strategy
takes advantage of this by offering facilities-based, end-to-end service
offerings that cover these broad geographic areas.
. INTERCONNECT MARKET CLUSTERS. The Company's strategy is to interconnect the
Company's major market clusters with facilities-based broadband, long-haul fiber
optic networks. Interconnecting its market clusters enables the Company to lower
costs and enhance its revenue potential by carrying increasing amounts of long
distance, frame relay, Internet and point-to-point traffic on its own
facilities. By carrying traffic on its own facilities, the Company is able to
improve the utilization of its network facilities and avoid leased facilities
charges and certain interconnection costs.
. MAXIMIZE ON-NET TRAFFIC BY PROVIDING FACILITIES-BASED SERVICES. The Company
has constructed extensive voice, frame relay, Internet backbone and
interconnecting long-haul networks, and each of the Company's operating clusters
includes an extensive fiber optic network backbone. These extensive networks
are a key aspect of the Company's strategy to maximize the services provided to
customers on the Company's network ("onnet"). Approximately half of the
Company's services provided to customers are currently on-net and the Company's
strategy is to increase this percentage over time. Maximizing the volume of on-
net traffic allows the Company to (i) improve customer loyalty and minimize
churn; (ii) increase network reliability; (iii) provide a wider range of
services; (iv) increase process control and thereby strengthen customer service
through end-to-end management; and (v) reduce its reliance on the ILEC for
technologically up-to-date services which are essential for the Company's
enhanced services. The Company believes that greater on-net traffic will also
increase operating margins by increasing utilization of capacity inherent in the
Company's network.
5
<PAGE>
. PENETRATE MARKETS BY LEVERAGING DATA EXPERTISE. The Company has undertaken a
major expansion of its networks and products to satisfy the growing demand for
enhanced network services, including frame relay networking services and
Internet access. As a result, the Company had 18 frame relay switches as of
June 30, 1997 servicing customer locations. Enhanced network services, which
are currently provided primarily on the Company's frame relay network, are
specialized interchange services offered by the Company for customers that need
to transport large amounts of data among multiple locations. ELI's relationship
with certain carriers allows the Company to terminate traffic both nationally
and internationally utilizing other companies' networks and to provide a flow of
traffic into the Company's networks. In addition, to further increase efficient
access to a greater customer base, ELI established approximately 30 POPs which
interconnect their frame relay networks to those of US WEST, PacBell and other
carriers.
. ESTABLISH STRATEGIC RELATIONSHIPS WITH UTILITY COMPANIES. A strategy of the
Company has been to form strategic relationships with utility companies that
enable it to (i) utilize existing rights-of-way and fiber optic facilities, (ii)
leverage their construction expertise and local permitting experience and (iii)
have access to capital in order for ELI to extend its network infrastructure
more quickly and economically. The Company's strategic alliances include
agreements for the utilization of existing excess facilities and the
construction of long-haul networks which link the Portland and Seattle clusters
and which will link Portland and Spokane, Washington and Portland and Eugene,
Oregon. Another agreement provides for a fiber optic network in the Phoenix
metropolitan area. These relationships allow the Company to achieve economies
of scale and scope by expanding its existing markets rapidly and cost-
effectively and enabling the Company to concentrate its efforts on sales and
marketing.
. CONTINUE ITS EFFECTIVE DIRECT SALES AND SUPERIOR CUSTOMER SERVICE. ELI has
built a highly motivated and experienced direct sales force and customer service
organization that is designed to establish a direct and personal relationship
with its customers. The Company offers its services in custom combinations, and
utilizes a consultative sales approach that provides customers a single point of
contract at the Company and an opportunity to work with the Company to design
innovative, turn-key solutions and new product applications which allow them to
take advantage of the broad array of services offered. Consistent with its
product offerings, the Company utilizes a three-pronged sales approach comprised
of direct retail, direct wholesale and agents. Salespeople are given
incentives through a commission structure which targets 50% of a salesperson's
compensation to be based on performance. A sales account manager is
responsible for managing each customer's account and staying in constant contact
with the customer to satisfy that customer's specific telecommunications needs.
Sales account managers utilize a vertical sales strategy with the goal of
selling additional value-added, high margin services to existing customers. The
Company believes that combining the consultative sales strategy with the
vertical sales strategy will enable it to achieve higher margins on each
account. The Company views its commitment to customer satisfaction as a key
success factor and is developing a superior customer service system which will
automate order processing, including order placement, design, provisioning and
billing, for both retail and wholesale customers. This strategy ensures that
the Company's processes are aligned with customer needs and satisfaction.
6
<PAGE>
The Company's principal executive offices are located at 8100 NE Parkway
Drive, Suite 150, Vancouver, Washington 98662 and its phone number is (360) 892-
1000.
See "Risk Factors" beginning on page 10 for a discussion of certain risks
relevant to an investment in the Common Stock.
7
<PAGE>
THE OFFERING
Class A Common Stock Offered: [ ] shares ([ ] shares in the U.S.
Offering and [ ] shares in the
International Offering) (assuming over-allotment
options not exercised)
Common Stock to be outstanding
after the Offering:
Class A Common Stock........ [ ] shares
Class B Common Stock........ [_________] shares
Total.................... [ ] shares
Use of Proceeds............... The net proceeds of the Offering are estimated
to be approximately $[ ] million,
after deducting underwriting discounts and
commissions and the estimated offering expenses
payable by the Company. The Company intends to
use such proceeds to fund its operating and
capital expenditure requirements. See "Use of
Proceeds."
Voting Rights................. Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common
Stock are entitled to 10 votes per share on all
matters submitted to a vote of stockholders. The
holders of the Class A Common Stock and the Class
B Common Stock vote together as a single class on
all matters submitted to a vote of stockholders,
except as otherwise required by law. Upon
completion of the Offering, Citizens, the holder
of the Class B Common Stock, will have
approximately [ ]% of the combined voting
power of the Company's outstanding Common Stock
(__% if the Underwriters' overallotment options
are exercised in full) and will have the ability
to control all matters requiring stockholder
approval, including the election of directors.
See "Risk Factors--Control by Citizens" and
"Description of Capital Stock--Common Stock."
Exchange...................... Each share of Class B Common Stock is
exchangeable at the option of the holder into one
share of Class A Common Stock. See "Description
of Capital Stock--Common Stock-Exchange."
Listing....................... The Nasdaq National Market under the symbol
"ELIX"
8
<PAGE>
SUMMARY FINANCIAL AND OTHER OPERATING DATA
The following summary Statement of Operations and Balance Sheet Data
for the years ended and as of December 31, 1994, 1995, and 1996 have been
derived from the Company's Financial Statements and related notes thereto
included elsewhere in this Prospectus, which Financial Statements have been
audited by KPMG Peat Marwick LLP, independent Certified Public Accountants. The
summary Statement of Operations and Balance Sheet Data for the six months ended
June 30, 1996 and 1997 and as of June 30, 1997 have been derived from the
Company's unaudited Financial Statements and related notes thereto included
elsewhere in this Prospectus, and in the opinion of management include all
adjustments necessary for a fair presentation of the results of operations and
financial condition of the Company for and as of such periods. The results of
operations for interim periods are not necessarily indicative of a full year's
operations. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's Financial Statements and related notes thereto and the other financial
data contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
---------------------------------- ----------------------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
($ in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 8,152 $ 15,660 $ 31,309 $ 13,374 $ 24,765
Operating expenses:
Network access expenses 6,155 8,728 24,081 9,527 15,206
Sales and marketing expenses 4,534 5,704 8,462 3,940 6,271
Depreciation and amortization 2,476 7,064 7,192 3,453 5,603
Other operating expenses 4,528 14,114 20,957 7,069 17,499
-------- -------- --------- -------- --------
Total operating expenses 17,693 35,610 60,692 23,989 44,579
-------- -------- --------- -------- --------
Operating loss (9,541) (19,950) (29,383) (10,615) (19,814)
Interest expense 873 372 - - 302
-------- -------- --------- -------- --------
Net loss $(10,414) $(20,322) $ (29,383) $(10,615) $(20,116)
======== ======== ========= ======== ========
Pro forma net loss(1) $ $ $
========= ======== ========
Pro forma net loss per share(2) $ $ $
========= ======== ========
<CAPTION>
As at December 31, As at Pro forma as at
--------------------------------
1994 1995 1996 June 30, 1997 June 30, 1997(3)
-------- -------- --------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency) $ (9,934) $(17,897) $ (9,940) $(19,856)
Total assets 110,691 128,901 195,656 233,835
Long-term debt and capital lease obligations 6,565 - - 10,664
Due to Citizens 35,109 64,941 155,395 194,669
Shareholder's equity (deficiency) 55,991 38,669 9,286 (10,830)
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------------
1994 1995 1996 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
OPERATING DATA
EBIDTA(4) $ (7,065) $(12,886) $ (22,191) $(14,211)
Cash flows used for operating activities (4,097) (1,570) (28, 893) (4,779)
Cash flows used for investing activities (60,774) (16,129) (59,169) (33,595)
Cash flows provided by financing activities 64,907 17,751 88,530 38,872
<CAPTION>
As at December 31, As at
--------------------------------
1994 1995 1996 June 30, 1997
-------- -------- --------- -------------------
<S> <C> <C> <C> <C>
OTHER DATA
Property, plant & equipment-owned $108,549 $127,297 $ 189,334 $235,953
-under lease(5) - $ 36,858 $ 57,279 $ 87,425
-Total $108,549 $164,155 $ 246,613 $323,378
Market clusters 5 5 5 5
Route miles(6) 601 780 1,490 1,728
Fiber miles(6) 37,504 52,013 96,609 104,718
Buildings connected 191 282 454 521
Switches installed:
Voice 2 2 5 5
Frame relay 2 5 15 18
Total switches installed 4 7 20 23
Employees 127 225 402 486
</TABLE>
__________________________
(1) The pro forma net loss represents the historical net loss as adjusted for
the revised administrative services fees, guarantee fee, and interest to be
charged on the long-term debt due to Citizens (see Note 6 of Notes to
Financial Statements) as if such fees and interest rate were effective
January 1, 1996.
(2) The pro forma net loss per share has been computed on the basis described
in Note 2(i) of Notes to Financial Statements.
(3) The pro forma balance sheet data gives effect to the contribution of a
certain amount of due to Citizens to additional paid-in capital as
discussed in Note 5 of Notes to Financial Statements, and gives effect to
the issuance of the shares of Class A Common Stock offered hereby.
(4) EBIDTA consists of Earnings Before Interest, Income Taxes, Depreciation and
Amortization. EBIDTA is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance.
EBIDTA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity. See the Company's Financial Statements included
elsewhere in this Prospectus.
(5) Facilities under an operating lease agreement under which the Company has
the option to purchase the facilities at the end of the lease term. See
Note 7 of Notes to Financial Statements.
(6) Route miles and Fiber miles also include those to which the Company has
exclusive use pursuant to license and lease arrangements (See "Business--
Long-Haul Networks")
9
<PAGE>
RISK FACTORS
Prior to purchasing any shares of Class A Common Stock offered hereby,
prospective investors should consider carefully the following factors in
addition to the other information contained in this Prospectus.
NEGATIVE CASH FLOW AND OPERATING LOSSES
The capital expenditures of ELI associated with the installation,
development and expansion of its existing and new telecommunications networks
are substantial, and a significant portion of these expenditures generally are
incurred before any revenues are realized. These expenditures, together with
associated initial operating expenses, result in negative cash flow and
operating losses until an adequate customer base and revenue stream for these
networks have been established. The Company expects to incur net losses for the
foreseeable future as it expands significant amounts on sales, marketing,
customer service, engineering and corporate personnel as it continues to
install, develop and expand its existing and new telecommunications networks.
There can be no assurance that an adequate revenue base will be established in
each of the Company's clusters or that the Company will achieve or sustain
profitability or generate sufficient positive cash flow to fund its operating
and capital requirements and/or service its debt obligations. If the Company is
unable to establish an adequate revenue base in each of its clusters or does not
achieve or sustain profitability or generate sufficient positive cash flow to
fund its operating and capital requirements and/or service its debt obligations,
it may be forced to change its strategic plan and consider alternatives. The
alternatives could include the sale of some or all of ELI's facilities, a
strategic alliance with another telecommunications or utilities company, a
restructuring with or without a new financial partner or with Citizens, or the
failure to continue as a growing concern. The consequences to the Company and
its investors could be materially adverse.
SIGNIFICANT CAPITAL EXPENDITURES
The development and expansion of the Company's existing and new networks
and services will require significant additional capital expenditures. The
Company's capital expenditures for the eighteen months subsequent to the
completion of the Offering are estimated to be approximately $400 million. The
Company continues to evaluate additional revenue opportunities in each of its
markets and, as additional opportunities develop, the Company plans to make
additional capital investments in its existing networks and to expand networks
as may be required to pursue such opportunities.
ELI has historically been funded by capital contributions, advances and
guarantees from Citizens. The Company expects to meet its capital needs with
the proceeds of the Offering, internally generated cash flow and lease
arrangements, together with the proceeds from bank credit facilities, other
borrowings and possible issuances of additional equity securities. Citizens
does not have any obligation to make additional equity investments in or
advances to ELI or to guarantee or otherwise provide financial support for ELI
after the completion of the Offering.
There can be no assurance that ELI will be successful in generating
sufficient cash flow or raising debt or equity capital in sufficient amounts on
terms acceptable to it. The failure to generate sufficient cash flow or to
raise sufficient funds may require the Company to delay or abandon some or all
of its development and expansion plans, which could have a material
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adverse effect on ELI's growth, its ability to compete in the telecommunications
services industry and its ability to achieve positive cash flow. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RISKS INHERENT IN EXPANSION
ELI intends to expand its networks in each of the Portland, Seattle, Salt
Lake City, Sacramento and Phoenix metropolitan areas, has commenced construction
in Boise, Idaho (the Salt Lake City cluster) and has completed preparations to
begin construction in Spokane and Tacoma, Washington (the Seattle cluster) and
Ogden, Utah (the Salt Lake City cluster). The Company intends to consider
additional expansion in other areas in the future. There can be no assurance
that the Company will be able to expand its existing clusters or construct new
clusters as currently planned or on a timely basis. The expansion of ELI's
existing clusters and its construction of new clusters will be dependent, among
other things, on its ability to acquire rights-of-way and any required permits
on satisfactory terms and conditions, on its ability to finance such expansion
and construction, its ability to assess markets, design fiber network carrier
rings and backbone routes, install other facilities, and implement
interconnection with ILECs, all in a timely manner, at reasonable costs and on
terms and conditions acceptable to ELI. The Company's ability to manage this
expansion effectively will require it to continue to implement and improve its
operational and financial systems and to expand, train and manage its employee
base. ELI's inability to expand its existing clusters or install new clusters
or manage effectively such expansion and installation could have a material
adverse effect upon the Company's business strategy, financial condition and
results of operations.
SUBSTANTIAL COMPETITION
The Company operates in an increasingly competitive environment. Services
substantially similar to those offered by the Company are also offered by the
ILECs serving the markets currently served or intended to be served by the
Company. ILECs have longstanding relationships with their customers, have
financial and technical resources substantially greater than those of the
Company and benefit from federal and state laws and regulations that, ELI
believes, in some instances favor the ILECs over CLECs. Under certain
circumstances, the FCC and state regulatory authorities provide the ILECs with
an ability to lower selectively the price of certain services within the areas
in which the Company operates. In addition, as a result of the 1996 Act, ILECs
are likely to obtain additional pricing flexibility with regard to services that
compete with those offered by the Company. Increased price competition from
ILECs could have a material adverse effect on the Company's financial condition
and results of operations. See "Business--Competition" and "Government
Regulation."
Also, under the 1996 Act, ILECs formerly subject to anti-trust decree
restrictions on interLATA (interexchange) long distance services are no longer
permanently barred from entry into these businesses, subject to certain
requirements in the 1996 Act and rules and policies to be implemented by the FCC
and the states. Also under the 1996 Act, long distances carriers will be
permitted to enter businesses in which they will be in competition with the
Company. The FCC may authorize a Regional Bell Operating Company ("RBOC") to
provide interLATA services in a state when the RBOC enters into a state utility
commission-approved agreement with one or more facilities-based competitors
which provide business and residential local exchange service and such agreement
satisfies 14 specified interconnection requirements. In evaluating an RBOC
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application for interLATA entry, the FCC must consult with the U.S. Department
of Justice. Alternatively, if no such facilities-based competitors request such
interconnection, the RBOC may obtain authority from the FCC to provide interLATA
services if the RBOC obtains state utility commission approval of a statement of
generally available terms and conditions of interconnection that satisfies the
requirements. If and when an RBOC obtains authority to provide interLATA
services, it will be able to offer customers local and long distance telephone
services. This will permit the RBOC to offer a full range of services to
potential customers in a new region and thus eliminate an existing competitive
advantage of the Company. Given the resources and experience the RBOCs
currently possess in the local exchange market, the ability to provide both
local and long distance services could make the RBOCs very strong competitors.
The 1996 Act is intended to increase competition in the local
telecommunications business. The 1996 Act requires all local exchange
providers, including new entrants, to offer their services for resale and
requires ILECs to offer their network facilities on an unbundled basis. There
can be no assurance that any unbundled rates or facilities offered by ILECs to
ELI will be economically attractive or technically viable. See "Government
Regulation--Telecommunications Act of 1996." These requirements facilitate
entry by new competitors without substantial capital risk or investment. See
"Business--Competition."
The Company faces strong competition from operational facility-based CLECs
in each of the markets in which the Company operates. In each of the clusters
in which ELI operates, at least one other CLEC, and in some cases several other
CLECs, offers many of the same telecommunications services provided by the
Company, generally at similar prices.
Potential and actual new market entrants in the local telecommunications
services business include RBOCs entering new geographic markets, CLECs, Inter-
Exchange Carriers ("IXCs"), cable television companies, electric utilities,
international carriers, satellite carriers, teleports, microwave carriers,
wireless telephone system operators and private networks built by large end
users, many of which may have financial, personnel and other resources
substantially greater than those of ELI. In addition, the current trend of
business combinations and alliances in the telecommunications industry,
including mergers between RBOCs, may increase competition for the Company. The
Company's competitors for high speed data services include major IXCs,
Competitive Access Providers ("CAPs"), other CLECs, and various providers for
niche services (e.g., Internet access providers, router management services and
systems integrators). The market for Internet access and related services in
the United States is extremely competitive, with no substantial barriers to
entry. The Company expects that competition will intensify as existing services
and network providers and new entrants compete for customers. The Company's
current and future competitors include telecommunications companies and other
Internet access providers. Many of these competitors have greater market
presence and greater financial, technical, marketing and human resources, more
extensive infrastructure and stronger customer and strategic relationships than
the Company.
DEPENDENCE UPON INTERCONNECTION AND RELATIONSHIP WITH ILECS
The 1996 Act imposes interconnection obligations on ILECs, and generally
requires that interconnection charges be cost-based and nondiscriminatory. To
the extent ELI interconnects with and uses an ILEC's network to service the
Company's customers, ELI is dependent upon the technology and capabilities of
the ILEC to meet certain telecommunications needs of the Company's customers and
to maintain its service standards. ELI will become increasingly
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dependent on interconnection with ILECs as switched services become a greater
percentage of the Company's business. However, there can be no assurance that
the Company will be able to obtain the services it requires at rates, and on
terms and conditions, that permit the Company to offer switched services at
rates that are both profitable and competitive. See "Business--Competition--ILEC
Competition." The Company has commenced legal action against U S WEST, alleging
that it was blocking competition in local telephone service. See "Business--
Legal Proceedings."
LOCAL SERVICES AND SWITCHED SERVICE STRATEGIES
The Company is a recent entrant in the competitive local telecommunications
services industry. The local telecommunications services market has recently
opened up to competition due to the passage of the 1996 Act, state and federal
regulatory rulings designed to implement the 1996 Act, and negotiations with
ILECs under the terms of the 1996 Act and state rulings. The Company believes
that offering a full-service portfolio of local, long distance and data products
is the best method for gaining market share among business customers and
reducing customer churn.
The Company is making significant operating and capital investments and
will have to address numerous operating complexities associated primarily with
providing local services. The Company will be required to enhance current
provisioning and technical support systems and will need to develop new
marketing initiatives and hire and train a continuing growing sales force
responsible for selling its services. There can be no assurance that the
Company can design and install, and coordinate with ILECS regarding, necessary
provisioning, billing and customer management systems in a timely manner to
permit the Company to provision local exchange, toll, long distance or data
communications services as planned.
The Company expects to face significant competition from ILECs, whose core
business is providing local dial tone service. The ILECs, who currently are the
dominant providers of services in their markets, are expected to mount a
significant competitive response to new entrants in their market, such as the
Company. The Company expects to face significant competitive product and
pricing pressures from the ILECs in these markets, as well as from other CLECs.
FEDERAL AND STATE REGULATION
The Company is subject to federal and state regulation. In most states,
ELI is subject to certification and tariff filing requirements with respect to
intrastate services. See "Government Regulation--State Regulation." In some
instances, the certificate obtained by the Company in a particular state limits
the services that it is permitted to provide in that state. These current
restrictions on the services that may be provided by the Company should be
eliminated as a result of the 1996 Act, which prohibits states from imposing
legal restrictions that effectively prohibit the provision of any
telecommunications service. States will, however, under the 1996 Act, retain
authority to impose on the Company and other telecommunications carriers
requirements to preserve universal service, protect public safety, ensure
quality of service and protect consumers. States are also responsible under the
1996 Act for mediating and arbitrating interconnection arrangements between
CLECs and ILECs if the carriers fail to agree on such arrangements.
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ELI is currently required to file tariffs for some interstate services with
the FCC, although such tariff requirements are less restrictive than those
imposed on ILECs offering similar services. These tariffs, which are presumed
to be lawful on filing, must contain the rates, terms and conditions under which
service is generally available from ELI. While unlikely, challenges by third
parties to the Company's tariff filings or related contractual arrangements may
cause ELI to incur substantial legal and administrative expenses. The FCC has
promulgated rules to eliminate tariffing of interstate long distance services.
Those rules have been stayed during the pendency of judicial review. If and
when these rules are allowed to go into effect, the Company will no longer be
required to file FCC tariffs for its interstate long distance services.
Additionally, under a recent FCC order, CLECs, including ELI, are no longer
required to file tariffs for interstate exchange access services.
Under the 1996 Act, the Company is subject to certain federal regulatory
obligations when it provides local exchange service in a market. All local
exchange carriers, including CLECs, must interconnect with other carriers, make
their services available for resale by other carriers, provide nondiscriminatory
access to rights-of-way, offer reciprocal compensation for termination of
traffic and provide dialing parity and telephone number portability. In
addition, the 1996 Act requires all telecommunications carriers to ensure that
their services are accessible to and usable by persons with disabilities.
Further, ELI and other CLECs will be required to contribute to federal and state
universal service funds provided for in the 1996 Act, but which have not yet
been implemented. Because many FCC rules implementing the 1996 Act are under
challenge in the courts and are still being analyzed by the industry, and
related state implementation processes are not complete, it is uncertain how
burdensome the requirements of the 1996 Act will be for ELI.
The 1996 Act contains other provisions that may be subject to FCC
rulemaking and judicial interpretation.
The FCC recently adopted rules to reform the interstate access charges
ILECs may impose for use of local networks to originate and terminate interstate
services. Among the effects of those rules will be a substantial reduction in
ILEC access prices. Certain of ELI's services permit the customer to bypass the
ILEC access charges. The downward pressure on access prices resulting from the
FCC's actions may adversely impact ELI's revenues from its competitive access
products. However, ELI also pays ILEC access charges in connection with ELI's
long distance products, and to this extent reductions in ILEC access charges
will lower ELI's costs.
In addition, no assurance can be given that changes to current regulations
or the adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives or court decisions would not have a material adverse
effect on ELI. See "Government Regulation."
GOVERNMENTAL AND OTHER AUTHORIZATIONS
The development, expansion and maintenance of the Company's networks depend
on, among other things, its ability to obtain rights-of-way and any other
required governmental authorizations and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. In addition, ELI
currently leases and plans in the future to enter into facility arrangements for
significant numbers of optical fibers from other parties. In some of the cities
or municipalities where ELI provides network services, it may pay license or
franchise fees, usually based on a percentage of gross revenues or a per foot
right-of-way fee. The 1996 Act permits
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municipalities to charge such fees only if they are nondiscriminatory, but there
can be no assurance that municipalities that presently favor a particular
carrier, typically the ILEC, will conform their practices to the requirements of
the 1996 Act in a timely manner or without a legal challenge. Furthermore, there
can be no assurance that certain cities or municipalities that do not now impose
fees will not seek to impose fees, nor can there be any assurance that,
following the expiration or renegotiation of existing franchises, fees will
remain at their current levels or that the franchises will be renewed.
With respect to the Company's ability to lease or enter into facility
arrangements, there can be no assurance that the Company will be able to obtain
all necessary permits, licenses, conduit agreements or pole attachment
agreements from governmental authorities or private rights-of-way providers
necessary to effectuate such transactions. As a result, there can be no
assurance that ELI will be able to expand its existing networks or develop new
networks successfully, which would have a material adverse effect on the
Company's growth and financial condition.
If any of the Company's existing franchise, license or similar agreements
for a particular market were terminated prior to their expiration dates or not
renewed and ELI were forced to remove its fiber or abandon its network in place,
such termination would have a material adverse effect on the Company's
operations in that market and could have a material adverse effect on ELI.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. During 1996, the
Company's top five customers accounted for approximately 21% of ELI's total
revenues. No customer accounted for 10% or more of total revenues. A
significant reduction in the level of services ELI performs for any of these
customers could have a material adverse effect on the Company's results of
operations or financial condition. Most of the Company's customers have short
notice contracts.
SERVICES PROVIDED BY THIRD PARTY VENDORS
Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Billing and information systems for
the Company's historical lines of business have been produced by third party
vendors. These systems have met the Company's needs, due in part to the
Company's low volume of bills and orders. As the Company provides expanded
local, long distance and data transmission services, the need for sophisticated
billing information systems will increase significantly. The Company's current
local billing platform plans rely on products and services provided by third
party vendors. Additionally, the Company is implementing new automated systems
and expanding customer service centers to provision orders. Information systems
are vital to the success of these centers, and the information systems for these
centers have largely been developed by third party vendors.
The failure of (i) the Company's vendors to deliver proposed products and
services in a timely and effective manner, (ii) the Company to adequately
identify all of its information and processing needs or (iii) the Company to
upgrade systems as necessary, could have a material adverse impact on the
ability of the Company to reach its objectives, and on its financial condition
and results of operations.
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While the Company believes that its software applications are "year 2000
compliant," there can be no assurance until the year 2000 occurs that all
systems will then function adequately. Further, if the software applications of
local exchange carriers, long distance carriers or others on whose services the
Company depends are not year 2000 compliant, it could have a material adverse
effect on the Company's financial condition and results of operations.
MINIMUM REQUIREMENTS OF LONG-HAUL LICENSE AGREEMENTS
The Company's license agreements for the exclusive use of long-haul
facilities connecting its Portland to Seattle, Portland to Spokane and Portland
to Eugene long-haul transport networks and for the exclusive use of the Phoenix
network contain annual minimum usage requirements. See "Business--Existing
Market Clusters--Long-Haul Networks." If the Company's traffic on any of these
networks falls below the minimums, the licensor will obtain the right to share
usage of a specified number of fibers with the Company, which could adversely
impair the capacity of such network available to service the Company's
customers.
OPERATING LEASE
Under the terms of the operating lease described under "Business--
Properties--Lease," if the Company wishes to continue to make use of its
presently leased facilities past the final lease expiration date in 2002, the
Company will be required to exercise its option to purchase the leased
facilities at the termination of the lease in 2002. If the purchase option is
exercised, the purchase price required will be the original cost to the lessor
of purchasing and installing the facilities subject to the maximum amount
available under the lease (expected to be $110,000,000). If the Company does
not purchase the facilities, they will be sold to a third party and the Company
will guarantee that the sales price to be received by the lessor will equal the
acquisition and installation costs, subject generally to a maximum payment under
the guarantee of 80% of such costs.
CONTROL BY CITIZENS
Citizens is currently the only shareholder of the Company. Upon the
completion of the Offering, Citizens will hold all the Class B Common Stock of
the Company (which Class B Common Stock entitles its holders to 10 votes per
share on any matter submitted to a vote of the Company's shareholders). The
Class B Common Stock will represent approximately ___% of the combined voting
power of all classes of voting stock of the Company (___% if the Underwriters'
over-allotment options are exercised in full) and thus will be able to direct
the election of all of the members of the Company's Board of Directors and
exercise a controlling influence over the business and affairs of the Company,
including any determinations with respect to mergers or other business
combinations, the acquisition or disposition of assets, the incurrence of
indebtedness, the issuance of any additional Common Stock or other equity
securities and the payment of dividends with respect to the Common Stock.
Similarly, Citizens will have the power to determine matters submitted to a vote
of the Company's shareholders without the consent of the Company's other
shareholders, will have the power to prevent a change of control of the Company
and could take other actions that might be favorable to Citizens. The
disproportionate voting rights of the Class B Common Stock relative to the Class
A Common Stock may render impossible any merger proposal, a tender offer or a
proxy contest, even if such actions were favored by a majority of the holders of
the Class A Common Stock. See "Securities Ownership," "Description of Capital
Stock" and "Relationship with Citizens." Citizens has advised the Company that
its current intent is to continue to hold all of its Class B
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Common Stock. There can be no assurance, however, concerning the period of time
during which Citizens will maintain its beneficial ownership of Common Stock. As
described below, pursuant to the Underwriting Agreement, Citizens has agreed,
subject to certain exceptions, not to sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock owned by it for a period of 180 days
after the date of this Prospectus without the prior written consent of Lehman
Brothers Inc. on behalf of the Representatives of the Underwriters.
The Company's Board of Directors currently consists of six members, four of
whom are executive officers and/or directors of Citizens and one of whom is
independent of both Citizens and ELI. Following the Offering, the Board will be
increased to consist of seven members to add an additional independent director.
In light of its ownership of the Company's Class B Common Stock, Citizens will
have the ability to change the size and composition of the Company's Board of
Directors and committees of the Board of Directors.
As of the date of the Prospectus, Citizens has advised ELI that Citizens
has no current plan or intention other than to hold the shares of Class B Common
Stock owned by it for the foreseeable future. However, there is no assurance
that Citizens may not decide in the future to sell all or a portion of its
shares of Common Stock publicly or privately or otherwise. Citizens has the
right to require the Company to register for sale under applicable securities
laws all of the shares of Common Stock (including any shares of Class A Common
Stock acquired by Citizens upon exchange of the Class B Common Stock) which
Citizens or its subsidiaries hold. See "Relationship with Citizens--
Registration Rights Agreement."
CONFLICTS OF INTEREST
Various conflicts of interest between the Company and Citizens may arise in
the future in a number of areas relating to their past and ongoing
relationships, including potential acquisitions of businesses or properties or
other corporate opportunities, the election of new or additional directors,
payment of dividends, incurrence of indebtedness, tax matters, financial
commitments, marketing functions, indemnity arrangements, registration rights,
administration of benefit plans, service arrangements, issuances of capital
stock of the Company, sales or distribution by Citizens of its remaining shares
of Common Stock and the exercise by Citizens of its ability to control the
management and affairs of the Company. In addition, Citizens is in the
telecommunications business and may, now or in the future, provide services
which are the same or similar to those provided by ELI. Citizens will be free
to compete with ELI in certain markets. See "Relationship with Citizens--
Customers and Service Agreement."
Citizens' Representation on Company's Board of Directors and as Officers of
the Company. Certain directors and/or executive officers of Citizens are
directors of the Company. Also, the Chief Executive Officer of Citizens is the
Chairman of the Board of the Company, the President of Citizens is Vice Chairman
and Chief Executive Officer of the Company and another executive officer of
Citizens is an executive officer of the Company. See "Management." Neither the
Company nor Citizens has instituted any formal plan or arrangement to address
potential conflicts of interest that may arise between the Company and Citizens.
The Company's directors intend to exercise reasonable judgment and take such
steps as they deem necessary under all of the circumstances in resolving any
specific conflict of interest that may occur and will determine what, if any,
specific measures may be necessary or appropriate in light of their fiduciary
duties under state law, including whether to have any specific matter approved
by a
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majority vote of the disinterested directors. There can be no assurance that any
conflicts will be resolved in favor of the Company.
Future Arrangements. The Company and Citizens have entered into a number
of agreements for the purpose of defining the ongoing relationship between them.
Pursuant to these arrangements, Citizens will provide benefits to the Company
that it might not provide to a third party, and there is no assurance that the
terms and conditions of any future arrangements between Citizens and the Company
will be as favorable to the Company as in effect now.
Competition. To address the potential for conflicts between the Company and
Citizens, the Customers and Service Agreement between the Company and Citizens
contains provisions prohibiting the Company from competing with Citizens for
customers in Citizens' existing service areas and in certain new lower density
territories which Citizens will have been first to enter after the Offering.
Citizens has agreed that it will not compete with the Company in the service
territories in which the Company is currently providing services and in certain
new higher density territories which the Company will have been first to provide
services after the Offering, except that Citizens may compete in ELI's new
territories in the provision of long distance services. Neither Citizens nor
ELI may solicit an existing wholesale customer of the other company for services
which such customer is currently receiving under contract from the other
company. The relevant provisions are intended to permit the Company to continue
all activities in which it currently engages, and to expand into related market
areas. The Customers and Service Agreement will remain in effect for so long as
Citizens owns a majority of the economic or voting interest of the shares of
Common Stock of the Company. See "Relationship with Citizens--Customers and
Service Agreement."
Tax Sharing. Following the Offering, the Company will no longer be a
member of Citizens' consolidated group for United States federal income tax
purposes. However, because the Company may be included in Citizens' combined,
consolidated or unitary income tax groups for state and local purposes, ELI and
Citizens will enter into a Tax Sharing Agreement (the "Tax Sharing Agreement").
Under the Tax Sharing Agreement, Citizens will have sole authority to respond to
and conduct all state and local tax proceedings (including tax audits) relating
to the Company and to file all state and local returns on behalf of the Company.
The amount of the Company's liability to (or entitlement to payment from)
Citizens under the Tax Sharing Agreement will equal the amount of state or local
taxes that the Company would owe (or refund that it would receive) had it
prepared state or local tax returns on a stand-alone basis. See "Relationship
with Citizens--Tax Sharing Agreement." This arrangement may result in conflicts
of interest between the Company and Citizens. For example, under the Tax
Sharing Agreement, Citizens may choose to contest, compromise or settle any
adjustment or deficiency proposed by the relevant taxing authority in a manner
that may be beneficial to Citizens and detrimental to the Company.
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATION
Citizens and the Company have entered into intercompany agreements that are
material to the Company's business. See "--Conflicts of Interest" above and
"Relationship with Citizens." Because the Company has been a wholly owned
subsidiary of Citizens, these agreements are a result of negotiations between
affiliated parties and, therefore, the prices charged to the Company at a
particular time for services provided thereunder may be higher or lower than
prices that might have been charged by an unaffiliated third party.
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POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors has the authority, without any further
vote or action by the Company's stockholders, to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to determine the designations,
powers, preferences and relative, participating, optional or other rights
thereof, including without limitation, the dividend rate (and whether dividends
are cumulative), exchange rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference. Although the Company has no
current plans to issue any shares of Preferred Stock, the rights of the holders
of Common Stock would be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
If at some future time Citizens should have disposed of its majority interest in
ELI, the issuance of Preferred Stock could have the effect of delaying,
deterring or preventing a change in control of ELI, including the imposition of
various procedural and other requirements that could make it more difficult for
holders of Common Stock to effect certain corporate actions, including the
ability to replace incumbent directors and to accomplish transactions opposed by
the incumbent Board of Directors. See "Description of Capital Stock."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry has experienced and is expected to continue
to experience rapid and significant changes in technology. While ELI believes
that, for the foreseeable future, these changes will neither materially affect
the continued use of fiber optic cable or digital switches and transmission
equipment nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's business and
operations cannot be predicted. Also, alternative technologies may develop for
the provision of services to customers. ELI may be required to select in
advance one technology over another but it will be impossible to predict with
any certainty, at the time the Company is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
DEPENDENCE ON KEY PERSONNEL AND CITIZENS
The Company's business is managed by a small number of key management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company's business. The Company believes that the future success
of ELI will depend in large part on its continued ability to attract and retain
highly skilled and qualified personnel. See "Management."
The Company believes that a significant factor contributing to its growth
has been its affiliation with Citizens and the provision by Citizens of
administrative and other services. Although the Company has entered into
various ongoing service and other agreements with Citizens, there can be no
assurance of ELI's continued relationship with Citizens. A disruption of
certain of the services provided ELI by Citizens could have a material adverse
effect on the Company's financial condition and results of operations. See
"Relationship with Citizens."
ENVIRONMENTAL MATTERS
The Company and its contractors are subject to various laws and regulations
governing hazardous or environmentally sensitive materials or conditions which
may occur in connection with the construction, installation, operation or
maintenance of the Company's facilities. There
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can be no assurance that hazardous materials or conditions of ELI's facilities
might not expose the Company to tort or other claims that could have a material
adverse effect on ELI.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to the Offering, there has been no public market for the Class A
Common Stock, and, although the Company will apply for listing the Class A
Common Stock on the Nasdaq National Market, there can be no assurance that an
active trading market for the Class A Common Stock will develop or will be
sustained. The initial public offering price of the Class A Common Stock has
been determined through negotiations with the Representatives of the
Underwriters and may not be indicative of the market price for the Class A
Common Stock following the Offering. For a discussion of the factors considered
in determining the initial public offering price, see "Underwriting." No
predictions can be made as to the effect, of any, that future market sales of
Class A Common Stock, or the availability of such shares for sale, will have on
the prevailing market prices of the Class A Common Stock following the Offering;
and there can be no assurance that future market prices for the Class A Common
Stock will equal or exceed the initial public offering price set forth on the
cover page of this Prospectus. The market prices of securities of growth
companies similar to ELI have historically been highly volatile. Future
developments and announcements on matters concerning ELI or its competitors,
including quarterly results, technological innovations, mergers or strategic
alliances, new services or government legislation or regulation, may have a
significant effect on the market price of the Class A Common Stock. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be [___________] shares of
Class A Common Stock issued and outstanding (_______ if the Underwriters' over-
allotment options are exercised in full) and [_________] shares of Class B
Common Stock outstanding. The [____________] shares of Class A Common Stock to
be sold in the Offering will be tradeable without restriction. The shares of
Class B Common Stock and any Class A Common Stock issued upon exchange of Class
B Common Stock held or to be held by Citizens may be offered for sale at any
time assuming compliance with legal requirements.
The Company and Citizens, as the holder of the Class B Common Stock, have
agreed not to offer, sell, contract to sell, file a registration statement
pursuant to the Securities Act or otherwise dispose of any shares of Common
Stock without the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives, for a period of 180 days after the date of this Prospectus. In
addition, Citizens has advised ELI that it currently intends to hold the shares
of the Class B Common Stock owned by it for the foreseeable future. However, no
assurance can be given that Citizens will not decide in the future to register
its shares of Common Stock under the Securities Act and to dispose of all or a
portion of such stock on the public market, or privately, or otherwise.
Citizens and ELI have entered into a Registration Rights Agreement, pursuant to
which Citizens has demand and piggyback registration rights. See "Relationship
with Citizens--Registration Rights Agreement." Alternatively, Citizens could
dispose of shares periodically pursuant to Rule 144 of the Securities and
Exchange Commission. See "Shares Eligible for Future Sale."
No predictions can be made about the effect, if any, that market sales of
shares of Class A Common Stock or the availability of such shares for sale would
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Class A Common
20
<PAGE>
Stock in the public market, or the perception that such sales could occur, may
have a material adverse impact on the market price for the shares of Class A
Common Stock offered hereby or on the ability of the Company to raise capital
through a public offering of its equity securities. See "Shares Eligible for
Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
and substantial dilution in pro forma net tangible book value per share. See
"Dilution."
ABSENCE OF DIVIDENDS
ELI has never paid or declared dividends on its capital stock and intends
to retain future earnings, if any, to finance the development and expansion of
its networks and operations. Therefore, ELI does not anticipate paying any
dividends in the foreseeable future. The decision whether to pay dividends will
be made by the Company's Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition and
requirements, business conditions, covenants under loan agreements and other
contractual arrangements, and other factors. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS
Statements made in this Prospectus which are not historical or current
facts, such as descriptions of the Company's intentions to enter new markets,
extend existing facilities, and deploy switches and other facilities outside of
markets, are forward-looking statements and are only predictions or statements
of current plans, which are constantly under review by the Company. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed or implied in the
forward-looking statements. These risks and uncertainties are referred to in
the Risk Factors section immediately above and elsewhere in this Prospectus and
also include, but are not limited to, the Company's ability to identify future
markets and successfully expand existing ones, design and acquire fiber optic
backbone routes, install cable and facilities including switching electronics,
finance its construction and expansion plans, successfully execute its marketing
strategy, surmount competitive challenges and obtain 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. Future successful results will also depend on favorable
regulatory, legislative and judicial developments.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $[____] million (approximately $[_____] million if the
Underwriters' over-allotment options are exercised in full) after deducting
underwriting discounts and commissions and estimated expenses of the Offering.
ELI intends to use the net proceeds of the Offering to fund its operating and
capital expenditure requirements. The Company estimates that its capital
expenditures for the eighteen months subsequent to the completion of the
Offering will be approximately $400 million.
21
<PAGE>
The Company's business strategy envisions that the Company will build out
its existing clusters, construct new clusters and interconnect its clusters,
which will require substantial additional capital in addition to the capital
raised in this Offering. The Company expects to meet such additional capital
needs with internally generated cash flow and lease arrangements, together with
the proceeds from bank credit facilities, other borrowings and possible
issuances of additional equity securities.
Because of the number and variability of factors that determine the
Company's use of the net proceeds of the Offering, management will retain
discretion over the application of net proceeds. There can be no assurance that
such application will not vary from the Company's current plans. In addition,
there can be no assurance that the Company will be able to generate or raise
sufficient capital to enable it to fully realize all of its strategic
objectives. See "Risk Factors--Significant Capital Expenditures" and "--Risks
Inherent in Expansion.''
Pending the foregoing uses, the net proceeds of the Offering will be
invested in short term and intermediate-term interest-bearing investment-grade
securities with maturities that match the operating and capital expenditure
requirements of the Company.
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was approximately $[______] or approximately $[________] per share of Common
Stock outstanding on such date. See "Description of Capital Stock." Pro forma
net tangible book value per share represents the amount of total tangible assets
of the Company less the amount of total liabilities (adjusted for the
capitalization of $20.7 million of the amount due Citizens) divided by the total
number of shares of Common Stock outstanding. After giving effect to the
Offering (at an assumed offering price of $______, the midpoint of the range set
forth on the cover of the Prospectus, less underwriting discounts and estimated
expenses of $_______ payable in connection with the Offering) the pro forma net
tangible book value of the Company as of June 30, 1997 would have been
approximately $[______], or $[_______] per share of Common Stock. This
represents an increase in pro forma net tangible book value of $[____] per share
to the existing stockholder and dilution of $[______] per share to new investors
purchasing shares of Class A Common Stock in the Offering. The following table
illustrates dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share $
Pro forma net tangible book value per share before $
the Offering............................................................
Increase per share attributable to new investors(1)..................... $
--------
Pro forma net tangible book value per share after the Offering............... $
--------
Dilution per share to new investors(2)(3).................................... $
========
</TABLE>
__________________________
(1) After deducting the underwriting discount and estimated offering expenses
payable by the Company.
(2) Dilution per share is determined by subtracting the pro forma net tangible
book value per share after the Offering from the initial public offering
price paid by a new investor for a share of Class A Common Stock.
(3) If the Underwriters' over-allotment options are exercised in full, pro
forma net tangible book value of the Company after the Offering would be
$[_____] per share, representing an increase in pro forma net tangible book
value of $[______] per share and dilution to new investors of $[_____] per
share.
22
<PAGE>
The following table summarizes the difference as of June 30, 1997 between
the existing stockholder and new investors with respect to the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price paid per share.
<TABLE>
<CAPTION>
Average
Shares Held Total Investment Cost
--------------------------------- ---------------------------------
Number Percentage Amount Percentage Per Share
--------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
New Investors............ % $ % $
Existing Stockholder(1) % $ % $
--------------- ---------------- ---------------- ---------------- -----------------
Total............... 100% $ 100%
=============== ================ ================ ================ =================
</TABLE>
____________________________
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1997.
DIVIDEND POLICY
ELI has never paid or declared dividends on its capital stock and intends
to retain future earnings, if any, to finance its operations and the development
and expansion of its networks and, therefore, does not anticipate paying any
dividends in the foreseeable future. The decision whether to pay dividends will
be made by the Company's Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition and
requirements, business conditions, covenants under loan agreements and other
contractual arrangements, and other factors which the Company cannot now
predict.
23
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 30, 1997; (ii) such capitalization pro forma to reflect the
contribution of $20.7 million of the amount due to Citizens to additional paid-
in capital and the reclassification of the balance to long-term debt payable to
Citizens and the ___ for-1 split of shares of Common Stock and the authorization
of Class A and Class B Common Stock; and (iii) such capitalization as adjusted
to reflect the Offering at an assumed public offering price of $_____, the
midpoint of the range set forth on the cover of this Prospectus. This table
should be read in conjunction with the Selected Financial and Operating Data and
the financial statements and notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As at June 30, 1997
---------------------------------------------
As Adjusted for the
Actual Pro Forma Offering
----------- ----------- ---------------------
<S> <C> <C> <C>
Capital lease obligation $ 10,664
Due to Citizens........................................ 194,669
Long-term debt due to Citizens......................... - (1)
Stockholders' (deficiency) equity:
Preferred Stock, $.01 par value; [___] shares
authorized, no shares issued and outstanding......... - (2)
Common Stock, no par value; 500 shares authorized,
100, 0 and 0 shares issued and outstanding..... - (2)
Class A Common Stock, $.01 par value;
0, [____] and [____] shares authorized
0, 0 and [____] shares issued and outstanding..... - (2)
Class B Common Stock, $.01 par value;
0, [ ] and [____] shares authorized
0, [____] and [____] shares issued and outstanding - (2)
Additional paid-in capital............................. 79,255 (1)
Deficit................................................ (90,085)
Total stockholders' (deficiency) equity................ (10,830)
Total capitalization................................. $194,503
========
</TABLE>
__________________________________
(1) Reflects recapitalization immediately prior to the Offering whereby
Citizens contributed $20.7 million of the amount due to Citizens to
additional paid-in capital with the remaining balance of $174 million being
converted to __% long-term debt payable to Citizens, due in
___________________________.
(2) Reflects the amendment to the Certificate of Incorporation in 1997 to
change the authorized capital stock to _________ shares, including
_________ shares of Class A Common Stock $.01 par value, _________ shares
of Class B Common Stock $.01 par value, and 10,000,000 shares of Preferred
Stock $.01 par value; to split the Common Stock __-for-1; and to designate
such Common Stock as Class B Common Stock.
24
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected Statement of Operations and Balance Sheet Data for the
years ended and as of December 31, 1992 and 1993 have been derived from the
Company's unaudited Financial Statements which, in the opinion of management
include all adjustments necessary for a fair presentation of the results of
operations and financial condition of the Company for and as of such periods.
The following selected Statement of Operations and Balance Sheet Data for the
years ended and as of December 31, 1994, 1995, and 1996 have been derived from
the Company's Financial Statements and related notes thereto included elsewhere
in this Prospectus, which Financial Statements have been audited by KPMG Peat
Marwick LLP, independent Certified Public Accountants. The selected Statement
of Operations and Balance Sheet Data for the six months ended June 30, 1996 and
1997 have been derived from the Company's unaudited Financial Statements and
related notes thereto included elsewhere in this Prospectus and in the opinion
of management include all adjustments necessary for a fair presentation of the
results of operations and financial condition of the Company for and as of such
periods. The results of operations for interim periods are not necessarily
indicative of a full year's operations. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's Financial Statements and related notes
thereto and the other financial data contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
($ in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 1,206 $ 3,705 $ 8,152 $ 15,660 $ 31,309
Operating expenses:
Network access expenses 142 1,289 6,155 8,728 24,081
Sales and marketing expenses 1,043 841 4,534 5,704 8,462
Depreciation and amortization 879 1,567 2,476 7,064 7,192
Other operating expenses 1,949 2,892 4,528 14,114 20,957
------- ------- -------- -------- --------
Total operating expenses 4,013 6,589 17,693 35,610 60,692
------- ------- -------- -------- --------
Operating loss (2,807) (2,884) (9,541) (19,950) (29,383)
Interest expense 754 1,053 873 372 -
------- ------- -------- -------- --------
Net loss $(3,561) $(3,937) $(10,414) $(20,322) $(29,383)
======= ======= ======== ======== ========
Pro forma net loss(1) $
=========
Pro forma net loss per share(2) $
=========
<CAPTION>
As at December 31,
------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency) $(5,300) $(5,699) $ (9,934) $(17,897) $ (9,940)
Total assets 25,476 47,840 110,691 128,901 195,656
Long-term debt and capital lease obligations 11,053 9,610 6,565 - -
Due to Citizens 4,581 21,481 35,109 64,941 155,395
Shareholder's equity (deficiency) 4,437 9,150 55,991 38,669 9,286
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING DATA
EBIDTA(4) $ (7,065) $(12,886) $(22,191)
Cash flows used for operating activities (4,097) (1,570) (28,893)
Cash flows used for investing activities (60,774) (16,129) (59,169)
Cash flows provided by financing activities 64,907 17,751 88,530
<CAPTION>
As at December 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER DATA
Property, plant & equipment-owned $21,083 $45,309 $108,549 $127,297 $189,334
-under lease(5) - - - $ 36,858 $ 57,279
-Total $21,083 $45,309 $108,549 $164,155 $246,613
Market clusters 2 5 5 5 5
Route miles(6) 71 131 601 780 1,490
Fiber miles(6) 5,140 9,796 37,504 52,013 96,609
Buildings connected 57 104 191 282 454
Switches installed:
Voice - 1 2 2 5
Frame relay - - 2 5 15
Total switches installed - 1 4 7 20
Employees 46 75 127 225 402
<CAPTION>
Six Months
Ended June 30,
--------------------------------------
1996 1997
------------------- -----------------
<S> <C> <C>
($ in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 13,374 $ 24,765
Operating expenses:
Network access expenses 9,527 15,206
Sales and marketing expenses 3,940 6,271
Depreciation and amortization 3,453 5,603
Other operating expenses 7,069 17,499
-------- --------
Total operating expenses 23,989 44,579
-------- --------
Operating loss (10,615) (19,814)
Interest expense - 302
-------- --------
Net loss $(10,615) $(20,116)
======== ========
Pro forma net loss(1) $ $
================== ==============
Pro forma net loss per share(2) $ $
================== ==============
<CAPTION>
As at Proforma as at
June 30, 1997 June 30, 1997(3)
------------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital (deficiency) $(19,856)
Total assets 233,835
Long-term debt and capital lease obligations 10,664
Due to Citizens 194,669
Shareholder's equity (deficiency) (10,830)
<CAPTION>
Six Months Ended
June 30, 1997
-------------
<S> <C>
OPERATING DATA
EBIDTA(4) $(14,211)
Cash flows used for operating activities (4,779)
Cash flows used for investing activities (33,595)
Cash flows provided by financing activities 38,872
<CAPTION>
As at
June 30, 1997
-------------
<S> <C>
OTHER DATA
Property, plant & equipment-owned $ 235,953
-under lease(5) $ 87,425
-Total $ 323,378
Market clusters 5
Route miles(6) 1,728
Fiber miles(6) 104,718
Buildings connected 521
Switches installed:
Voice 5
Frame relay 18
Total switches installed 23
Employees 486
</TABLE>
________________________
(1) The pro forma net loss represents the historical net loss as adjusted for
the revised administrative services fees, guarantee fee, and interest to be
charged on the long-term debt due to Citizens (see Note 6 of Notes to
Financial Statements) as if such fees and interest rate were effective
January 1, 1996.
(2) The pro forma net loss per share has been computed on the basis described
in Note 2(i) of Notes to Financial Statements.
(3) The pro forma balance sheet data gives effect to the contribution of
certain amount of due to Citizens to additional paid-in capital as
discussed in Note 5 of Notes to Financial Statements, and gives effect to
the issuance of the shares of Class A Common Stock offered hereby.
(4) EBIDTA consists of Earnings Before Interest, Income Taxes, Depreciation and
Amortization. EBIDTA is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance.
EBIDTA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity. See the Company's Financial Statements included
elsewhere in this Prospectus.
(5) Facilities under an operating lease agreement under which the Company has
the option to purchase the facilities at the end of the lease term. See
Note 7 of Notes to Financial Statements.
(6) Route miles and Fiber miles also include those to which the Company has
exclusive use pursuant to license and lease arrangements (See "Business--
Long-Haul Networks")
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
ELI's historical audited financial statements and the notes thereto included
elsewhere in this Prospectus.
OVERVIEW
The Company is a full-service, facilities-based competitive local exchange
carrier providing a broad range of telecommunications services in five major
market clusters in the western United States. The Company currently provides
services in the following markets: Portland, Oregon; Seattle, Washington; Salt
Lake City, Utah; Sacramento, California; and Phoenix, Arizona ("hub cities") and
their respective surrounding areas (together with the hub cities, "market
clusters" or "clusters"). Among its five current markets, the Company has been
operating in Portland and Seattle since 1991, Salt Lake City and Sacramento
since 1994 and Phoenix since 1995. The Company began building its switched data
network in 1994. The Company installed its first local switch in the Seattle
market in 1994 and began generating revenues in early 1995 followed by Portland,
Salt Lake City and Sacramento in 1996. The Company intends to install a local
switch in Phoenix in 1998. The Company placed in service its first long haul
network from Phoenix to Las Vegas in 1995 and its second long haul network from
Portland to Seattle in early 1997.
The Company's product portfolio has grown from traditional competitive
access provider services such as point-to-point connectivity for interexchange
carriers and businesses to a full array of switched voice, data and long-haul
services targeted toward communications-intensive businesses in both the retail
and wholesale markets. The Company offers an extensive portfolio of products
and services in four categories: local telephone, long distance, data and video,
and network access services (see "Current Products and Services" below for a
description of the product and services) as follows:
. Local Telephone - local dial tone and switched products and services
that include lines, trunks, local access and Centrex(TM) among other services.
. Long Distance - wholesale and retail services that include 1+,
toll-free, pre-paid, originating and terminating access services.
. Data and Video - switched and dedicated data connectivity services that
include frame relay, video conferencing, ISDN PRI, LAN/WAN and Internet
transport services.
. Network Access - point-to-point services that include special access,
digital private line and other dedicated services both in metropolitan and long-
haul applications.
The Company categorizes its operating expenses into the following five
major groupings:
. Network Access - includes all leased network facilities and resold
product expenses.
26
<PAGE>
. Sales and Marketing - includes all direct and indirect sales channel
expenses and commissions. Also includes all product development, advertising and
promotional expenses.
. Depreciation and Amortization - includes depreciation of
telecommunications network assets including fiber optic cable, network
electronics, network switching and network data equipment.
. Administrative Services - includes administrative services provided by
Citizens. The Company is charged for the direct cost of administrative services
plus an allocation of Citizens' corporate overheads.
. Other Operating - includes all general and other operating and
administrative expenses.
The pace of the Company's revenue and expense growth results from its
market cluster expansion strategy. Once a potential market is identified, the
Company establishes a network in the hub city and then expands the network to
adjacent cities and communities of interest. This strategy requires that
significant capital and operating expenditures be incurred before the
realization of revenues which results in negative cash flow and operating losses
until an adequate customer base and revenue stream for these networks is
established. The Company experiences very minimal customer churn. In addition,
the Company is developing a superior customer service system which will
facilitate combining enhanced services such as data and video with network
access services. The growth in enhanced services is expected to increase
revenues with minimal additional expense.
The Company has been a subsidiary of Citizens since 1990. Citizens is a
publicly-held communications and public services company which provides, either
directly or through subsidiaries, telecommunications, electric distribution,
natural gas transmission and distribution and water and wastewater services to
over 1.6 million customer connections in 20 states. Citizens Communications is
one of the nation's leading independent communications companies and operates an
integrated distribution network over which it provides local, long distance,
paging, cellular, network sales and other communications products and services.
Citizens has funded or guaranteed the financing of nearly all of the Company's
capital and operating needs to date.
Results of Operations
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Revenues increased from $13.4 million to $24.8 million, an increase of
$11.4 million, or 85%, for the six months ended June 30, 1996 as compared with
the six months ended June 30, 1997, primarily due to the Company's rapid
customer growth and expansion in all product categories. The Company's local
telephone services revenues and local access revenues increased from $.8 million
to $2.4 million, an increase of $1.6 million, or 200%, for the six months ended
June 30, 1996 as compared with the six months ended June 30, 1997, primarily due
to local switch implementations and upgrades for new and existing customers in
Portland, Salt Lake City, Sacramento and Seattle during the second half of 1996.
Annualized monthly
27
<PAGE>
local telephone services revenues increased to $5.7 million based on June 1997
revenues from $2.1 million based on June 1996 revenues as the Company increased
its access line equivalents to 31,060 as of June 1997. Long distance services
revenues increased from $1.6 million to $3.5 million, an increase of $1.9
million, or 119%, for the six months ended June 30, 1996 as compared with the
six months ended June 30, 1997, primarily due to the introduction of prepaid
debit card services and wholesale long distance services. The Company's data and
video services revenues increased from $.8 million to $3.1 million, an increase
of $2.3 million , or 288%, for the six months ended June 30, 1996 as compared
with the six months ended June 30, 1997, primarily due to the introduction of
ISDN services and increases in frame relay and Internet access services. ISDN
PRI and Internet access services were introduced the last half of 1996 and have
obtained considerable market acceptance. The Company believes that these
products will continue to experience exceptional growth based on current market
trends. Network access services and other revenues increased from $10.2 million
to $15.8 million, an increase of $5.6 million, or 55%, for the six months ended
June 30, 1996 as compared with the six months ended June 30, 1997, primarily due
to increased volume on its existing Phoenix to Las Vegas route as well as volume
on the Portland to Seattle route which was placed in service in February, 1997.
Of the $5.6 million increase in network access services revenues, $.7 million is
pursuant to a contract with a significant customer which will expire in early
1998.
NETWORK ACCESS EXPENSES
Network access expenses increased from $9.5 million to $15.2 million, an
increase of $5.7 million, or 60%, for the six months ended June 30, 1996 as
compared with the six months ended June 30, 1997, primarily due to the Company's
expansion of its frame relay product, development of a fully redundant leased
Internet access backbone with related Internet access costs, expanded long
distance sales and customer growth.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased from $3.9 million to $6.3 million,
an increase of $2.4 million, or 62%, for the six months ended June 30, 1996 as
compared with the six months ended June 30, 1997, primarily due to increased
product development activities related to local services and data services, such
as Internet access and frame relay. The Company's expanded focus on direct
retail sales which targets large- to medium- size telecommunications intensive
businesses resulted in increased sales expenses. The Company believes that by
focusing on these end-user customers vertical selling opportunities will be
maximized.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $3.5 million to $5.6 million,
an increase of $2.1 million, or 60%, for the six months ended June 30, 1996 as
compared with the six months ended June 30, 1997, primarily due to higher plant
in service balances for newly completed telecommunications network facilities
and electronics in the Portland, Salt Lake City and Sacramento markets.
ADMINISTRATIVE SERVICES EXPENSES
Administrative services expenses increased from $.9 million to $1.6
million, an increase of $.7 million, or 78%, for the six months ended June 30,
1996 as compared with the six months
28
<PAGE>
ended June 30, 1997, primarily due to increases in the volume and cost of
services provided by Citizens.
OTHER OPERATING EXPENSES
Other operating expenses increased from $6.2 million to $15.9 million, an
increase of $9.7 million, or 156%, for the six months ended June 30, 1996 as
compared with the six months ended June 30, 1997, primarily due to increases in
labor costs, including increases in salaries, payroll taxes and related benefits
to support the expanded delivery of services, new product development, marketing
activities and an expanded customer service organization. The average number of
employees increased 66% for the six months ended June 30, 1996 as compared with
the six months ended June 30, 1997.
INTEREST EXPENSE
Interest expense increased $.3, for the six months ended June 30, 1996 as
compared with the six months ended June 30, 1997, primarily due to interest
associated with the capital lease for the Company's long-haul route between
Portland and Seattle which commenced in February 1997 (see Note 7 of Notes to
Financial Statements).
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Revenues increased from $15.7 million to $31.3 million, an increase of
$15.6 million, or 99%, for the year ended December 31, 1995 as compared with the
year ended December 31, 1996, primarily due to expansion of the customer base,
increased sales of services in Portland and Seattle, and the Company's expansion
in the Salt Lake City and Sacramento markets. The Company's local telephone
services revenues increased from $.6 million to $2.2 million, an increase of
$1.6 million, or 267%, for the year ended December 31, 1995 as compared with the
year ended December 31, 1996, primarily due to increases in the Company's local
dial tone services revenues and local access services revenues associated with
the introduction of local switched services in Portland and Salt Lake City and
expanded local services in the Seattle market. Long distance services revenues
increased from $1.6 million to $5.0 million, an increase of $3.4 million, or
213%, for the year ended December 31, 1995 as compared with the year ended
December 31, 1996, primarily due to revenues associated with a short term
contract which has since expired for wholesale long distance services. The
Company's data and video services increased from $.3 million to $2.4 million, an
increase of $2.1 million, for the year ended December 31, 1995 as compared with
the year ended December 31, 1996, primarily due to increases in frame relay and
Internet access services. Network access services and other revenues increased
from $13.1 million to $21.7 million, an increase of $8.6 million, or 66%, for
the year ended December 31, 1995 as compared with the year ended December 31,
1996, primarily due to the increase of long-haul transport of DS-3 and DS-1
sales.
NETWORK ACCESS EXPENSES
Network access expenses increased from $8.7 million to $24.1 million, an
increase of $15.4 million, or 177%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to facilities rent
expense associated with the expansion of the
29
<PAGE>
customer base and the establishment of a leased network linking the Company's
five market clusters.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased from $5.7 million to $8.5 million,
an increase of $2.8 million, or 49%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to sales and
marketing costs associated with the introduction of local switched services in
Portland, Salt Lake City, and Sacramento, expanded local services in the Seattle
market, the expanded frame relay product and newly-introduced Internet access
and ISDN products in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization were comparable for both years.
ADMINISTRATIVE SERVICES EXPENSES
Administrative services expenses increased from $1.5 million to $2.3
million, an increase of $.8 million, or 53%, for the year ended December 31,
1995 as compared with the year ended December 31, 1996, primarily due to
increases in the volume and cost of services provided by Citizens.
OTHER OPERATING EXPENSES
Other operating expenses increased from $12.6 million to $18.7 million, an
increase of $6.1 million, or 48%, for the year ended December 31, 1995 as
compared with the year ended December 31, 1996, primarily due to an increased
provision for uncollectible accounts of $2.9 million, labor costs and outside
services to support customer growth and expansion in all service categories.
The number of average employees increased 68% for the year ended December 31,
1995 as compared with the year ended December 31, 1996 resulting in increases in
salaries and payroll taxes.
INTEREST EXPENSE
Interest expense decreased $.4 million, or 100%, for the year ended
December 31, 1995 as compared with the year ended December 31, 1996, primarily
due to the repayment in December 1995 of previously outstanding debt.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Revenues increased from $8.2 million to $15.7 million, an increase of $7.5
million, or 91%, for the year ended December 31, 1994 as compared with the year
ended December 31, 1995, primarily due to the Company's expansion of its
customer base for network access services revenues. Local dial tone services
were introduced in 1995 in Seattle and generated $.6 million of local telephone
services revenues. Long distance services revenues increased from $1.4 million
to $1.6 million, an increase of $.2 million , or 14%, for the year ended
December 31, 1994 as compared with the year ended December 31, 1995, primarily
due to increases in retail long distance services. The Company's data and video
services increased from $.1 million
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to $.3 million, an increase of $.2 million, or 200%, for the year ended December
31, 1994 as compared with the year ended December 31, 1995, primarily due to
increases in frame relay and Internet access services. Network access services
and other revenues increased from $6.7 million to $13.1 million, an increase of
$6.4 million, or 96%, for the year ended December 31, 1994 as compared with the
year ended December 31, 1995, primarily due to increased metropolitan area
network transport and long haul transport services.
NETWORK ACCESS EXPENSES
Network access expenses increased from $6.2 million to $8.7 million, an
increase of $2.5 million, or 40%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to the expansion
of its customer base for network access services revenues and the introduction
of local telephone services in Seattle.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased from $4.5 million to $5.7 million,
an increase of $1.2 million, or 27%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to increased sales
for its network access services revenues and the introduction of local telephone
services in Seattle. Marketing costs also include costs associated with product
development for frame relay and Internet access services products and wider
product offerings to current and potential customers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $2.5 million to $7.1 million,
an increase of $4.6 million, or 184%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to expansion of
the telecommunications network and the commencement of amortization of deferred
start-up costs in Salt Lake City and Sacramento.
ADMINISTRATIVE SERVICES EXPENSES
Administrative services expenses increased from $1.3 million to $1.5
million, an increase of $.2 million, or 15%, for the year ended December 31,
1994 as compared with the year ended December 31, 1995, primarily due to
increases in the volume and cost of service provided by Citizens.
OTHER OPERATING EXPENSES
Other operating expenses increased from $3.2 million to $12.6 million, an
increase of $9.4 million, or 294%, for the year ended December 31, 1994 as
compared with the year ended December 31, 1995, primarily due to increased labor
costs associated with the significant growth of the Company. The Company
increased its number of employees resulting in increases in salaries and payroll
taxes. The Company also supplemented staffing with temporary employees to
support the Company's growth.
INTEREST EXPENSE
Interest expense decreased from $.9 million to $.4 million, a decrease of
$.5 million, or 56%, for the year ended December 31, 1994 as compared with the
year ended December 31,
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1995, primarily due to the declining balance of outstanding debt. This debt was
fully paid in December 1995.
LIQUIDITY AND CAPITAL RESOURCES
The capital expenditures of the Company associated with the installation,
development and expansion of its existing and new telecommunications networks
are substantial, and a significant portion of these expenditures generally are
incurred before any revenues are realized. The Company's gross property, plant
and equipment has grown from $109 million at December 31, 1994 to $236 million
at June 30, 1997. These expenditures, together with associated initial
operating expenses, have resulted in negative cash flow and operating losses and
will continue to do so until an adequate customer base and revenue stream for
these networks have been established. The Company expects to incur net losses
for the foreseeable future as it continues to install, develop and expand its
new and existing telecommunications networks. There can be no assurance that an
adequate revenue base will be established or that the Company will achieve or
sustain profitability or generate sufficient positive cash flow to fund its
operating and capital requirements and/or service debt.
The development and expansion of the Company's new and existing networks
and services will require significant additional capital expenditures. The
Company's capital expenditure requirements for 1997 are estimated to be $82
million (of which $39 million was incurred through June 30, 1997) and for 1998
are estimated to be $260 million. In addition, the Company expects to lease an
additional $22.6 million of network facilities through an existing operating
lease agreement. The Company continues to evaluate opportunities for revenue
growth and to make substantial capital investments in connection with the entry
into new markets and the continued development of its existing networks. These
opportunities include, but are not limited to, acquisitions and/or joint
ventures, which are consistent with the Company's long-range business plans.
Additionally, the Company expects to continue to build on its existing
relationships with providers and other strategic customers, suppliers and
telecommunications carriers. Such acquisitions, investments and/or strategic
arrangements, if available, could require financial resources in addition to the
1997 and 1998 capital requirements presented above and could require
reallocation of the Company's financial resources.
The Company expects to meet its capital needs with the proceeds of the
Offering, internally generated cash flow and lease arrangements, together with
the proceeds from bank credit facilities, other borrowings and possible
issuances of additional equity securities. The Company has historically been
funded by capital contributions and advances from Citizens which totaled
approximately $278.2 million through June 30, 1997, and through a lease
agreement guaranteed by Citizens. While Citizens will continue to fund the
Company's operating and capital requirements through the completion of the
Offering, Citizens will not have any obligation to make additional equity
investments in or advances to the Company or to guarantee or otherwise provide
financial support for the Company subsequent to the Offering.
Prior to the completion of the Offering, $20.7 million of the amount due to
Citizens as of June 30, 1997 will be contributed to additional paid-in-capital
and the remaining $174 million will become long-term debt payable to Citizens.
Funds provided to the Company by Citizens subsequent to June 30, 1997 will be
treated as long-term debt payable to Citizens. In 1994, 1995 and 1996, Citizens
had been charging interest on the amount due to Citizens only to the extent
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<PAGE>
that the Company was allowed to capitalize interest under Generally Accepted
Accounting Principles. Effective with the completion of the Offering, interest
on the long-term debt payable to Citizens will be at an annual rate of ____%,
will be non-amortizing, and will mature in _______.
During 1995, the Company entered into an operating lease agreement in
connection with the construction of certain network facilities. The
construction is ongoing and rent is paid on the facilities when completed and
placed in service. The Company will have the option to purchase the facilities
at the end of the lease term. In the event the Company chooses not to exercise
this option, the Company is obligated to arrange for the sale of the facilities
to an unrelated party and is required to pay the lessor any difference between
the net sales proceeds and the lessor's investment in the facilities. However,
any amount required to be paid to the lessor is subject generally to a maximum
of 80% of the lessor's investment, giving effect to previously made lease
payments previously made. The total amount of facilities leased through this
agreement is expected to be $110 million, of which approximately $87.4 million
has been completed and placed in service as of June 30, 1997. Citizens has
guaranteed all obligations of the Company under this operating lease. Effective
with the completion of the Offering, the Company has agreed to pay to Citizens
an annual guarantee fee equal to 3.25% per annum of the lessor's investment in
the leased assets.
Citizens also provides certain administrative services to the Company
including, but not limited to, certain financial management services,
information services, legal and contract services and human resources services.
The Company has been charged for all reasonable costs incurred in the provision
of these services. The Company will enter into an administrative services
agreement with Citizens effective with the completion of this Offering for the
continuation of such services and will continue to be billed for all
reimbursable costs plus an administrative charge.
EFFECTS OF NEWLY-ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share," which supersedes Accounting Principles Board Opinion No. 15 and
establishes standards for computing and presenting earnings per share ("EPS").
It replaces the presentation of primary EPS with a presentation of basic EPS.
Dual presentation of basic and diluted EPS on the face of the income statement
is also required. SFAS 128 is effective for fiscal periods ending after
December 15, 1997. The Company does not expect the adoption of SFAS 128 to have
a material effect on the Company's EPS.
BUSINESS
GENERAL
ELI is a full-service, facilities-based CLEC providing a broad range of
telecommunications services in five major market clusters in the western United
States. The Company provides state-of-the-art voice and data communications
services to retail customers, primarily large- and medium-sized communications-
intensive businesses, and wholesale customers, primarily telecommunications
service providers. The Company operates high
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<PAGE>
quality, extensive digital fiber optic networks based on a switched broadband
platform in each of its five market clusters (comprising six MSAs, including 59
municipalities) with 31,060 local access line equivalents, 1,728 route miles and
104,718 fiber miles installed and 521 on-net buildings connected as of June 30,
1997. The Company has interconnected its market clusters with facilities-based
owned and leased long-haul fiber optic networks.
The Company currently provides services in five markets: Portland, Oregon;
Seattle, Washington; Salt Lake City, Utah; Sacramento, California; and Phoenix,
Arizona ("hub cities") and their respective surrounding areas (together with the
hub cities, "market clusters" or "clusters"). The Company's clusters include an
extensive fiber optic network. The Company currently provides switched
services, including local dial tone, utilizing five Nortel DMS 500 switches, in
all of its market clusters except Phoenix, where the Company expects to initiate
local dial tone service upon installing an additional switch in the first half
of 1998. The Company's clusters are also served by its extensive frame relay
network, which is comprised of 18 state-of-the-art switches and 30 POPs in 26
western U.S. cities. The Company has also developed an Internet backbone
network providing Internet connectivity in each of its markets which includes
access on a redundant basis to the three largest Internet service providers in
the United States. The Company's goal is to add to its market presence from six
to 14 MSAs and from two to five long-haul networks by the end of 1998.
The Company offers an extensive portfolio of products and services in four
categories: local telephone, long distance, data and video, and network access.
These products and services include: Local dial tone, with voicemail and
enhanced features; long distance with calling cards; advanced data services,
including frame relay, international frame relay and high-speed Internet access
video conferencing and dialable wideband services; LAN-to-LAN services with very
high transport speeds; ISDN; and point-to-point communications and dedicated DS-
1s and DS-3s. The Company expects to provide ATM services during 1998. The
Company's data network expertise allows it to provide a broader range of
telecommunications services to customers, which helps to maximize the amount of
telecommunications traffic on its network.
The above services are offered to meet customers' complete
telecommunications requirements. The Company offers its services in custom
combinations, and utilizes a consultative sales approach that provides customers
a single point of contact at the Company and an opportunity to work with the
Company to design innovative, turn-key solutions and new product applications
which allows them to take advantage of the broad array of services offered. The
Company has implemented an integrated network management and maintenance system
designed to monitor and test the Company's networks 24 hours a day, seven days a
week and is developing a superior customer care system which will automate the
entire order management process (i.e., order placement, design, provisioning and
billing preparation) for both retail and wholesale customers. The order
placement, design and provisioning components of the order management system
have been installed and are operational. A new customized billing system and an
up-to-the minute trouble ticket tracking module, which is an enhancement of the
management and maintenance system, are being installed and are expected to be
operational and integrated into the information system by the end of the first
quarter of 1998.
Deregulation in the telecommunications industry has created an enormous
market opportunity for ELI. Based on FCC data, the Company estimates that in
1996 total revenues from local and long distance telecommunications services
were approximately $183 billion, of which approximately $107 billion were
derived from business telecommunications services. The
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Company estimates that based on industry sources, the total addressable business
telecommunications services market in its current five market clusters (based on
access lines) was approximately $4.3 billion in 1997. The Company believes that
the market in its clusters will grow over the next decade because of the
favorable demographics and an increase in use of telecommunications services and
that its share of this market will increase as a result of the passage of the
1996 Act, the actions of various state commissions and other FCC rulings, which
collectively have essentially opened up the market to competition.
Since its inception, ELI believes that it has been at the forefront of
industry efforts to introduce competition to the local telecommunications
markets. As such, ELI believes that it has achieved significant milestones in
the CLEC industry and is well positioned to benefit from the opening of the
local telecommunications market. Before the passage of the 1996 Act, the
Company pursued regulatory and legislative reforms and consummated certain
interconnection agreements with ILECs that in its view allowed the Company to
offer economical and operationally efficient local exchange services. The
Company believes that it was early to market in Portland, Seattle, Salt Lake
City and Sacramento and believes it is the leading CLEC in Portland, Seattle and
Salt Lake City. The Company believes that it was the first CLEC to receive
authority from a state regulatory authority in a state west of the Mississippi
River to operate and to offer a full switch-based product portfolio.
Since 1990, the Company has been a subsidiary of Citizens. Citizens is a
publicly-held communications and public services company which provides, either
directly or through subsidiaries, telecommunications, electric distribution,
natural gas transmission and distribution, and water and wastewater services to
over 1.6 million customer connections in 20 states. Citizens is one of the
nation's leading independent communications companies and operates an integrated
distribution network over which it provides local, long distance, paging,
cellular, network sales and other communications products and services. At June
30, 1997, Citizens' consolidated assets totaled $4.4 billion and shareholders'
equity totaled $1.6 billion. Citizens' consolidated revenues for the twelve
months ended June 30, 1997 totaled $1.3 billion. The Company has historically
been funded by capital contributions and advances from Citizens and through a
lease agreement guaranteed by Citizens. See "Capitalization" and "Relationship
with Citizens."
BUSINESS STRATEGY
Guided by the business strategy adopted in 1990, the Company has become a
leading facilities-based, full-service CLEC. The key elements of this strategy
include:
. TARGET ATTRACTIVE REGIONAL MARKETS. The Company's focus is on MSAs in
the western United States that the Company believes have few CLEC competitors, a
relatively high proportion of communications-dependent businesses and the
prospect of population and economic growth above the national average. Growth in
these regions has been fueled to a large degree by the computer, software,
semiconductor and aerospace industries and other telecommunications-intensive
businesses such as financial services and telemarketing call centers. The
Company's policy has been and will continue to be to establish a new market
cluster where it expects to become the leading facilities-based, full-service
CLEC in such market in competition with the ILEC. Due to its superior customer
service, advanced network technologies and the breadth and quality of its
networks, the Company believes that it has an
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<PAGE>
opportunity to capture a significant share of the local market for
communications in its target regions in competition with U S WEST and PacBell,
which are the ILECs in its target regions.
. DEVELOP MARKET CLUSTERS. The Company builds facilities and offers
services in market clusters which exist in and around a hub city in the selected
MSA. Once a potential market is identified, the Company establishes a network in
the hub city and then expands the network to adjacent cities and communities of
interest. Through the use of this strategy, the Company is able to leverage and
extend the depth of its management resources, communications network, switch
assets and product portfolio and reduce its dependence on the ILEC. The Company
realizes economies of scale in terms of network build out, switch deployment,
provisioning and servicing from its cluster strategy. Clustering also enables
the Company to (i) optimize its networks' switching capacity through the ability
to place switches anywhere in the cluster, (ii) cost-effectively offer services
to smaller markets adjacent to its existing networks and in which the Company is
less likely to face strong competition from other CLECs, and (iii) achieve
increased gross margins and improved network reliability due to higher levels of
on-net traffic. The Company believes communications traffic is heavy between a
metropolitan area and its outlying markets and its cluster strategy takes
advantage of this by offering facilities-based, end-to-end service offerings
that cover these broad geographic areas.
. INTERCONNECT MARKET CLUSTERS. The Company's strategy is to interconnect
the Company's major market clusters with facilities-based broadband, long-haul
fiber optic networks. Interconnecting its market clusters enables the Company to
lower costs and enhance its revenue potential by carrying increasing amounts of
long distance, frame relay, Internet and point-to-point traffic on its own
facilities. By carrying traffic on its own facilities, the Company is able to
improve the utilization of its network facilities and avoid leased facilities
charges and certain interconnection costs.
. MAXIMIZE ON-NET TRAFFIC BY PROVIDING FACILITIES-BASED SERVICES. The
Company has constructed extensive voice, frame relay, Internet backbone and
interconnecting long-haul networks, and each of the Company's operating clusters
includes an extensive fiber optic network backbone. These extensive networks are
a key aspect of the Company's strategy to maximize the services provided to
customers onnet. Approximately half of the Company's services provided to
customers are currently on-net and the Company's strategy is to increase this
percentage over time. Maximizing the volume of on-net traffic allows the Company
to (i) improve customer loyalty and minimize churn; (ii) increase network
reliability; (iii) provide a wider range of services; (iv) increase process
control and thereby strengthen customer service through end-to-end management;
and (v) reduce its reliance on the ILEC for technologically up-to-date services
which are essential for the Company's enhanced services. The Company believes
that greater on-net traffic will also increase operating margins by increasing
utilization of capacity inherent in the Company's network.
. PENETRATE MARKETS BY LEVERAGING DATA EXPERTISE. The Company has
undertaken a major expansion of its networks and products to satisfy the growing
demand for enhanced network services, including frame relay networking services
and Internet access. As a result, the Company had 18 frame relay switches
servicing customer locations as of June 30, 1997. Enhanced network services,
which are currently provided primarily on the Company's frame relay network, are
specialized interchange services offered by the Company for customers that
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need to transport large amounts of data among multiple locations. ELI's
relationship with certain carriers allows the Company to terminate traffic both
nationally and internationally utilizing other companies' networks and to
provide a flow of traffic into the Company's networks. In addition, to further
increase efficient access to a greater customer base, ELI established
approximately 30 POPs which interconnect their frame relay networks to those of
U S WEST, PacBell and other carriers.
. ESTABLISH STRATEGIC RELATIONSHIPS WITH UTILITY COMPANIES. A strategy of
the Company has been to form strategic relationships with utility companies that
enable it to (i) utilize existing rights-of-way and fiber optic facilities, (ii)
leverage their construction expertise and local permitting experience and (iii)
have access to capital in order for ELI to extend its network infrastructure
more quickly and economically. The Company's strategic alliances include
agreements for the utilization of existing excess facilities and the
construction of long-haul networks which link the Portland and Seattle clusters
and which will link Portland and Spokane, Washington and Portland and Eugene,
Oregon. Another agreement provides for a fiber optic network in the Phoenix
metropolitan area. These relationships allow the Company to achieve economies of
scale and scope by expanding its existing markets rapidly and cost-effectively
and enabling the Company to concentrate its efforts on sales and marketing.
. CONTINUE ITS EFFECTIVE DIRECT SALES AND SUPERIOR CUSTOMER SERVICE. ELI
has built a highly motivated and experienced direct sales force and customer
service organization that is designed to establish a direct and personal
relationship with its customers. Consistent with its product offerings, the
Company utilizes a three-pronged sales approach comprised of direct retail,
direct wholesale and agents. Salespeople are given incentives through a
commission structure which targets 50% of a salesperson's compensation to be
based on performance. Each customer is provided with a single point of contact
at the Company. A sales account manager is responsible for managing each
customer's account and staying in constant contact with the customer to satisfy
that customer's specific telecommunications needs. Sales account managers
utilize a vertical sales strategy with the goal of selling additional value-
added, high margin services to existing customers. The Company believes that
combining the consultative sales strategy with the vertical sales strategy will
enable it to achieve higher margins on each account. The Company views its
commitment to customer satisfaction as a key success factor and is developing a
superior customer service system which will automate order processing, including
order placement, design, provisioning and billing, for both retail and wholesale
customers. This strategy ensures that the Company's processes are aligned with
customer needs and satisfaction.
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EXISTING MARKET CLUSTERS AND LONG -HAUL NETWORKS
COMBINED NETWORK INFORMATION AT JUNE 30, 1997
<TABLE>
<CAPTION>
EXISTING NUMBER OF ON- NET
MARKET MUNICIPALITIES ROUTE FIBER BUILDINGS VOICE FRAME RELAY
CLUSTERS SERVED MILES MILES CONNECTED SWITCHES SWITCHES
- -------- ------ ----- ----- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Portland.................. 8 283 19,563 226 2 4
Seattle................... 15 118 10,764 84 1 2
Salt Lake City............ 20 197 19,633 107 1 2
Sacramento................ 11 176 16,896 97 1 2
Phoenix(1)................ 5 191 2,438 4 - 1
----------------- --------- ------ ---------- -------- -----------
Total.................... 59 965 69,294 518 5 11
=================
Other Frame 7
Relay Switches(2)........
LONG-HAUL NETWORKS(1)
- --------------------------
Las Vegas to Phoenix...... 356 18,204 3 - -
Portland to Seattle....... 207 12,420 - - -
Portland to Spokane(3).... 200 4,800 - - -
----------------- --------- ------ ---------- -------- -----------
Total Long-Haul Networks 763 35,424 3 - -
----------------- --------- ------ ---------- -------- -----------
Total Networks....... 1,728 104,718 521 5 18
================= ========= ====== ========== ======== ===========
</TABLE>
___________________________
(1) Route Miles and Fiber Miles also include 166 miles of which the Company has
exclusive use through license and lease agreements.
(2) The Other Frame Relay Switches are located in San Francisco and Los
Angeles, California; Tremonton, Utah; Kingman and Holbrook, Arizona;
Dallas, Texas; and Gloversville, New York. The Tremonton, Kingman and
Holbrook switches are co-located on the premises of Citizens.
(3) This 570-mile network is currently under construction. Amount shown is
miles completed as of June 30, 1997.
EXISTING MARKET CLUSTERS
The Company's existing market clusters currently consist of the Portland,
Seattle, Salt Lake City, Sacramento and Phoenix hub cities and their respective
surrounding areas.
PORTLAND CLUSTER
Portland represents the Company's most mature network. The Company began
building the network in 1990, generated its first revenues from this cluster in
1991 and installed its first long distance switch in 1993. During 1996, the
hubsite located in downtown Portland doubled in size and more than quadrupled in
capacity. On January 12, 1996, the Company received a Certificate of Authority
to begin providing intrastate services and, on April 18, 1996, ELI reached an
interim interconnection agreement with the ILEC, U S WEST. The Company
installed a new Nortel DMS-500 switch in 1996, providing for both toll and local
switched services. The Company is currently expanding the Portland network into
Vancouver, Washington.
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SEATTLE CLUSTER
Seattle represents the Company's first market in terms of the provisioning
of switched services. The Company began construction of the Seattle network in
1990, generated its first revenues in 1991 and installed its first switch in
1994. The Company received a Certificate of Authority to begin providing
telecommunications services on March 24, 1994. On April 3, 1997, the Company
reached a comprehensive interconnection agreement with U S WEST. Seattle
experienced significant network facilities growth since late 1996. The main
Seattle downtown hubsite was significantly expanded and two mini-hubs were also
constructed to allow for better distribution of traffic loads and to improve
fiber cable plant utilization. In addition to the above facilities growth, the
Bellevue, Washington network was completed in 1996. The Company is currently
finishing the Lake Washington project which will complete the SONET ring around
the Seattle metropolitan area.
SALT LAKE CITY CLUSTER
The Company began construction of the Salt Lake City cluster in 1993 and
began generating revenues in 1994. On August 16, 1995, the Company received a
Certificate of Authority to begin providing a wide variety of telecommunications
services. On August 21, 1996, the Company began offering switched telephone
services via a Nortel DMS-500 switch. In addition, the Company completed the
first build-out of its customer market by interconnecting Salt Lake City with
the satellite cities of Orem and Provo in 1996.
The Company has begun the construction of a backbone network in Boise,
Idaho, and expects to install a Nortel DMS-500 switch during the first half of
1998. ELI was authorized by the Idaho Public Utilities Commission to provide
intrastate service in Idaho as of February 17, 1997. ELI's authority covers
long distance business customers with six or more access lines in the greater
Boise area.
SACRAMENTO CLUSTER
The Company entered the Sacramento market in 1993 and began to generate
revenues from this market in 1994. The Company received a Certificate of
Authority from the California Public Utility Commission on March 16, 1994.
During 1996, the Company accelerated the build-out of this market and installed
its first switch in December 1996. The Company is currently constructing
facilities in the decommissioned Mather Air Force Base which the Company
believes is Sacramento's premier economic development area.
PHOENIX CLUSTER
The Company entered the Phoenix market in 1993 and began to generate
revenues in 1995. The Company intends to install a Nortel DMS-500 switch in the
first half of 1998. On September 11, 1996, the Company and Salt River Project
Agricultural Improvement and Power District ("SRP") entered into an agreement
whereby SRP agreed to lease to the Company an existing fiber optic network
consisting of 166 route miles, which will be expanded by SRP by 490 route miles
in the Phoenix metropolitan area. The Company's rights to use this network are
exclusive subject to required minimums. The Company has committed to
constructing 55 miles of the network and the installation and investment of
electronics equipment for the entire expanded network, at an estimated cost of
$30.4 million. In June of 1997, the Company connected its downtown area network
to SRP's network. The agreement with SRP will
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<PAGE>
significantly reduce the Company's time to market and capital expenditures in
the Phoenix metropolitan area while increasing network reach and customer
access. On January 16, 1997, the Company received a Certificate of Authority
from the Arizona Corporation Commission and on July 2, 1997 the Company signed
an interconnection agreement with the ILEC, U S WEST. Of the number of route
miles shown in the above table under "--Existing Market Clusters and Long-Haul
Networks--Combined Network Information at June 30, 1997," 166 represent route
miles leased from SRP.
LONG-HAUL NETWORKS
ELI's long-haul networks are, and will continue to be, built to
interconnect the Company's market clusters and form an integral part of the
Company's long-term strategy. Through the long-haul networks, the Company is
able to capture, control and manage a larger end-to-end share of the regional
communications traffic, enjoy greater margins due to the ability to keep more
traffic on-net and improve customer service. Many of the Company's long-haul
routes are the result of alliances with power utilities. These alliances
greatly accelerate network deployment, minimize the Company's capital
requirements, and optimize the synergies of the alliance partners. A brief
overview of each of the Company's long-haul networks is provided below.
PHOENIX TO LAS VEGAS (SOUTHWEST FIBERNET)
In 1993, the Company began construction of a long-haul transport network
connecting Phoenix and Las Vegas. The completed network is 356 route miles long
and contains 48 fiber strands. The Company began generating revenues from this
network in 1995.
PORTLAND TO SEATTLE
In March 1996, the Company and a utility reached a 15-year license
agreement to implement a long-haul transport network linking Portland and
Seattle. This agreement grants the Company an exclusive right to use capacity
from a fiber optic cable that was constructed by this utility linking Portland
and Seattle, subject to attaining traffic minimums to retain exclusivity. The
network is 207 miles long and contains 72 fiber strands. The Company may use 60
fiber strands for its services, including transport services, enhanced services
to end-users and dark fiber leasing. The Company was also granted the right to
manage four additional fiber strands from the fiber cable in a fiber swap
arrangement with another IXC in order to create a diverse SONET ring. The
Company began generating revenues from this network in 1997.
PORTLAND TO SPOKANE
In November 1996, the Company and the same utility reached a 15-year
license agreement to implement a long-haul transport network to link the
Portland and Spokane clusters. This agreement provides for the construction of
a 570-mile, 36-fiber strand network linking Portland to Spokane, of which the
Company may use 24 strands for its services. Two hundred miles of this network
had been constructed as of June 30, 1997. As in the license agreement for the
Portland to Seattle network, the Company will have an exclusive right to use
capacity, subject to attaining traffic minimums to retain exclusivity.
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PORTLAND TO EUGENE
In July 1997, the Company and the same utility signed a 15-year license
agreement for the construction of a joint long-haul transport network linking
Portland and Eugene, Oregon. The network is scheduled to be completed by April
1, 1998, and will have approximately 140 route miles containing 72 fiber
strands, of which the Company will have exclusive use of 60 for its services,
subject to minimums to retain exclusivity.
CURRENT PRODUCTS AND SERVICES
Since its inception in 1990, the Company's product portfolio has grown from
traditional competitive access provider ("CAP") services such as point-to-point
connectivity for IXCs and businesses to a full array of switched voice and data
services that target communications-intensive companies in both the retail and
wholesale markets.
The Company's product strategy is to continue being a full-service
communications provider offering customers complete "one-stop shopping" for
their communications needs. By offering a diverse product portfolio, the
Company creates custom-tailored product bundles that are capable of delivering
innovative, turn-key solutions for customers. The Company provides facilities-
based products and services over its switched broadband digital network
platform. With a growing array of software-driven intelligent features, this
network platform enables the Company to cost-effectively integrate high revenue
generating products into its existing portfolio. The product and service
offerings are divided into the following four categories: Local Telephone
Services, Long Distance Services, Data and Video Services, and Network Access
Services. The following table summarizes the Company's current product and
service offerings:
CURRENT PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
LOCAL TELEPHONE LONG DISTANCE DATA AND VIDEO NETWORK ACCESS
<S> <C> <C> <C>
Basic Business Lines Retail Switched 1+ Services Dedicated Internet Services 56 KB / 64 KB
PBX/Key Systems Trunks Retail Dedicated 1+ Services Frame Relay DS-1
Virtual Private Exchange Wholesale Termination International Frame Relay DS-3
Centrex(TM) Conferencing LAN / WAN FDDI Disaster Recovery
Foreign Exchange Services 800 Services Dedicated Switched 56 KB Multiplexing
Voice Mail 800 Services Switched Dialable Wideband Service Collocation
Multi-Service Fractional T-1 Prepaid Debit Cards Videoconferencing OC-12
Customer Premise Equipment Travel Cards ISDN PRI Diverse Routing
Fax Mail OC-3 / OC-3C
CLASS(TM) Services
Wholesale LTS
</TABLE>
The following discussion summarizes the Company's primary product and
service offerings.
LOCAL TELEPHONE SERVICES
ELI's Local Telephone Services consist of products which involve the
switching of local calls. There are three primary customer segments for Local
Telephone Service: (i) small customers (less than 10 employees) with multi-key
telephone sets; (ii) medium-sized customers (10-50 employees) who use a key
system, (iii) and customers with more than 50 employees who have either their
own Private Branch Exchange ("PBX"), have a hybrid key system, or use the ILEC's
Centrex(TM) product. ELI's Local Telephone Service products are as follows:
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Basic Business Lines offer either two-way lines (calls that can be placed
or received) or one-way lines (outgoing calls from the customer) to small and
medium-sized businesses with certain types of customer premise equipment.
Features such as call forwarding, three-way conferencing/call transfer,
directory number hunting, caller/number ID and speed dialing can also be
included.
PBX/Key System Trunk Interface is offered to medium and large businesses
that have their own PBX or key system that require special interface equipment.
ELI offers two types of interfaces: line-side or trunk-side. Trunk-side
connections are used when all calls are directed to an attendant and can
accommodate features such as three-way calling/call transfer, call forwarding
and hunting. Line-side connections are used when calls are directed to each
station line.
Virtual Private Exchange ("VPX") is an alternative to the customer's PBX,
key system or ILEC-provided Centrex(TM) for medium and large businesses that
require the advanced functionality of a PBX or key system, such as call park,
call pick-up and last number redial. ELI's switch provides approximately 28
features for a flat monthly rate with optional features available for an
additional charge. Direct inward dialing is an inherent feature of VPX. ELI
also offers the Nortel electronic business sets which are designed to work with
VPX, allowing customers to use features with the touch of a button. VPX can be
purchased separately or with the electronic business set, and voice mail can be
added for an additional monthly charge.
Foreign Exchange Service ("FEX") provides customers local telephone service
from an exchange (central office) other than the exchange from which they would
normally be served. Therefore, the customer would obtain access to the local
calling area (free calling area) of the foreign exchange office. Customers who
experience significant long distance calling between locations within the same
Local Access Transport Area ("LATA") are typical users of FEX lines in order to
pay one flat rate per month for these calls, rather than usage-based long
distance fees.
Voice Mail offers customers the option of using ELI's voice mail product
versus buying their own system. Voice mail is either offered for a flat
additional fee per month or bundled with other products, such as Enhanced
Business Services. Enhanced Business Service ("EBS") is a package for small
business users, usually with less than 10 lines. EBS is a line with selected
special features, including voice mail, offered for a flat monthly charge.
CustomLink (Multi-service Fractional T-1) is a package of services built
around local telephone services. It is the bundling of local lines/trunks with
DS-0s used for other services, all delivered on the same T-1. Since ELI in many
cases is already taking a T-1 to the customer's premises to deliver dial tone,
the customer is offered the opportunity to utilize the empty DS-0s on the T-1
for access. Other ELI services, such as dedicated long distance, frame relay or
Internet, are offered at a lower rate than if these services were purchased
separately.
Customer Premise Equipment ("CPE") which is provided through a partnership
with various equipment vendors, makes available to the Company's customers
Nortel telephone sets, "2500"-type sets and electronic business sets.
LONG DISTANCE SERVICES
ELI's Long Distance Service is comprised of both retail and wholesale,
switched and dedicated, 1+, toll-free and pre-paid services.
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Retail Switched 1+ and toll-free service is offered to business customers,
whereby the customer chooses ELI as its long distance/toll-free carrier and
calls are routed to/from ELI through the public switched network. Customers can
call intrastate, interstate, or internationally.
Retail Dedicated 1+ and toll-free service is offered to high volume
business customers, whereby the customer establishes a point-to-point circuit
(i.e. DS-1 or DS-3) from their switch/PBX to ELI's switch. Outbound long
distance and toll-free calls are routed directly to/from ELI via this dedicated
path. Customers can call intrastate, interstate, or internationally.
Wholesale Termination encompasses an array of 1+ and toll-free services
providing carriers with LATA-wide termination services, enabling lower cost
access to, or diversity from, the ILEC's facilities. This product aggregates
the termination traffic of many carriers at ELI's switch and terminates it at a
lower cost than each of the carriers could obtain individually.
Prepaid Debit Cards and Travel Cards, are product offerings allowing mobile
people the ability to make long distance calls from any phone, anywhere through
accessing a toll-free number and the pre-paid switch. The service can either be
pre- or post-paid and sold through either retail or wholesale channels. Callers
can utilize the calling card from anywhere in the United States, Canada, or 18
other countries worldwide and can make calls to anywhere in the world.
"ALL CALLS" offers switched customers lower rates when they commit to ELI
long distance service plus ELI ISDN PRI or ELI local telephone services. With
ALL CALLS, the customer uses ELI for all local and long distance calls they
make.
DATA AND VIDEO SERVICES
The Company offers a wide range of switched and dedicated data connectivity
and internetworking products. These products are marketed through both retail
and wholesale channels.
Dedicated Internet Services provides access to Internet service providers
and large businesses. ELI offers Internet access through frame relay, dedicated
DS-1, dedicated DS-3 and shared Ethernet.
Frame Relay is a data communications alternative to traditional point-to-
point networks for wide area network ("WAN") connectivity. The service provides
multi-point, wide-area connectivity using frame relay packet technology that
reduces the connection costs of distributed data networks. The service offers a
choice of interface speeds with multiple virtual circuits possible at each site.
ELI offers worldwide connectivity to its network through its frame relay
partners.
LAN/WAN Services are turn-key data networking solutions that connect two or
more customer locations at very high speeds, typically, 10Mbps to 100Mbps.
Included in the transparent LAN service is point-to-point connectivity,
installed CPE and the monitoring of the customer's network to insure
connectivity. Through the service, ELI provides native LAN protocols like
Ethernet, Token Ring or FDDI in a variety of configurations.
Videoconferencing is a service whereby ELI operates videoconferencing rooms
in five cities in the western United States: Vancouver, Seattle, Salt Lake City,
Portland and Sacramento. ELI can connect two or more of its rooms together and
can tie in two other non-ELI videoconferencing rooms at the same time.
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ISDN PRI provides customers with a high-speed, flexible digital access
connection to ELI's network for voice, video and data applications.
Applications include Internet access, telecommuting, videoconferencing and
remote access to LANs or mainframes. ELI offers ISDN PRI in all of its service
areas.
The Company expects to offer ATM during 1998. It is a service that
formats, switches, and multiplexes various types of information, including
voice, video and data at speeds ranging from T-1 (1.544 megabits per second
("Mbps")) to OC-3 (155 Mbps). ATM provides Quality of Services ("QoS")
parameters based on the type of information being carried in a statistically
multiplexed architecture to reduce network costs. ELI's ATM service will
provide interworking between frame relay, transparent LAN and native ATM
locations.
NETWORK ACCESS SERVICES
The Company's dedicated point-to-point services, which include special
access and digital private line services, use high capacity digital circuits to
carry voice, video and data services. Services are offered in flexible
configurations at standardized transmission speeds.
The Company's network services are grouped together under the name
"LightLine." LightLine is a dedicated interstate and intrastate point-to-point
transmission facility (private line). LightLine may require some specific
equipment on the customer's premises on which the connection can be terminated.
This equipment can be leased from ELI by the customer. In most cases, ELI uses
its own fiber optic networks to provide LightLine services. The Company may
lease facilities from another carrier if it does not have the facilities
available. LightLine is labeled as four separate products differentiated by
transmission speed: DS-0, DS-1, DS-3 and OC-3.
PRODUCT STRATEGY AND DEVELOPMENT
In addition to its voice products, the Company's strategy is to continue to
expand its market role in data products. By expanding the Company's networks
through Network-to-Network Interfaces ("NNIs"), the Company has created an
expansive data network to deliver data solutions in the United States and
internationally. To leverage these networks and expand the Company's product
offerings, the Company is developing video and other high bandwidth
applications. The Company believes that the wholesale market offers a strong
fit with its product offerings. Database, long distance, frame relay, Internet,
ISDN PRI and ATM products can offer ILECs, IXCs and other resellers the
opportunity to expand their product offerings while enabling the Company to
leverage its networks.
The Company is focusing its product marketing and development efforts in
the following categories:
Local Telephone Services. As a supplement to basic access products, the
Company is focusing on software-based, high margin services including automatic
call distribution, Custom Local Area Signaling Service ("CLASS") features,
enhanced fax, integrated voice and fax mail, integrated voice response and other
Advanced Intelligent Network ("AIN")-based services. Expanded CPE offerings
will also be developed in 1997.
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Long Distance. The Company is enhancing its existing product set for both
the wholesale and end-user markets by adding such services as international
callback and international 800.
Data and Video. The Company is focusing on national and international
network expansion and the continued development and delivery of ATM products.
In addition, customer network management products are being developed, as well
as switched access to frame relay and enhanced Internet services. The Company
will continue to focus on developing applications for data intensive markets,
with a particular focus on video applications.
Network and Strategic Services. The Company is focusing on its long-haul
networks and expansion of products into the optical carrier bandwidth range,
enabling customers to take full advantage of the SONET architecture and ATM
offerings. The Company is also developing telecommunications services to aid in
the delivery and management of electric utility services and telemetry
applications.
NETWORK
The Company views the depth and breadth of its networks as a key strategic
asset. The Company's network is designed to simultaneously maximize both the
amount of communications traffic that can travel over the Company's owned
network facilities and the number of products and services that can be offered.
Nortel DMS-500 switches are currently operating in the Portland, Seattle, Salt
Lake City and Sacramento clusters, with an additional switch scheduled to be
installed and operational in Phoenix in the first half of 1998. The Company's
frame relay network, which is comprised of 18 state-of-the-art Cascade 9000
switches, has 30 POPs established in 26 western U.S. cities and is expected to
be capable of providing ATM services during 1998. The Company has also
developed an Internet backbone network providing Internet connectivity in each
of its markets, which includes access on a redundant basis to the nation's three
largest Internet service providers--UUNET, Sprint and MCI. The Company's data
network expertise allows it to provide a broader range of telecommunications
services to customers, which helps to maximize the amount of telecommunications
traffic on its network.
NETWORK DESIGN
To maximize circuit availability for its customers, the Company designs its
networks utilizing diverse fiber facilities, redundant electronics and back-up
power systems including diesel generators at all switching hubs. These
stringent design principles result in an overall circuit reliability of 99.99%.
The Company deploys the latest network technologies including SONET rings,
integrated digital loop carrier systems, NORTEL DMS-500 switching platforms,
Cascade Frame Relay and ATM switches, Titan 3/1 cross connects and Alcatel 1/0
cross connect systems. These systems are coupled together to provide a seamless
telecommunications transport infrastructure that is centrally monitored and
managed to deliver services to customers efficiently.
Customer access is provided via several methods, the most prevalent of
which is to connect the customer location directly to the Company's network by
splicing fiber laterals directly into the backbone through diverse paths. A
second method for providing customer access is by way of a 38ghz DS-1 or DS-3
microwave link connecting the customer location to
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the Company's fiber infrastructure. The third mechanism of providing customer
access is via a leased circuit connection from a secondary facilities-based
service provider to the Company's own fiber network.
In addition to providing dedicated customer access, the Company
strategically builds fiber facilities to IXC and LEC POPs and co-locates its own
high capacity SONET systems that provide a medium to facilitate the flow of
significant traffic volumes between an IXC and LEC. Under the 1996 Act, all
ILECs were mandated to provide licensed service providers access to their
embedded networks (referred to as "co-location"). The Company builds diverse
fiber entrance facilities to the chosen ILEC, builds out and then leases floor
space adjacent to ILEC's switching facilities in order to accommodate various
transport, data, and voice frequency ("VF") equipment. In doing so, the Company
significantly reduces the leased circuit costs charged by the ILEC and provides
a very reliable service to the end user. As of June 30, 1997, the Company had
co-located in 17 ILEC offices.
SALES AND MARKETING
GENERAL
The Company serves retail and wholesale customers. The Company's retail
customers cover a broad range of fields. Major customers include companies in
the finance, government, health care, education, and Internet service provider
segments, all of which have high volume and complex telecommunications
requirements. Wholesale customers include IXCs, ILECs, CAPs, CLECs, travel
card/debit card providers and wireless service providers. The Company competes
in this market for point-to-point, high bandwidth products on the basis of
price, reliability, route diversity, ease of ordering, building access and
customer service. This market segment provides the Company with significant
revenues at wholesale margins that contribute to fixed costs coverage. The
Company focuses on serving its wholesale customers in all of its markets with a
view to establishing national preferred vendor relationships. Historically, the
wholesale market has accounted for approximately half of the Company's total
revenues.
The Company targets the higher margin data products category in its
marketing efforts to take advantage of increasing demand customers for
sophisticated data communications solutions.
The Company's sales professionals utilize solutions-based consultative
selling techniques whereby they gain an in-depth understanding of the customer's
operations in order to develop innovative applications-specific solutions for
all of the customer's needs. Each customer is managed by, and directly
interfaces with, a single sales account manager who has an in-depth
understanding of the customer's operations and the Company's product portfolio.
Each sales account manager is supported by a team consisting of a sales engineer
and customer service advisor, who have the ability to offer training to
customers in new product applications. Once the sales relationship has been
firmly established, the sales account manager implements a vertical sales
strategy aimed at selling additional high margin, value-added, switch-based
services to the customer. The Company believes that combining the consultative
sales strategy with the vertical sales strategy should enable it to achieve
higher margins on each account.
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SALES CHANNELS
In order to effectively market its products and services, the Company has
established the following sales channels: direct retail, direct wholesale and
agent. At June 30, 1997, the Company employed 53 salespeople and 42 customer
care professionals.
The retail channel targets medium- to large-sized businesses. The Company
utilizes a direct sales force in each market cluster. Each regional sales force
is headed by a regional general manager and his/her sales team, which consists
of a sales manager, sales engineers, corporate account executives, account
executives and associate account executives, and local customer support
personnel.
The wholesale channel targets telecommunications service providers. The
Company uses a direct sales force, which is comprised of general sales managers,
network service managers, national account managers and account managers.
The Company uses qualified agents in each of its operating markets to sell
its products and services to a wide range of small- to medium-sized end-users.
Using agents for this account size is more cost effective than a direct sales
force. Agents primarily sell local dialtone, long distance and frame relay
services as well as product bundles. The Company supports its agents by
providing market research and training on the Company's products and services.
The Company currently uses approximately 25 agents across all of its markets and
is expanding its agent program.
COMPETITION
ILEC COMPETITION
In each of its markets, the Company faces significant competition from the
ILEC, which currently dominates the local exchange market and is a defacto
monopoly provider of local switched voice services. The Company's primary ILEC
competitors are U S WEST, PacBell and GTE. ILECs have longstanding
relationships with their customers, have financial and technical resources
substantially greater than those of the Company and benefit from federal and
state laws and regulations that, ELI believes, in some instances favor the ILECs
over CLECs. Under certain circumstances, FCC and state regulatory authorities
may provide ILECs with increased flexibility to reprice their services as
competition develops and as ILECs allow competitors to interconnect to their
networks. In addition, some new entrants in the local market may price certain
services to particular customers or for particular routes below the prices
charged by the Company for services to those customers or for those routes, just
as the Company may itself underprice those new entrants for other services,
customers or routes. If the ILECs and other competitors lower their rates and
can sustain significantly lower prices over time, this may adversely affect
revenues of the Company if it is required by market pressure to price at or
below the ILECs' prices. If regulatory decisions permit the ILECs to charge
CAPs/CLECs substantial fees for interconnection to the ILECs' networks or afford
ILECs other regulatory relief, such decisions could also have a material adverse
effect on the Company. However, the Company believes that the negative effects
of the 1996 Act may be more than offset by (i) the increased revenues available
as a result of being able to address the entire local exchange market, (ii)
mutual reciprocal compensation with the ILEC that results in ELI terminating its
local exchange traffic on the ILEC's network at little or no net cost to ELI,
(iii) obtaining access to off-network customers through more reasonably priced
expanded interconnection with ILEC networks and
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(iv) a shift by IXCs to purchase access services from CAPs/CLECs instead of
ILECs. There can be no assurance, however, that these anticipated results will
offset the effects of increased competition as a result of the 1996 Act.
Under the 1996 Act, ILECs formerly subject to anti-trust decree
restrictions on interLATA (interexchange) long distance services are no longer
permanently barred from entry into these businesses, subject to certain
requirements in the 1996 Act and rules and policies to be implemented by the FCC
and the states. The FCC may authorize an RBOC to provide interLATA services in
a state when the RBOC enters into a state utility commission-approved agreement
with one or more facilities-based competitors which provide business and
residential local exchange service and such agreement satisfies 14 specified
interconnection requirements. In evaluating an RBOC application for interLATA
entry, the FCC must consult with the U.S. Department of Justice. Alternatively,
if no such facilities-based competitors request such interconnection, the RBOC
may obtain authority from the FCC to provide interLATA services if the RBOC
obtains state utility commission approval of a statement of generally available
terms and conditions of interconnection that satisfies the requirements. If and
when an RBOC obtains authority to provide interLATA services, it will be able to
offer customers local and long distance telephone services. This will permit
the RBOC to offer a full range of services to potential customers in a new
region and thus eliminate an existing competitive advantage of the Company.
Given the resources and experience the RBOCs currently possess in the local
exchange market, the ability to provide both local and long distance services
could make the RBOCs very strong competitors.
The 1996 Act imposes interconnection obligations on ILECs, and generally
requires that interconnection charges be cost-based and nondiscriminatory. To
the extent ELI interconnects with and uses an ILEC's network to service the
Company's customers, ELI is dependent upon the technology and capabilities of
the ILEC to meet certain telecommunications needs of the Company's customers and
to maintain its service standards. ELI will become increasingly dependent on
interconnection with ILECs as switched services become a greater percentage of
the Company's business. However, there can be no assurance that the Company will
be able to obtain the services it requires at rates, and on terms and
conditions, that permit the Company to offer switched services at rates that are
both profitable and competitive. However, the Company believes that the
wholesale customers, and end-users that it targets, demand state-of-the-art
technology, consistent high quality transmission, superior high-speed data
transmission, diverse product offerings and superior customer service, all of
which the Company believes it can competitively provide. In addition,
historically, the Company has been able to build new networks and expand
existing networks in a more timely and economical manner than most CAP or CLEC
competitors through strategic arrangements such as leasing fiber optic cable
from others that already possess rights-of-way and have facilities in place.
The Company intends to use its experience and presence in the telecommunications
industry to further develop and expand its existing telecommunications
infrastructure.
CLEC COMPETITION
The Company's facility-based operational CLEC competitors in the markets in
which the Company operates include: MCI Metro, Inc.; MFS Telecommunications,
Inc.; Teleport Communications Group, Inc.; Brooks Fiber; NEXTLINK
Communications, Inc.; and GST Telecommunications, Inc.
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Based on management's experience, the initial market entrant with an
operational fiber optic CLEC network generally enjoys a competitive advantage
over other CLECs that later enter the market. The Company believes that it is
well positioned in each of its existing clusters due to a combination of
factors, including its early entry into the Portland, Seattle and Salt Lake City
markets, its full-service capabilities, its commitment to superior customer
service and the depth of its network coverage.
In each of the clusters in which ELI operates, at least one other CLEC, and
in some cases several other CLECs, offers many of the same local
telecommunications services provided by the Company, generally at similar
prices.
COMPETITION FROM OTHERS
Potential and actual new market entrants in the local telecommunications
services business include RBOCs entering new geographic markets, IXCs, cable
television companies, electric utilities, international carriers, satellite
carriers, teleports, microwave carriers, wireless telephone system operators and
private networks built by large end users, many of which may have financial,
personnel and other resources substantially greater than those of ELI. In
addition, the current trend of business combinations and alliances in the
telecommunications industry, including mergers between RBOCs, may increase
competition for the Company. With the passage of the 1996 Act and the entry of
RBOCs into the long distance market, the Company believes that IXCs may be
motivated to construct their own local facilities or otherwise acquire the right
to use local facilities and/or resell the local services of the Company's
competitors.
DEDICATED SERVICES
Competition for dedicated services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. The Company believes that its reliable, state-of-the-art
digital networks, which offer significant transmission capacity at competitive
prices, will allow it to compete effectively with the ILECs, which may have not
yet fully deployed fiber optic networks in many of the Company's target markets.
The Company's fiber optic networks will provide both diverse access routing and
redundant electronics, design features not widely deployed within the ILEC's
networks.
HIGH-SPEED DATA SERVICE
The Company's competitors for high-speed data services include major IXCs,
CAPs, other CLECs, and various providers of niche services (e.g., Internet
access providers, router management services and systems integrators). The
interconnectivity of the Company's markets may create additional competitive
advantages over other data service providers that must obtain local access from
the ILEC or another CLEC in each market or that cannot obtain intercity
transport rates on as favorable terms as the Company.
INTERNET SERVICES
The market for Internet access and related services in the United States is
extremely competitive, with no substantial barriers to entry. The Company
expects that competition will intensify as existing services and network
providers and new entrants compete for customers. The Company's current and
future competitors include telecommunications companies, including the RBOCs,
IXCs, CLECs and CATVs, and other Internet access providers. Many of
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these competitors have greater market presence and greater financial, technical,
marketing and human resources, more extensive infrastructure and stronger
customer and strategic relationships than the Company. The Company believes that
it has a competitive advantage because of its existing Internet backbone network
providing Internet connectivity in each of its market clusters, which includes
access on a redundant basis to the three largest Internet providers.
OPERATIONS/INFORMATION TECHNOLOGY
The Company views the establishment of a superior information technology
platform as a key strategic advantage in the execution of its goal to operate
effectively and deliver superior customer service. The Company has created
business relationships with selected software support organizations known for
state-of-the-art solutions.
The Company views its commitment to customer satisfaction as a key success
factor. The Company focuses on ensuring the Company's processes are aligned
with customer needs and satisfaction. The Company offers high-quality service
with its state-of-the-art network technology, integrated operations and superior
customer support. The Company has implemented an integrated network management
and maintenance system designed to monitor and test the Company's networks 24
hours a day, seven days a week and is developing a fully integrated superior
customer care system from three leading vendors which will automate the entire
order management process (i.e., order placement, design, provisioning and
billing preparation) for both wholesale and retail customers. The order
placement, design and provisioning components of the order management system
have been installed and are operational. A new customized billing system and an
up-to-the minute trouble ticket tracking module, which is an enhancement of the
management and maintenance system, are being installed and are expected to be
operational and integrated into the information system by the end of the first
quarter of 1998.
The current billing management system is capable of producing a single bill
detailing all of the products and services provided to both wholesale and retail
customers. The Company is installing a new billing system, which will allow the
Company to bill for incremental services and unique product bundles in a more
rapid and cost-efficient manner. The Company expects to complete the
implementation of the system by the first quarter of 1998.
The Company's goal is to have an efficient operating structure in place for
administering, provisioning and maintaining the Company's products and services
so as to become a low-cost telecommunications provider, while delivering
superior customer service.
EMPLOYEES
As of June 30, 1997 the Company employed 486 persons. None of the
Company's employees are represented by a union, and the Company considers its
employee relations to be excellent.
PROPERTIES
GENERAL
The Company manages its operations through its corporate headquarters,
located in Vancouver, Washington. In addition, the Company has local offices
and warehouse facilities in Portland, Seattle, Sacramento, Phoenix and Salt Lake
City. Currently, all of the Company's office and warehouse space is leased.
The Company also leases network hub and network
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equipment installation sites in various locations throughout the metropolitan
areas in which it provides products and services. The office, warehouse and
other facilities leases expire on various dates through September 2005.
Additional facilities will be needed as the Company expands its markets.
Management believes that the Company will be able to lease space as needed on
acceptable terms. The Company owns a 6.6-acre parcel of land in Vancouver,
Washington, on which it is constructing its new corporate headquarters building.
The Company believes its facilities are, and the new building will be, suitable
and adequate for its purposes.
LEASE
In June 1995 the Company entered into agreements to lease certain equipment
to be constructed for the Company. The lessor has agreed to commit up to a
maximum of $110,000,000 of the cost of purchasing and installing the equipment.
Rental obligations for the equipment commenced in June 1995, and, with renewal
options, will expire on April 30, 2002. The Company may, at its option, purchase
the equipment either at or before the end of the lease at a price approximating
the amounts expended by the lessor to acquire and install the leased equipment.
If the Company does not purchase the equipment by April 30, 2002, it will be
sold to a third party and the Company will guarantee that the sales price to be
received by the lessor will equal the acquisition and installation costs,
subject generally to a maximum payment under the guarantee of 80% of such costs.
Payments under the lease arrangements depend on then current interest rates, and
assuming continuation of current interest rates and full utilization of the
lease facility, payments would amount to approximately $6,500,000 annually
through April 30, 2002 and, assuming exercise of the purchase option,
approximately $110,000,000 in 2002. Citizens has guaranteed all obligations of
ELI under the lease and ELI will pay Citizens a guarantee fee of 3.25% per annum
of the amount of the lessor's investment in the leased assets. See
"Relationship with Citizens--Guarantee of Lease Obligations."
LEGAL PROCEEDINGS
On June 30, 1997, the Company filed a lawsuit in the U.S. District Court in
Seattle, Washington, against U S WEST, Electric Lightwave v. U S WEST
Communications, Inc., alleging that U S WEST was illegally blocking competition
in local telephone service. The lawsuit charges that U S WEST was violating
federal and state antitrust laws, as well as various federal and state
regulatory statutes, by failing to provide adequate interconnection services and
facilities to enable ELI to provide quality services to its customers. ELI is
seeking an unspecified amount of damages to be determined by a jury. In
addition, ELI is seeking an injunction to prohibit U S WEST from discriminating
against ELI and its customers when it provides interconnection facilities and
equipment. As indicated under "Risk Factors Dependence Upon Interconnection
and Relationship with ILECs," to the extent ELI interconnects with and uses U S
WEST's networks to service the Company's customers, ELI is dependent upon the
technology and capabilities of U S WEST to meet the telecommunications needs of
the Company's customers and to maintain ELI's service standards. ELI will
become increasingly dependent on interconnection with U S WEST as switched
services become a greater percentage of ELI's business. In the event the outcome
in the lawsuit is unfavorable it would not have a materially adverse effect on
the Company's condition and results of operations.
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GOVERNMENT REGULATION
ELI's services are subject to federal and state regulation. In general,
ELI's interstate and international telecommunications services are regulated by
the FCC. ELI's intrastate services are regulated by the public utilities
commission of each state in which ELI operates. Nationally, the recent trend
has been for federal and state legislators and regulators to permit and
encourage additional competition in the local telecommunications industry. ELI
believes this public policy trend should contribute to an increase in the
Company's market opportunities, although the pace and extent of such positive
benefits cannot be predicted with any precision.
FEDERAL REGULATION
The FCC exercises regulatory jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The FCC has established through its rules
different levels of regulation for "dominant" carriers and "nondominant"
carriers. For domestic interstate telecommunications services, only the ILECs
(subject to limited exceptions that are not material) are classified as dominant
carriers, and all other carriers are classified as nondominant carriers.
Additionally, to the extent a BOC is engaged in out-of-region long distance
services it is also classified as nondominant as to those services. Non-BOC
ILEC-affiliated long distance services are classified as nondominant regardless
of whether conducted inside or outside the ILEC service area. The FCC regulates
many of the rates, charges and services of dominant carriers to a greater degree
than those of nondominant carriers. As a result of its nondominant carrier
status, the Company believes it has significant flexibility to respond to
changes in interstate market conditions on a timely basis.
As a nondominant carrier, ELI may install and operate facilities for
domestic interstate communications without prior FCC authorization. ELI is
presently required to tariff certain of its domestic interstate tariff services.
The FCC has promulgated rules to eliminate tariffing of interstate long distance
services. Those rules have been stayed during the pendency of judicial review.
If and when these rules are allowed to go into effect, the Company will no
longer be required to file FCC tariffs for its interstate long distance
services. Additionally, under a recent FCC order, CLECs, including ELI, are no
longer required to file tariffs for interstate exchange access services. As a
provider of international long distance services, ELI obtained FCC operating
authority and maintains an international tariff. ELI is also required to submit
certain periodic reports to the FCC and to pay regulatory fees.
TELECOMMUNICATIONS ACT OF 1996
The national public policy framework for telecommunications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform
was to open local telecommunications markets to workable competition. ELI
believes that the 1996 Act has begun and will continue to result in substantial
changes in the marketplace that largely are favorable for the Company.
The 1996 Act preempts state and local laws to the extent that they prevent
competitive entry into the provision of any telecommunications service. Under
the 1996 Act, however, states retain authority to impose on carriers, including
ELI, requirements necessary to preserve universal telecommunications service,
protect public safety and welfare, ensure quality of service
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and protect consumers. States are also responsible for mediating and arbitrating
interconnection agreements between CLECs and ILECs if voluntary negotiations
fail.
In order to create an environment in which local competition is a practical
possibility, the 1996 Act imposes a number of access and interconnection
requirements on all local telecommunications providers. All local carriers,
including ELI, must interconnect with other carriers, permit resale of their
services, provide local telephone number portability and dialing parity, provide
access to poles, ducts, conduits, and rights-of-way, and complete calls
originated by competing carriers under reciprocal compensation or mutual
termination arrangements.
The 1996 Act also imposes some additional specific obligations on ILECs
(although certain small and rural ILECs may qualify for exemption from some of
these obligations). In particular, ILECs must allow interconnection at any
technically feasible point, provide interconnection service quality at least
equal to that provided to their own customers and other carriers, provide
nondiscriminatory access to unbundled network elements at any technically
feasible point at cost-based rates, provide wholesale discounts to carriers who
wish to resell ILEC services, give notice of network changes, provide physical
co-location, and negotiate in good faith with competitors. ELI believes its
opportunity for success in local telephone service markets is enhanced as a
result of these obligations imposed by federal law on ILECs. The access offered
by the 1996 Act to physical co-location, unbundled local loops and resale
discounts will give the Company the opportunity to expand the geographic reach
of its services in advance of facilities construction. Full implementation of
these provisions of the 1996 Act will require further federal and state rule
makings, industry negotiations, and possible legal enforcement actions and
remedies. Portions of the FCC's rules implementing interconnection,
particularly those related to the FCC's imposition of pricing methodology upon
state regulators, have been vacated by a federal appellate court (as discussed
below under "--Court of Appeals Decision." The appellate court found that,
under the 1996 Act, the states are the primary arbiters of charges for
interconnection, unbundled access, resale and the prices for the transport and
termination of calls. However, ELI should be able to continue and expand its
CLEC operations under a variety of negotiated interconnection arrangements and
state interconnection rules and policies, state arbitrated agreements, public
policy processes and judicial proceedings.
RBOCs have generally been barred from participating in the market for
interLATA (primarily long distance) services since the break up of the Bell
System in 1984. Under the 1996 Act, an RBOC now is allowed to provide interLATA
services outside of its local telephone service region. RBOC interLATA long
distance entry will increase the level of competition faced by ELI's retail long
distance services. However, ELI believes that RBOCs providing long distance
service outside their telephone service areas may represent new potential
customers of ELI's wholesale services.
The 1996 Act also authorizes the FCC to allow an RBOC to provide interLATA
services within its local telephone service area in a state in which the RBOC
has satisfied certain conditions.
During 1996 and 1997 the FCC took several additional actions with respect
to competitive local telecommunications pursuant to the 1996 Act.
On August 1, 1996, the FCC issued an order amending its pole attachment
rules to reflect the 1996 Act by requiring utilities, including ILECs and most
electric companies, to make poles, conduit and rights-of-way available to
certain carriers, including CLECs, at reasonable cost and
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on a nondiscriminatory basis. Several utilities have appealed the FCC order to
the U.S. Court of Appeals, which has not yet issued a decision.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, long distance companies and state public utility
commissions ("PUCs") on several provisions of the 1996 Act. The rules include,
among other things, FCC guidance on: (i) discounts for end-to-end resale of ILEC
local exchange services; (ii) availability of unbundled local loops and other
unbundled ILEC network elements; (iii) the use of Total Element Long Run
Incremental Costs in the pricing of these unbundled network elements; (iv)
average default proxy prices for unbundled local loops in each state; (v) mutual
compensation proxy rates for termination of ILEC/CLEC local calls; and (vi) the
ability of CLECs and other interconnecters to opt into portions of
interconnection agreements negotiated by the ILECs with other parties on the
basis of the ability to "pick and choose" among the provisions of an existing
agreement. See below for a discussion of the Eighth Circuit Court of Appeals
decision overturning certain aspects of this order.
The 1996 Act requires the FCC to establish explicit mechanisms for
subsidizing service to rural areas, low-income customers, schools and libraries,
and rural health care providers. On May 8, 1997, the FCC adopted an Order in
its universal service proceeding to implement this mandate. All
telecommunications carriers, including ELI and other CLECs, are required under
that Order to contribute to a federal universal service fund. Schools,
libraries and other entities eligible for universal service support represent a
potential target market for the Company. The availability of such support will
assist such entities in obtaining advanced telecommunications and information
services, thus potentially increasing demand for services of the type the
Company provides. Most states are expected to implement state-specific
universal service funds to supplement the federal programs. All carriers,
including ELI, will be required to contribute to those state and federal funds.
At this time, the Company is unable to quantify the total amount of these
payments it will be required to make or the effect these required payments will
have on its financial condition.
In a combined Report and Order and Notice of Proposed Rulemaking released
on December 24, 1996, the FCC made changes and proposed further changes in the
interstate access charge structure. In the Report and Order, the FCC removed
restrictions on the ILECs' ability to lower access prices and proposed the
relaxation of the regulation of new switched access services in those markets
where there are other providers of access services. If any such increased
pricing flexibility is allowed but is not effectively monitored by federal
regulators, it could have a material adverse effect on the Company's revenues
from interstate access services. However, the Company believes this potential
impact will be limited by the fact that its private line revenues are only
partially derived from bypass of ILEC switched access services. On May 16,
1997, the FCC released an order revising its access charge rate structure. The
new rules substantially increase the costs that ILECs subject to the FCC's price
cap rules ("price cap LECs") recover through monthly, non-traffic sensitive
access charges and substantially decrease the costs that price cap LECs recover
through traffic sensitive access charges. In the May 16 order, the FCC also
announced its plan to bring interstate access rate levels more in line with
cost. The plan will include rules to be established sometime this year that
grant price cap LECs increased pricing flexibility upon demonstrations of
increased competition (or potential competition) in relevant markets. The
manner in which the FCC implements this approach to lowering access charge
levels may have a material adverse effect on the Company's ability to
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compete in providing interstate access services. However, the Company also
believes it may benefit from certain aspects of the FCC's access charge
restructuring. Under the FCC's rules, which are the subject of a petition for
reconsideration, the Company will no longer be required to pay a portion of ILEC
access charges (the terminating interconnection charge) by connecting directly
to ILEC end offices. Additionally, the Company may be able to differentiate its
access prices from those of competing ILECs by eliminating certain other rate
elements. Several parties have appealed the May 16 order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
As part of the overall plan to lower interstate access rates, the FCC also
released an order on May 21, 1997, in which the FCC revised its price cap rules.
In the order, the FCC increased the so-called X-Factor (the percentage by which
price cap LECs must lower their interstate access charges every year, net of
inflation and exogenous cost increases) and made it uniform for all price cap
LECs. The results of these rule changes will be both a one-time overall
reduction in price cap ILEC interstate access charges and an increase in the
rate at which those charges will be reduced in the future. Several parties have
appealed the May 21 order. Those appeals have been consolidated and transferred
to the United States Court of Appeals for the Tenth Circuit where they are
currently pending.
COURT OF APPEALS DECISION
Various parties, including ILECs and state PUCs, filed appeals of the FCC's
August 8, 1996 interconnection order, many of which were consolidated and
transferred to the U.S. Court of Appeals for the Eighth Circuit. On July 18,
1997, the Eight Circuit rendered its decision, which held that, in general, the
FCC does not have jurisdiction over prices for interconnection, resale, leased
unbundled network elements and traffic termination. The Eighth Circuit also
overturned the FCC's "pick and choose" rules as well as certain other FCC rules
implementing the 1996 Act's local competition provisions. In addition, the
Eighth Circuit decision substantially limits the FCC's authority to enforce the
local competition provisions of the 1996 Act. The FCC has indicated that it
will seek Supreme Court review of the decision.
In the short term the Company believes that the Eighth Circuit decision
will not have a material adverse effect on it, because the Company already has
interconnection agreements in place, or expects to have such agreements in
place, under the provisions of the FCC's order and the 1996 Act which were not
invalidated by the Court. The decision does not delay the implementation of the
1996 Act by the parties and by the state PUCs, but rather eliminates the
guidance on pricing and pick and choose as well as other issues that the FCC
sought to provide to the parties and the state PUCs.
In the long term, the Eighth Circuit's decision makes it more likely that
the rules governing local competition will vary from state to state. Most
states have already begun to establish rules for local competition that are
consistent with the FCC rules overturned by the Eighth Circuit. If a patchwork
of state regulations were to develop, it could increase the Company's costs of
regulatory compliance and could make competitive entry in some markets more
difficult and expensive than in others.
STATE REGULATION
Most state public utilities commissions require telecommunications
providers such as ELI to obtain operating authority prior to initiating
intrastate services. Most states also require the
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filing of tariffs or price lists and/or customer-specific contracts. In the
states in which ELI currently operates, ELI is not subject to rate-of-return or
price regulation. ELI is subject, however, to state-specific quality of service,
universal service, periodic reporting and other regulatory requirements,
although the extent of such requirements is generally less than that applicable
to ILECs. ELI currently has intrastate operating authority in the following
states:
Arizona: ELI is authorized as a competitive provider to provide intrastate
long distance statewide and other intrastate services in all U S WEST service
territories pursuant to tariff.
California: ELI is authorized as a Competitive Local Carrier to provide
basic local service within PacBell and GTE Corp. service territories and other
intrastate services statewide pursuant to tariff. ELI has a pending application
to provide basic local service within the service territory of Roseville
Telephone Co.
Idaho: ELI is authorized to provide basic local service to business
customers with more than five lines in U S WEST service territory in Southern
Idaho and other intrastate services statewide pursuant to tariff.
Minnesota: ELI is authorized to provide intrastate long distance statewide
and local services in the greater Minneapolis-St. Paul metropolitan area
pursuant to tariff.
Nevada: ELI is authorized to provide intrastate services statewide,
excluding points within the Citizens Telecommunications Company of Nevada
service territory, pursuant to price list.
Oregon: ELI is authorized as a Competitive Telecommunications Provider to
provide intrastate long distance service statewide and local exchange services
in the greater Portland metropolitan area. ELI is not required to file tariffs,
price lists or contracts.
Utah: ELI is authorized as a Competitive Telecommunications Company to
provide intrastate services statewide pursuant to price list or customer-
specific contracts.
Washington: ELI is authorized as a Competitive Telecommunications Company
to provide intrastate services statewide pursuant to price list or customer-
specific contracts.
LOCAL GOVERNMENT AUTHORIZATIONS
ELI generally is required to obtain street opening and construction permits
from city and county authorities prior to installing or expanding its fiber
optic network facilities. In most states in which ELI currently operates as a
CLEC, it must first obtain a franchise or license from each incorporated city
and town, and sometimes from each county, in which it wishes to utilize public
rights of way. The franchise or license establishes the overall terms,
conditions and fees for use of the rights of way in the particular jurisdiction.
In California, ELI and other holders of certification from the California Public
Utilities Commission are not required to obtain municipal franchises nor pay
franchise fees.
The 1996 Act now provides that while local governments may continue to
manage the public rights of way, they may not impose conditions on companies
like ELI which constitute barriers to entry in the telecommunications market.
Further, the 1996 Act requires that municipal right-of-way authorizations be
granted on a nondiscriminatory basis and that any fees be reasonable.
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THE LOCAL TELECOMMUNICATIONS SERVICES INDUSTRY
On January 1, 1984, AT&T (then referred to as the "Bell System") divested
itself of the Bell Operating Companies (the "BOCs"), which were transferred to
seven holding companies. Following this divestiture (the "Divestiture"), each
BOC continued to conduct local telephone and other telecommunications business
in geographically defined areas, referred to as "Local Access and Transport
Areas" or "LATAs."
Prior to the Divestiture, the BOCs and "independent" local exchange
telephone companies not affiliated with the Bell System had government-regulated
monopolies for most local telephone services. The Divestiture encouraged the
growth of competition for long distance services and equipment manufacturing by
prohibiting the BOCs from entering these markets. However, the BOCs retained
monopoly control over the market for local telephone services. Competition in
the long distance market accelerated dramatically and, by the end of 1995,
AT&T's long distance competitors had captured approximately 40% of the
interstate long distance market.
The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in some local telecommunications market segments, including (i)
increasing customer desire for an alternative to the ILEC monopoly, particularly
among business customers, prompted in part by competition in the long distance
market, (ii) technological advances in the transmission of data and video
requiring greater capacity and reliability levels than copper-based ILEC
networks were able to accommodate, (iii) a monopoly position and rate of return-
based pricing structure that provided little incentive for the ILECs to upgrade
their networks or meet specialized customer needs, (iv) the development of fiber
optics and digital electronic technology, which combined the ability to
economically build a high-capacity digital network with the ability to transmit
voice, data and video signals at high speeds and (v) the significant "access
charges" that long distance carriers were required to pay to the ILECs to
originate and terminate long distance telephone calls on the ILECs' networks.
The first competitors in the local market were designated as "competitive
access providers" or "CAPs" by the FCC because they provided special access
services (e.g., dedicated lines for local access links to long distance
networks). Initially, CAPs provided special access (dedicated access lines) by
installing fiber optic facilities connecting long distance carriers' POPs within
a metropolitan area and, in some cases, connecting end users (primarily large
businesses) to long distance carriers' POPs. CAPs also provided private line
services connecting multiple locations of a single end user within a local
market area with dedicated fiber optic lines. CAPs used the technological
advantage and substantial capacity and economies of scale inherent in fiber
optic technology to offer customers service that initially was generally less
expensive and of higher quality than could be obtained from the ILECs, due in
part to the ILECs' copper-based facilities and higher overhead costs. In
addition, CAPs generally offered shorter installation and repair intervals and
improved reliability in comparison to the ILECs. In recent years, the ILECs
steadily have been increasing the amount of fiber used in their networks,
thereby decreasing the competitive advantage held by the CAPs in the special
access and private line markets.
As CAPs proliferated during the latter part of the 1980s, federal and some
state regulators issued rulings which permitted and sometimes encouraged local
competition and opened some local market segments to new entrants. These
rulings allowed CAPs to offer a number of new
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services, including, in certain states, certain switched services (but not basic
local exchange telephone service). A series of state public utility commission
decisions beginning in 1989 and FCC decisions beginning in 1991 requiring
expanded interconnection (or "co-location") permitted CAPs to interconnect their
networks with the largest ILECs' networks. This expanded interconnection gave
CAPs the option to access customers by either leasing facilities from an ILEC
through a co-location arrangement or installing extensions to the CAP's own
network, depending on the relative cost and other factors. Beginning in 1994, a
few states permitted CAPs, including ELI, to become "competitive local exchange
carriers" or "CLECs," and thus to begin providing local exchange services,
primarily to business customers. By the time the 1996 Act was adopted,
approximately half the states had removed legal prohibitions on the provision of
competitive local exchange service. Legal and regulatory restrictions in the
remaining states will be significantly reduced by the 1996 Act.
While many companies have been organized over the last decade to provide
CAP or CLEC services, only a few have grown to significant size. These large
CAPs and CLECs operate in multiple local markets and have acquired a number of
smaller CAPs. Recently, new CAPs or CLECs have been created, primarily to serve
small markets.
The competitive position of the CAPs and CLECs has been improved by the
regulatory commissions of an increasing number of states, which have encouraged
competition in various aspects of the intrastate local telecommunications
market. The intrastate local market consists of intrastate access services,
basic local exchange services and local private line special access services.
While the majority of state initiatives were originally limited to intrastate
private line and special access services, many states are in the process of
changing their statutes or regulations to permit competition for switched
services, including basic local exchange telephone services. Those states that
have not made these changes will be required to do so under the 1996 Act.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their respective
ages and positions are set forth below.
<TABLE>
<CAPTION>
NAME Age Title
- ---- ---- -----
<S> <C> <C>
Leonard Tow 69 Chairman of the Board
Daryl A. Ferguson 58 Vice Chairman of the Board and Chief Executive Officer
David B. Sharkey 47 President, Chief Operating Officer and Director
Robert J. DeSantis 41 Vice President, Chief Financial Officer and Treasurer
James Berthot 52 Vice President Marketing and Product Development
Todd Hanson 36 Vice President Engineering
Randall Lis 38 Vice President Staff Operations
Michael J. Miller 41 Vice President Planning
Kerry Rea 39 Vice President and Controller
John Wolff 51 Vice President Sales
Ernest D. Yates 52 Vice President Operations
Stanley Harfenist 66 Director
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Robert A. Stanger 57 Director
Maggie Wilderotter 42 Director
</TABLE>
Leonard Tow has been a director and Chairman of the Board of the Company
since August 1994. Mr. Tow has been a director of Citizens since April 1989.
In June 1990, he was elected Chairman of the Board and Chief Executive Officer
of Citizens. In October 1991, he was appointed to the additional position of
Chief Financial Officer of Citizens. He has also been a Director, Chief
Executive Officer and Chief Financial Officer of Century Communications Corp.
since its incorporation in 1973, and Chairman of its Board of Directors since
October 1989.
Daryl A. Ferguson, has been a director of the Company since September 1995
and Vice Chairman of the Board and Chief Executive Officer of the Company since
October 1997. Mr. Ferguson has been President and Chief Operating Officer of
Citizens since June 1990. Mr. Ferguson was Vice President, Administration of
Citizens from July 1989 through March 1990 and Senior Vice President, Operations
and Engineering of Citizens from March 1990 through June 1990. From April 1987
through July 1989, Mr. Ferguson was President and Chief Executive Officer of
Microtecture Corporation. He is currently also a Director of Centennial
Cellular Corp.
David B. Sharkey joined ELI as President and Chief Executive Officer in
August 1994, has been a director since September 1995, and Chief Operating
Officer since October 1997. Mr. Sharkey has 29 years of telecommunications
experience. Prior to joining ELI, from 1989 to 1994, he held the position of
Vice President and General Manager at Mobile Media, Inc., a radio common carrier
provider. Mr. Sharkey spent 21 years with New Jersey Bell Telephone and AT&T in
technical operations and sales & marketing.
Robert J. DeSantis, Vice President, Chief Financial Officer and Treasurer
of the Company since August 1994, has been Vice President and Treasurer of
Citizens since October 1991. Mr. DeSantis was Assistant Treasurer of Citizens
from June 1986 through September 1991 and was Assistant to the Treasurer of
Citizens from January 1986 to June 1986.
James Berthot joined ELI as Vice President of Marketing and Product
Development in July 1995. Prior to joining ELI, from January 1990 to July 1995,
Mr. Berthot was Director of Marketing and Public Relations for Century Telephone
Enterprises, Inc.'s Telephone Group, where he led marketing, sales and public
relations activities. Mr. Berthot has served as Sales Director for The
Information Line, a joint venture with United Telecommunications (Sprint) and
Volt Information Sciences Inc. He has more than 25 years experience in the
high-technology industry including management positions with Southwestern Bell
Corporation and AT&T.
Todd Hanson joined ELI as Vice President of Engineering in June 1995.
Prior to joining ELI, from 1993 to 1995, Mr. Hanson served as Vice President of
Network Engineering for MFS Telecommunications, Inc., where he was responsible
for network planning and implementation on a national basis. Mr. Hanson was
Director of Project Management and Access Engineering at AT&T Canada in 1992 and
1993. Mr. Hanson's experience comprises 13 years of telecommunications
management including positions with Sprint and Unitel in the areas of
engineering, operations and project management.
Randall Lis joined ELI as Vice President--Operations in February 1995 and
has served as Vice President--Staff Operations since April 1996. Prior to
joining ELI, from 1993 to 1995,
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Mr. Lis was General Manager of the Mid-Atlantic Region of Nextel Communications.
His nearly 20 years of telecommunications experience includes positions with
Southwestern Bell Corporation and Ram Mobil Data. From 1985 through 1993, Mr.
Lis held several positions with Metromedia and Metromedia Paging, in which he
served as Business Manager, General Manager and Senior Director of Operations.
Michael J. Miller joined ELI as Director of Accounting in March 1994, was
promoted to Vice President of Finance in October 1995 and became Vice President-
Planning in September 1997. Prior to joining ELI, from February 1988 to
December 1993, Mr. Miller was Manager of Financial Planning and Analysis for
NERCO, Inc., a diversified natural resource company in Portland, Oregon. At
NERCO, Mr. Miller performed economic analyses and evaluations for the
operations, accounting and marketing groups. He is a Certified Public
Accountant.
Kerry D. Rea joined ELI as Vice President and Controller in October, 1997.
Prior to joining ELI, Mr. Rea served as Controller for the Portland, Oregon-
based operations of Mattel, Inc. (since March, 1997), and its predecessor Tyco
Toys, Inc. (from November 1989 to March 1997). Mr. Rea, a certified public
accountant, previously worked in various accounting and finance positions for
Tyco's predecessor as well as working seven years in public accounting.
John Wolff joined ELI as Vice President--Sales in October 1994. Prior to
joining ELI in 1994, he was Vice President and General Manager of the Southwest
Region for SBC. Mr. Wolff has 25 years in the telecommunications industry with
experience in sales, marketing, operations, and training. Mr. Wolff was
employed by New Jersey Bell for 10 years, rising to Director of Sales/Marketing
Training Center. From 1980 to 1983, Mr. Wolff acted as the personal
representative of the Vice President of Sales of AT&T on the Divestiture
Reorganization Committee. After the breakup of the Bell System in 1983, he
served as General Sales Manager at AT&T Communications. Mr. Wolff left AT&T in
1985 to join Metromedia Paging Service, Inc., as Director of Sales and
Marketing, then joined SBC.
Ernest D. Yates joined ELI as Senior Director of Sales in February 1995.
In September 1995 he was promoted to Vice President--Administration and has
served as Vice President--Operations since April 1996. Prior to joining ELI,
Mr. Yates, from 1965 through 1995, was employed by AT&T and Southwestern Bell
Corporation where he held various sales, technical and general management
positions. Mr. Yates is currently responsible for the implementation of ELI's
new order tracking, provisioning and billing systems as well as operations in
all ELI-staffed cities.
Stanley Harfenist has been a director of the Company since October 1997.
Mr. Harfenist has been a director of Citizens since 1992. He is President and
Chief Executive Officer of Adesso, Inc., a manufacturer of hardware for the
Macintosh computer. He was President, Chief Operating Officer and Director of
Players International, Inc. from 1985 to 1993, an Officer of Sega Enterprises
from 1982 to 1984 and an Officer of Knickerbocker Toy Company, Inc. from 1978 to
1982.
Robert A. Stanger has been a director of the Company since October 1997.
Mr. Stanger has been a director of Citizens since 1992. He is Chairman of
Robert A. Stanger & Company, an investment banking and consulting service. Mr.
Stanger is Publisher of The Stanger Real Estate Report. Mr. Stanger is also a
director of Callon Petroleum Company, Inc., which is in the business of
exploration and production of oil and natural gas.
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Maggie Wilderotter has been a director of the Company since October 1997.
Ms. Wilderotter has been President and Chief Executive Officer of Wink
Communications since [date]. From [date] to [date], Ms. Wilderotter was the
Executive Vice President of National Operations for AT&T Wireless Services, Inc.
and Chief Executive Officer of AT&T's Aviation Communications Division. From
[date] to [date], she served as Senior Vice President of McCaw Cellular
Communications, Inc. and Regional President of its California/Nevada/Hawaii
Region. Ms. Wilderotter was with U.S. Computer Services, Inc./Cable Data, as
Senior Vice President and General Manager from [date] to [date]. She is also a
director of Gaylord Entertainment Corporation, ANTEC Corporation, Airborne
Express, Jacor and the California Cable Television Association.
BOARD COMPOSITION
Directors are elected annually. The Board presently consists of six
members, four of whom are associated with Citizens and one of whom is
independent of both Citizens and ELI. Following the Offering, the Board will be
increased to consist of seven members to add an additional independent director.
At each annual meeting of the Company's stockholders at which directors are
elected, the holders of Class A Common Stock and Class B Common Stock (all of
which will be held by Citizens) may vote for directors. The holders of Class A
Common Stock are entitled to one vote per share of Class A Common Stock and the
holders of Class B Common Stock are entitled to ten votes per share of Class B
Common Stock. Each director is entitled to receive an annual retainer of
$[_______] and an additional $[____] plus reasonable expenses for attending each
meeting of the Board of Directors. Each director is also entitled to be paid
$[____] annually for each committee of the Board of Directors for which such
director serves as chairman.
COMPENSATION COMMITTEE
The Board of Directors of ELI has established a Compensation and Benefits
Committee to address and make recommendations with respect to the compensation
of executive officers and the establishment of compensation and benefit plans.
There was no Compensation Committee of the Company during fiscal year 1996. Mr.
Sharkey, as a member of the Board of Directors of the Company, participated in
deliberations regarding executive officer compensation.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee to meet with and
consider suggestions from members of management, as well as with the Company's
independent accountants, concerning matters of internal controls. The Audit
Committee also will have the responsibility to review the audited financial
statements of the Company and consider and recommend the employment of, and
approve the fee arrangements with, independent accountants for both audit
functions and for advisory and other consulting services.
EXECUTIVE COMPENSATION
The following table shows compensation paid to, deferred or accrued for the
benefit of, the Company's Chief Executive Officer during 1996 and each of the
four remaining most highly compensated executive officers (the "Named Executive
Officers") for all services rendered to ELI during the three most recent fiscal
years ended December 31, 1996.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------------------------------ ----------------------------------------
Awards Payouts
------------------------
Securities
Underlying Long-term All Other
Other Annual Restricted Options/ Incentive Plan Compensation
Salary Salary Bonus(2) Compensation Stock Awards SARs (3) Payouts (4)
Name and Position(1) Year $ $ $ $ (#) $ $
- -------------------- ------ -------- --------- ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David B. Sharkey 1996 155,833 80,000 - - 17,039 - 26,703
President and CEO 1995 150,000 75,000 - - - -
1994 79,612 - - - 23,267 - -
John Wolff 1996 127,500 40,000 - - 8,117 - 4,750
VP-Sales 1995 120,000 40,000 - - - 15,535
1994 30,000 - - - 11,326 - 4,681
Randall Lis 1996 114,125 40,000 - - 8,117 - 32,163
VP-Staff Operations 1995 99,634 30,000 - - 11,327 - 18,450
1994 - - - - -
Todd Hanson 1996 131,401 40,000 - - - 3,651
VP-Engineering 1995 95,804 40,000 - - 16,490 - 30,338
1994 - - - - - -
Ernest Yates 1996 107,833 40,000 - - 7,987 - 3,997
VP-Operations 1995 71,942 18,000 - - - 34,907
1994 - - - - - -
</TABLE>
__________________
(1) Messrs. Ferguson and DeSantis are executive officers of Citizens. Their
1996 compensation for services to ELI does not place any of them among the
five most highly compensated executive officers of the Company. Mr.
Sharkey was Chief Executive Officer of the Company from August 1994 until
October 1997, when Mr. Ferguson became Chief Executive Officer.
(2) Bonus amounts awarded were for performance for the stated Salary Year,
notwithstanding determination of the bonus amount in the subsequent year.
(3) All Options in this column are exercisable for shares of common stock, par
value $.01 per share, of Citizens. Options are adjusted to reflect stock
dividends paid subsequent to date of grant. All awards shown are options
granted under the Citizens Utilities Company Management Employee Incentive
Plan or its successor Plan, the Employee Incentive Plan. In 1996, no
compensation was paid to any executive officer or employee in stock or
restricted stock of ELI, and no stock options or SARs denominated in stock
of ELI were awarded or granted to any executive officer or employee of ELI.
(4) Represents the Company's matching contribution to each executive's 401(k)
plan. Additionally represents $25,453 which represents the 1996 economic
benefit of split-dollar life insurance for Mr. Sharkey, $28,271 and $222
for relocation allowances paid to Mr. Lis and Mr. Yates, respectively, in
1996, and $9,935, $18,450, $28,898 and $33,610 for relocation allowances
paid to Messrs. Wolff, Lis, Hanson and Yates in 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted to the Named Executive
Officers in 1996. All of the options listed below relate only to options to
purchase shares of Citizens' common stock. No options or stock appreciation
rights relating to the Company's Common Stock, and no stock appreciation rights
relating to Citizens' common stock, were granted in 1996. Options relating to
the Company's Common Stock will be granted as of the effective date of the
Offering to the Named Executive Officers. See "--Equity Incentive Plan."
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<TABLE>
<CAPTION>
NUMBER OF %OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE GRANT DATE
OPTIONS/SARS EMPLOYEES IN PRICE AT EXPIRATION PRESENT
NAME GRANTED (#)(1) FISCAL YEAR GRANT ($/SH)(2) DATE VALUE $(3)
- ------------------- -------------- ------------ --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
David B. Sharkey 17,039 1% $11.44 02/15/06 $39,030
John Wolff 8,117 .3% 11.44 02/15/06 12,456
Randall Lis 8,117 .3% 11.44 02/15/06 12,456
Todd Hanson
Ernest Yates
</TABLE>
______________
(1) All options are for shares of common stock of Citizens. All options become
exercisable at the rate of 20% per year on February 15, 1997, 1998, 1999,
2000 and 2001.
(2) Fair Market Price at time of grant.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may
realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no assurance
the value realized, if any, by an executive will be at or near the value
estimated by the Black-Scholes model. The estimated values under that
model are based on arbitrary assumptions as to variables such as interest
rates, stock price volatility and future dividend yield. The pricing model
assumes a dividend yield of 6.2%, a riskless rate of return of 5.6%, a
seven-year term of exercise and volatility of 0.198.
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND 1996 YEAR-END OPTION/SAR VALUES
The following table sets forth option and stock appreciation rights
exercised by the Named Executive Officers during 1996 and the number and value
of options held by them at December 31, 1996. All of the options listed below
relate only to Citizens' common stock. There were no outstanding stock
appreciation rights relating to Citizens' common stock at December 31, 1996. No
exercises occurred during 1996 of options or stock appreciation rights relating
to the Company's Common Stock and, at December 31, 1996 there were no
outstanding options or stock appreciation rights relating to the Company's
Common Stock.
<TABLE>
<CAPTION>
VALUE OF
SHARES NUMBER OF UNEXERCISED
ACQUIRED ON VALUE UNEXERCISED IN-THE-MONEY
EXERCISE(#) REALIZED OPTIONS/SARS AT OPTIONS/SARS AT
NAME COMMON STOCK $ FISCAL YEAR END (#) FISCAL YEAR-END($)
-------------------- ---------------- ------------- ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
David B. Sharkey 0 0 9,304 31,001 0 0
John Wolff 0 0 4,453 14,783 0 0
Randall Lis 0 0 2,265 17,050 0 0
Todd Hanson 0 0 3,298 13,192 0 0
Ernest Yates 0 0 0 7,987 0 0
</TABLE>
All numbers are as of December 31, 1996 and reflect adjustment for stock
dividends paid subsequent to the date of grant. The closing price of Citizens'
common stock on December 31, 1996 was $11.125.
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EQUITY INCENTIVE PLAN
The Board of Directors established an Equity Incentive Plan (the "Plan") in
September 1997, which has been approved by the sole stockholder. The purpose of
the Plan is to provide incentives for high levels of performance and
productivity by employees of the Company. The Plan is intended to strengthen
the Company's existing operations through its ability to attract and retain
outstanding employees upon whose judgment, initiative and efforts the continued
efficiency, productivity, growth and development of the Company is dependent.
The Plan became effective on October 15, 1997 and will remain in effect for 10
years. No awards will be granted more than 10 years after the effective date of
the Plan.
As of the effective date of the Offering, (i) _______ will be granted
options for _____ shares of Common Stock, (ii) _______ will be granted options
for _____ shares of Common Stock, (iii) _______ will be granted options for
_____ shares of Common Stock, (iv) ________ will be granted options for _____
shares of Common Stock and (v) _______ will be granted options for _____ shares
of Common Stock. Also, as of the effective date of the Offering, _______ will
be granted options for ______ shares of Common Stock; _______ will be granted
options for _________ shares of Common Stock; other executive officers in the
aggregate will be granted options for _______ shares of Common Stock; and
options for an aggregate of ______ shares of Common Stock will be granted to
[number] employees of ELI who are also employees of Citizens. All of such
employees of ELI who are also employees of Citizens are expected to render
services to ELI either directly or through the Administrative Services
Agreement.
All employees of the Company are eligible for selection to participate in
the Plan. Directors who are not employees of the Company are ineligible.
Awards granted under the Plan consist of stock options or other stock-based
awards relating to shares of the Company's Class A Common Stock. The maximum
number of shares of Common Stock which may be issued pursuant to awards is no
more than _____ shares. Under the Plan, no individual may be granted share-
denominated performance awards in any calendar year covering more than 500,000
shares and dollar value-denominated performance awards in any calendar year
covering more than $250,000 in dollar value. No awards will be granted more
than ten years after the effective date of the Plan.
The Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the express provisions of the Plan, the Compensation
Committee is authorized, among other things, to (a) grant awards to eligible
employees; (b) determine the terms and conditions of each award; (c) establish
and modify performance objectives; and (d) modify or amend any award unless the
effect adversely and materially affects the rights of any recipient. If the
Compensation Committee so determines, any action or discretion delegated in the
Plan to the Compensation Committee may be carried out by, or delegated to, the
Board of Directors or the stockholders.
Under the Plan, a Stock Option, which may be a nonqualified or an incentive
stock option, may be granted either alone or in conjunction with one or more
other awards. The exercise price, except in the discretion of the Compensation
Committee in the case of new employees, shall be equal to or greater than the
85% of the fair market value of the underlying Common Stock on the date of
grant. The term of each Stock Option is also determined by the Compensation
Committee but may not exceed ten years from the date of grant. Upon exercise,
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<PAGE>
the option price of each Stock Option is payable by the option holder in cash
or, in the sole discretion of the Compensation Committee, through the delivery
of shares of the Company's Common Stock valued at their fair market value, or in
a combination of cash and shares. The Compensation Committee may grant a
replacement Stock Option to an option holder to replace the shares which the
option holder delivered to Company in payment of the option price in a stock-
for-stock exercise or of any withholding taxes. The exercise price of any
replacement Stock Option may not be less than 100% of the fair market value of
the Common Stock delivered to the Company on the date of such payment. The
Compensation Committee may also accept the surrender of the right to exercise
any Stock Option for alternative settlement by payment to the option holder of
an amount not to exceed the difference between the exercise price and the then
fair market value of the shares as to which such right of exercise is
surrendered. Such payment may be made in cash or in shares of the Company's
Common Stock (valued at the then fair market value) or any combination thereof.
The Compensation Committee may also grant stock appreciation rights, free
standing or in tandem with Stock Options, which entitle the holder thereof to
receive a similar payment at his or her election.
The Plan also authorizes the Compensation Committee to grant other stock-
based awards to eligible employees, which consist of awards that are valued in
whole or in part by reference to, or otherwise based on, the Company's Common
Stock and may include, but are not limited to, restricted stock, performance
shares and deferred stock. Subject to the terms of the Plan, the Compensation
Committee may determine any and all terms and conditions of other stock-based
awards. The performance objectives determined by the Committee for each
performance share award shall be based on stock price; market share; sales;
earnings per share; operating cash flow; free cash flow; net income or loss; net
income or loss adjusted to exclude specified items such as gain or losses from
extraordinary or non-recurring items and non-cash expense and income and before
specified expense items such as interest, depreciation, amortization and income
taxes; EBITDA; revenues; return on equity or assets; cost control; or a
combination of any of the foregoing. Payment or settlement of other stock-based
awards will be in cash or in shares of the Company's Common Stock or in any
combination thereof as the Compensation Committee determines in its sole
discretion. The Compensation Committee may permit the payment of withholding
taxes due in connection with awards under the Plan by the withholding of shares
to be issued under the award or by the employee's delivery of other shares of
Common Stock of the Company.
Awards may include terms which provide that any or all of the following
actions may occur as a result of, or in anticipation of, any "Change in Control"
(as defined below) to assure fair and equitable treatment of employees: (i)
acceleration of time periods for purposes of vesting, or realizing gain from,
any outstanding award; (ii) purchase of any outstanding award from the holder
for its equivalent value, as determined by the Compensation Committee; (iii)
adjustments or modifications to outstanding awards, including the modification
or elimination of performance goals, as the Compensation Committee deems
appropriate to maintain and protect the rights and interests of participants. A
"Change in Control" is defined to mean the occurrence of any of the following
events: (i) a person or group (other than Citizens) becomes the owner of stock
having 20% or more of the total number of votes that may be cast for the
election of directors of the Board or 20% or more of the fair market value of
the Company's issued and outstanding stock; (ii) a consolidation or merger or
sale of assets in which the Company is not the surviving corporation or pursuant
to which the Company's stock will be converted into cash, securities or other
property or a sale, lease, exchange or other transfer of 51% or more of the
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<PAGE>
assets of the Company; or (iii) as a result of any cash tender or exchange
offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing Transactions, the persons who are
members of the Board before the Transaction shall cease to constitute a majority
of the Board of the Company.
These provisions in the Plan allowing the Compensation Committee to award
accelerated vesting upon a Change in Control could in some circumstances have
the effect of an "antitakeover" defense because, as a result of these
provisions, a Change in Control of the Company could be more difficult or
costly.
The Plan is subject to suspension, amendment, modification or termination
at any time by the Company's Board of Directors or the stockholders. However,
no amendment or modification would become effective unless approved by
affirmative vote of the stockholders of the Company if such approval is
necessary or desirable for the continued validity of the Plan or its compliance
with any tax or securities law rule or regulation or any stock exchange in stock
market, or other legal or regulatory, requirement.
PENSION PLAN
Citizens has a noncontributory qualified retirement plan covering Mr.
Sharkey that provides benefits based on formulas related to base salary and
years of service. Benefits shown are not subject to reduction for Social
Security payments. The following table illustrates the estimated annual plan
pension benefits available to Mr. Sharkey upon retirement at age 65 assuming a
preretirement death benefit election of 100% joint and survivorship benefits.
The remuneration classifications are based on the highest five-year average
annual salary and the years of service represent years of credited service.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
----------------
<S> <C> <C> <C> <C> <C> <C>
Remuneration 5 10 15 20 25 30
(000 Omitted) -- -- -- -- -- --
-------------
$160........................ 12 25 37 49 62 74
</TABLE>
Full years of credited service for Mr. Sharkey are two.
RELATIONSHIP WITH CITIZENS
GENERAL
Upon completion of the Offering, Citizens will own 100% of the outstanding
Class B Common Stock of the Company which will represent approximately ____% of
the combined voting power of all of the outstanding Common Stock (or
approximately ___% if the Underwriters' over-allotment options are exercised in
full). For so long as Citizens continues to own shares of Common Stock
representing more than 50% of the combined voting power of the Common Stock of
the Company, Citizens will be able, among other things, to determine any
corporate action requiring approval of holders of Common Stock, including the
election of the entire Board of Directors of the Company, certain amendments to
the Certificate of Incorporation and By-Laws of the Company and approval of
certain mergers and other control transactions,
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<PAGE>
without the consent of the other shareholders of the Company. See "Description
of Capital Stock."
In addition, through its beneficial ownership of Common Stock and,
following the Offering, its control of the Board of Directors, Citizens will be
able to control certain decisions, including decisions with respect to the
Company's dividend policy, the Company's access to capital (including borrowing
from third-party lenders and the issuance of additional equity securities),
mergers or other business combinations involving the Company, the acquisition or
disposition of assets by the Company and any change in control of the Company.
Citizens has advised the Company that Citizens has no present plan or intention
other than to hold all of the Class B Common Stock beneficially owned by it for
the foreseeable future. Citizens has no agreement with the Company not to sell
or distribute such shares, other than pursuant to the Underwriting Agreement in
which Citizens has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities exchangeable into or
exercisable or exchangeable for Common Stock or file any registration statement
under the Securities Act with respect to any of the foregoing for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. on behalf of the Representatives. There can be no
assurance concerning the period of time during which Citizens will maintain its
beneficial ownership of Common Stock.
Beneficial ownership of at least 80% of the total voting power and value of
the outstanding Common Stock is required in order for Citizens to continue to
include the Company in its consolidated group for federal income tax purposes.
Completion of the Offering made by this Prospectus will terminate the
consolidated group which includes the Company. Beneficial ownership of at least
80% of the total voting power and at least 80% of any class of nonvoting capital
stock is required in order for Citizens to be able to effect a tax-free spin-
off. The Company's relationship with Citizens will also be governed by
agreements to be entered into in connection with the Offering with Citizens,
including an Administrative Services Agreement, a Tax Sharing Agreement, an
Indemnification Agreement, a Customers and Service Agreement and a Registration
Rights Agreement, the material terms of which are described below.
The arrangements described below are the result of negotiations between
affiliated parties and, therefore, there can be no assurance that the prices
charged to the Company at a particular time for services provided thereunder may
not be higher or lower than prices that might have been charged by an
unaffiliated third party.
The descriptions set forth below are intended to be summaries, and while
material terms of the agreements are set forth herein, the descriptions are
qualified in their entirety to reference to the relevant agreement filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
ADMINISTRATIVE SERVICES AGREEMENT
The Administrative Services Agreement (the "Administrative Services
Agreement") provides for Citizens to continue to provide certain financial
management services, information services, legal and contract services, human
resources services and corporate planning services to the Company. Under the
terms of the Administrative Services Agreement, all of the services
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<PAGE>
will be rendered by Citizens subject to the oversight, supervision and approval
of ELI, acting through its Board of Directors.
The administrative costs to be paid by ELI to Citizens pursuant to the
Administrative Services Agreement are not expected to exceed the fees that would
be paid if such services were to be provided by an independent third party.
The Administrative Services Agreement will become effective upon the public
offering of shares of Class A Common Stock, and shall terminate on December 31,
2005, unless earlier terminated by Citizens or ELI. The Administrative Services
Agreement will be automatically renewed for additional terms of two years unless
either party gives at least six months written notice prior to a scheduled
termination date. The Administrative Services Agreement can be terminated upon
a material breach and will be terminated upon a change of control of ELI. A
change of control shall be deemed to have occurred if (i) Citizens or the
companies controlled by Citizens should own shares representing less than a
majority of the voting power of the then outstanding common stock; (ii) majority
of the seats of the board of directors shall be occupied by persons who are
neither (a) nominated by Citizens or by the board of directors of ELI, nor (b)
appointed by directors of ELI so nominated or (iii) any person or group other
than Citizens and companies controlled by Citizens shall otherwise directly or
indirectly have the power to exercise a controlling influence over ELI.
TAX SHARING AGREEMENT
Because the Company may be included in Citizens' combined, consolidated or
unitary income tax groups for state and local tax purposes, the Company and
Citizens will enter into the Tax Sharing Agreement (the "Tax Sharing
Agreement"). Pursuant to the Tax Sharing Agreement, the Company will be
responsible for any and all liabilities arising as a result of state or local
income, franchise, excise, single business, gross receipts or withholding tax
returns filed by it on a separate-return basis. With respect to the portions of
Citizens' state or local unitary, combined or consolidated income or franchise
tax liabilities that are allocable to the Company, the Company will pay Citizens
an amount equal to the taxes which the Company would have been required to pay
if it had filed a separate return. The Company will be responsible for any tax
liability due any foreign jurisdiction arising from its business activities.
The Tax-Sharing Agreement will remain in effect so long as any taxing
jurisdiction requires the filing of a combined tax return by both Citizens and
ELI.
Citizens will have sole and exclusive responsibility for (i) preparing any
state and local tax returns (including amended returns or claims for refund) of
the Company; (ii) representing
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<PAGE>
the Company with respect to any state and local tax audit or tax contest; (iii)
engaging outside counsel and accountants with respect to tax matters regarding
the Company; and (iv) performing such other acts and duties with respect to the
Company's tax returns as Citizens determines is appropriate. Under the
Administrative Services Agreement, the amounts that the Company will pay
Citizens will encompass reimbursement to Citizens for all direct and indirect
costs and expenses incurred with respect to the Company's share of the overall
costs and expenses incurred by Citizens with respect to tax related services.
INDEMNIFICATION AGREEMENT
The Company and Citizens have entered into an indemnification agreement
(the "Indemnification Agreement"). The Indemnification Agreement provides that
each party thereto (the "Indemnifying Party") will indemnify the other party
thereto and its directors, officers, employees, agents and representatives (the
"Indemnified Party") for liabilities under federal or state securities laws as a
result of the Offering, including liabilities arising out of or based upon
alleged misrepresentations in or omissions from the Registration Statement, of
which this Prospectus is a part, and for liabilities that may be incurred by the
Indemnified Party relating to, resulting from or arising out of (i) the
businesses and operations conducted or formerly conducted, or assets owned or
formerly-owned, by the Indemnifying Party and its subsidiaries (except, in the
case where Citizens is the Indemnifying Party, such businesses, operations and
assets of the Company and its subsidiaries) or (ii) the failure by the
Indemnifying Party to comply with any other agreements executed in connection
with the Offering, except to the extent caused by the Indemnified Party.
The Indemnification Agreement also provides that the Company will indemnify
Citizens for any liabilities incurred by Citizens under any guarantees of ELI's
obligations or liabilities of the Company and that the Company will pay Citizens
for its direct costs, if any, of maintaining such guarantees.
REGISTRATION RIGHTS AGREEMENT
The Company and Citizens have entered into a Registration Rights Agreement
(the "Registration Rights Agreement"). The Registration Rights Agreement
provides that, upon the request of Citizens, the Company will use its best
efforts to effect the registration under the applicable federal and state
securities laws of any of the shares of Common Stock (and any other securities
issued in respect of or in exchange therefor) held by Citizens for sale in
accordance with Citizens' intended method of disposition thereof and will take
such other actions necessary to permit the sale thereof in other jurisdictions,
subject to certain specified limitations. Although as of the date of this
Prospectus, Citizens has advised the Company that Citizens has no current plan
or intention other than to hold its shares of Class B Common Stock for the
foreseeable future, Citizens will also have the right, which it may exercise at
any time and from time to time, to include the shares of Common Stock held by it
in certain other registrations of common equity securities of the Company
initiated by the Company on its own behalf or on behalf of its other
shareholders. Citizens will pay the out-of-pocket costs and expenses of
registration for registrations which it initiates. The Company has agreed to
pay all out-of-pocket costs and expenses (other than underwriting discounts and
commissions) in connection with registrations initiated by the Company or others
in which Citizens participates. Subject to certain limitations specified in the
Registration Rights Agreement, such registration rights will be assignable by
Citizens and its assigns. The Registration Rights Agreement contains
indemnification and
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<PAGE>
contribution provisions (i) by Citizens and its permitted assigns for the
benefit of the Company and related persons and (ii) by the Company for the
benefit of Citizens and the other persons entitled to effect registrations of
Common Stock and related persons.
CUSTOMERS AND SERVICE AGREEMENT
The Company and Citizens have entered into a Customers and Service
Agreement (the "Customers and Service Agreement"). The Customers and Service
Agreement contains provisions prohibiting the Company from competing with
Citizens for customers in Citizens' existing service areas and in certain new
lower density territories which Citizens will have been first to enter after
the Offering. Citizens has agreed that it will not compete with the Company in
the service territories in which the Company is currently providing services and
in certain new higher density territories which the Company will have been first
to provide services after Offering. Neither Citizens nor ELI may solicit an
existing wholesale customer of the other company for services which such
customer is currently receiving under contract from the other company. The
relevant provisions are intended to permit the Company to continue all
activities in which it currently engages, and to expand into related markets.
The Customers and Service Agreement will remain in effect for so long as
Citizens owns a majority of the economic or voting interest of the shares of
Common Stock of the Company.
GUARANTEE OF LEASE OBLIGATIONS
Citizens has guaranteed all obligations of ELI under a lease of certain
equipment described under "Business--Properties." Effective with the Offering,
ELI has agreed to pay Citizens a guarantee fee equal to 3.25% per annum of the
amount of the lessor's investment in the leased assets. See
"Business--Properties--Lease."
TELECOMMUNICATIONS SERVICES
Citizens has leased "dark" fiber optic lines from ELI for which Citizens
has agreed to pay an annual fee of $360,000. Also, Citizens and ELI have agreed
to combine their purchases of long-haul services in an arrangement with a long
distance company in order to receive a lower unit cost. ELI has agreed to
reimburse Citizens for the cost of ELI's usage and pay an additional fee
consisting of 5% of such cost. In 1996, ELI paid Citizens a total of
approximately $7.6 million. The agreement was replaced effective May 1, 1997
with a 24-month term agreement which removed the 5% additional fee.
ELI'S LONG-TERM DEBT PAYABLE TO CITIZENS
Prior to completion of the Offering, $20.7 million of the balance due to
Citizens as of June 30, 1997 will be contributed to additional paid-in capital
and the remaining $174 million will become long-term debt payable to Citizens
(the "Company Debt"). Funds provided to the Company by Citizens subsequent to
June 30, 1997 will be added to the Company Debt. The Company will issue a
promissory note to Citizens evidencing the Company Debt. The note will be
nonamortizing with a maturity date of ____. Effective with the completion of
the Offering, interest on the note will be payable at an annual rate of %__.
CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and Citizens in a
number of areas relating to their past and ongoing relationships, including
potential acquisitions of businesses or
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properties or other corporate opportunities, potential competitive business
activities, the election of a new or additional directors, payment of dividends,
incurrence of indebtedness, tax matters, financial commitments, marketing
functions, indemnity arrangements, registration rights, administration of
benefits plans, service arrangements, issuances of capital stock of the Company,
sales or distributions by Citizens of its remaining shares of Common Stock and
the exercise of Citizens of its ability to control the management and affairs of
the Company. The Customers and Service Agreement contains certain noncompete
provisions; however, in many circumstances, the Company and Citizens are free to
engage in competition with one another.
The Company and Citizens may enter into material transactions and
agreements in the future in addition to those described above. The Board will
utilize such procedures in evaluating the terms and provisions of any material
transactions between the Company and Citizens or its affiliates as the Board may
deem appropriate in light of its fiduciary duties under the state law. In any
such evaluation, the Board may rely on management's statements and opinions and
may or may not utilize outside experts or consultants or obtain independent
appraisals or opinions.
The six current directors of the Company include Leonard Tow, Chairman of
the Board and Chief Executive Officer of Citizens, who is Chairman of the Board
of the Company, Daryl A. Ferguson, President and Chief Operating Officer of
Citizens, who is Vice Chairman of the Board of the Company, and Stanley
Harfenist and Robert Stanger, directors of Citizens. Also, Mr. Ferguson is
Chief Executive Officer of the Company and Robert DeSantis, an executive officer
of Citizens is an executive officer of the Company. Directors and officers of
the Company who are also directors and officers of Citizens will have conflicts
of interest with respect to matters potentially or actually involving or
affecting the Company or Citizens, such as acquisitions, financing and other
corporate opportunities that may be suitable for the Company and Citizens. To
the extent that such opportunities arise, such directors may consult with their
legal advisors and make a determination after consideration of a number of
factors, including whether such opportunity is within the Company's line of
business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunity. In addition,
determination may be made by the Board, when appropriate, by the vote of the
disinterested directors only. Notwithstanding the foregoing, there can be no
assurance that conflicts will be resolved in favor of the Company.
So long as the Company remains a subsidiary of Citizens, the directors and
officers of the Company will, subject to certain limitations, be indemnified by
Citizens and insured under insurance policies maintained by Citizens against
liability for actions taken or omitted to be taken in their capacities as
directors and officers of the Company, including actions or omissions that may
be alleged to constitute breaches of the fiduciary duties owed by such persons
to the Company and its shareholders. This insurance may not be applicable to
certain of the claims which Citizens may have against the Company pursuant to
the Indemnification Agreement or otherwise.
SECURITIES OWNERSHIP
ELI COMMON STOCK
No shares of Class A Common Stock were outstanding or beneficially owned
prior to the Offering. Immediately after the Offering, the only shares of Class
A Common Stock that will be outstanding are those that will be issued in the
Offering (including any shares issued upon
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exercise of the Underwriters' over-allotment options). All of the ________
shares of Class B Common Stock outstanding are beneficially owned by Citizens.
Accordingly, upon consummation of the Offering, Citizens will own Common Stock
representing approximately ___% of the economic interest in the Company (___% if
the Underwriters' over-allotment options are exercised in full) and representing
approximately ___% of the combined voting power of the Company's outstanding
Common Stock (or ___% if the Underwriters' over-allotment options are exercised
in full).
The following table provides information, as of June 30, 1997, and as
adjusted to reflect the sale of [ ] shares of Class A Common Stock by ELI in
the Offering, with respect to the beneficial ownership of the Company's Common
Stock by each person known by ELI to be the beneficial owner of more than 5% of
any class of the Company's voting securities. None of the directors nor any of
the executive officers of the Company beneficially owns any shares of Class A
Common Stock or Class B Common Stock.
<TABLE>
<CAPTION>
Class A Class B Percent of Vote of
Common Stock Common Stock All Classes of
----------------------- ----------------------
Number of Number of
Name and Address(1) Shares % Shares % Common Stock
- ------------------- ----------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Citizens Utilities
Company................. 0 0 %
</TABLE>
(1) The address of Citizens is High Ridge Park, Stamford, Connecticut 06905.
CITIZENS COMMON STOCK
The following table reflects shares of Common Stock of Citizens
beneficially owned (or deemed to be beneficially owned pursuant to the rules of
the Securities and Exchange Commission) as of September 15, 1997 by each
director and Named Executive Officers of the Company and all executive officers
and directors of the Company as a group.
<TABLE>
<CAPTION>
Acquirable Percentage of
Name Title Shares Owned Within 60 Days(1) Common Stock(2)
- ---- ----- ------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Daryl A. Ferguson Vice Chairman and CEO 124,164 106,536 *
Todd Hanson Vice President 17,201 *
Stanley Harfenist Director 48,035 34,748 *
Randall Lis Vice President 6,390 *
David B. Sharkey President and Director 13,129 *
Robert A. Stanger Director 37,162 34,749 *
Leonard Tow Chairman 8,873,097(3)(4) 2,770,040(4) 3.6%
John Wolff Vice President 7,088 *
Earnest Yates Vice President 1,666 *
All Officers and Directors as
a group [ ](5) [ ](5) [ ]%
</TABLE>
- -----------------------------
* Represents less than 1% of Citizens' common stock.
(1) Reflects number of shares that could be purchased by exercise of options
available as of September 15, 1997 or within 60 days thereafter under
Citizens' stock option plans.
(2) Based on number of shares outstanding at, or acquirable within 60 days of,
September 15, 1997.
(3) Includes 4,812,549 shares of Citizens' common stock owned by Century
Communications Corp. of which Leonard Tow is Chairman of Board, Chief
Executive Officer, Director and, together with his wife, the holder of a
majority ownership interest in its common stock. These shares are included
in the above table as required by the definition of beneficial ownership of
the Securities and Exchange Commission. Except to the extent of such
indirect interest, Leonard Tow disclaims beneficial ownership of any of
these shares of common stock of Citizens.
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(4) Includes 14,631 shares of Citizens' common stock held by his wife as
custodian for her minor grandchildren and 34,748 shares of Citizens' common
stock acquirable by his wife within 60 days. Leonard Tow disclaims
beneficial ownership of all such shares.
(5) Share information is qualified as described in the previous footnotes
DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of the Offering, ELI will amend its Certificate
of Incorporation to change its authorized capital stock to 180,000,000 shares,
including 110,000,000 shares of Class A Common Stock, $.01 par value per share,
60,000,000 shares of Class B Common Stock, $.01 par value per share, and
10,000,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Upon completion of the Offering, there will be no preferred stock
outstanding and Citizens will own of record all of the outstanding shares of
Class B Common Stock. See "Securities Ownership."
The following summary description relating to the capital stock of the
Company does not purport to be complete. The rights of the holders of ELI's
capital stock will be set forth in ELI's Certificate of Incorporation, the form
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The summary set forth below is qualified by reference
to such exhibit and to the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
COMMON STOCK
The preferences and relative rights of the Class A Common Stock and Class B
Common Stock are substantially identical in all respects, except for voting
rights and exchange rights.
VOTING RIGHTS
Each share of Class A Common Stock entities the holder to one vote and each
share of Class B Common Stock entities the holder to 10 votes on each matter to
be voted upon by the holders of the Common Stock. The holders of the shares of
Class A Common Stock and Class B Common Stock vote as one class on all matters
to be voted on by stockholders, including, without limitation, the election of
directors and any proposed amendment to the Certificate of Incorporation of ELI
that would increase the authorized number of shares of Common Stock or any class
thereof or any other class or series of stock or decrease the number of
authorized shares of any class or series of stock (but not below the number
thereof then outstanding), except as required by the DGCL.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see "Risk Factorssymbol 190 \f "Symbol" \s 12 3/4Control by
Principal Stockholder" and "symbol 190 \f "Symbol" \s 12 3/4Conflicts of
Interest."
DIVIDENDS
Each share of Common Stock is entitled to receive dividends from funds
legally available therefor if, as and when declared by the Board of Directors of
ELI. Class A Common Stock and Class B Common Stock share equally, on a share-
for-share basis, in any dividends declared by the Board of Directors. If at any
time a distribution of the Class A Common Stock or Class B
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Common Stock is to be paid in shares of Class A Common Stock, Class B Common
Stock or any other securities of the Company or any other person, such dividends
may be declared and paid only as follows: (1) a share distribution consisting of
Class A Common Stock to holders of Class A Common Stock and Class B Common
Stock, on an equal per share basis; or to holders of Class A Common Stock only,
but in such event there shall also be a simultaneous share distribution to
holders of Class B Common Stock consisting of shares of Class B Common Stock on
an equal per share basis; (2) a share distribution consisting of Class B Common
Stock to holders of Class B Common Stock and Class A Common Stock, on an equal
per share basis; or to holders of Class B Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class A
Common Stock consisting of shares of Class A Common Stock on an equal per share
basis; and (3) a share distribution of shares of any class of securities of the
Company or of any other person other than the Common Stock, either on the basis
of a distribution of identical securities, on an equal per share basis to the
holders of Class A Common Stock and Class B Common Stock, or on the basis of a
distribution of one class of securities to the holders of Class A Common Stock
and another class of securities to holders of Class B Common Stock, provided
that the securities so distributed do not differ in any respect, other than
relative voting rights and related differences, in designations, exchange and
share distribution provisions, with the holders of Class B Common Stock
receiving the class having the higher relative voting rights, provided that if
the securities so distributed constitute capital stock of a subsidiary of the
Company, such rights shall not differ to a greater extent than the corresponding
existing differences in voting rights, designations, exchange and distribution
provisions between Class A Common Stock and Class B Common Stock. If the Company
shall in any manner subdivide or combine the outstanding shares of Class A
Common Stock or Class B Common Stock, the outstanding shares of the other class
of Common Stock shall be proportionally subdivided or combined in the same
manner and on the same basis as the outstanding shares of Class A Common Stock
or Class B Common Stock, as the case may be, that have been subdivided or
combined.
EXCHANGE
Under the Certificate of Incorporation, each share of Class B Common Stock
is exchangeable at any time and from time to time at the option of the holder
thereof into one share of Class A Common Stock. The Class A Common Stock has no
exchange rights.
OTHER
Stockholders of ELI have no preemptive or other rights to subscribe for
additional shares. All holders of Common Stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available for
distribution to stockholders on liquidation, dissolution or winding up of ELI.
No shares of the Common Stock are subject to redemption or a sinking fund. All
outstanding shares are, and all shares offered by this Prospectus will be, when
sold, validly issued, fully paid and nonassessable. ELI may not subdivide or
combine shares of Common Stock without at the same time proportionally
subdividing or combining shares of the other classes.
PREFERRED STOCK
The Company's Board of Directors is authorized to provide for the issuance
of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative,
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participating, optional and other rights, qualifications, limitations and
restrictions thereof, including the dividend rate, exchange rights, voting
rights, redemption price and liquidation preference and to fix the number of
shares to be included in any such series. Any such Preferred Stock so issued may
rank senior to the Common Stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding up, or both. In addition, any
such shares of Preferred Stock may have class or series voting rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is the Illinois Stock
Transfer Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Offering, there will be [____________] shares of
Class A Common Stock issued and outstanding (_______ if the Underwriters' over-
allotment options are exercised in full) and [____________] shares Class B
Common Stock issued and outstanding. The [__________] shares of Class A Common
Stock to be sold in the Offering will be tradable without restriction by persons
other than "affiliates" of ELI. The shares of Class B Common Stock and any
Class A Common Stock issued upon exchange of Class B Common Stock held or to be
held by Citizens will be deemed "restricted securities" within the meaning of
the Securities Act, and, as such, may not be sold in the absence of registration
under the Securities Act or an exemption therefrom, including the exemptions
contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have
beneficially owned shares of an issuer for at least one year, including an
"affiliate," is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding number of
shares of such class or the average weekly trading volume in composite trading
in all national securities exchanges during the four calendar weeks preceding
the filing of the required notice of such sale, provided that such issuer has
been a reporting company for at least 90 days. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, such issuer. Citizens would be deemed an "affiliate" of ELI under the
Securities Act.
The Company and Citizens, as the holder of the Class B Common Stock, have
agreed not to offer, sell, contract to sell, file a registration statement
pursuant to the Securities Act (except for certain registration statements
relating to the issuance of stock and stock options to employees) or otherwise
dispose of any shares of Common Stock without the prior written consent of
Lehman Brothers Inc. on behalf of the Representatives, for a period of 180 days
after the date of this Prospectus.
The shares of the Company's Class B Common Stock are exchangeable into
shares of Class A Common Stock and, in the event of exchange of such shares and
expiration of the 180-day lock-up period described above, [__________] of the
aggregate shares of Class A Common Stock issuable upon exchange of the Class B
Common Stock would be immediately eligible for sale pursuant to the provisions
of Rule 144 under the Securities Act or upon registration under the Securities
Act. Citizens has advised ELI that Citizens has no current plan or intention
other than to hold the shares of Class B Common Stock owned by it for the
foreseeable future.
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<PAGE>
However, no assurance can be given that Citizens will not decide in the future
to register its shares under the Securities Act and to dispose of all or a
portion of such stock on the public market from time to time, in an underwritten
transaction, or privately or otherwise. See "Relationship with
Citizens--Registration Rights Agreement." Alternatively, Citizens
could dispose of shares periodically pursuant to Rule 144. Any such offers or
dispositions could have a material adverse effect on the market price of the
Class A Common Stock.
Prior to the Offering, there has been no public market for the Class A
Common Stock, and no predictions can be made about the effect, if any, that
market sales of shares of Class A Common Stock or the availability of such
shares for sale would have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Class A Common Stock in the public
market, or the perception that such sales could occur, may have a material
adverse impact on the market price for the shares of Class A Common Stock
offered hereby or on the ability of the Company to raise capital through a
public offering of its equity securities. See "Risk
Factors--Shares Eligible for Future Sale."
CERTAIN TAX CONSIDERATIONS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock. This
discussion is intended only as a descriptive summary and does not purport to be
a complete analysis or listing of all possible tax considerations. The
discussion deals only with Common Stock held as capital assets and does not
address any special United States tax consequences that may be applicable to
holders that are subject to special treatment under the United States Internal
Revenue Code of 1986, as amended (the "Code"). Furthermore, the following
discussion is based on provisions of the Code and administrative and judicial
interpretations as of the date hereof, all of which are subject to change. Each
prospective holder is urged to consult a tax advisor with respect to the federal
tax consequences of holding and disposing of Common Stock in light of its
particular situation, as well as any tax consequences that may arise under the
laws of any U.S. state, municipality or other taxing jurisdiction.
CERTAIN TAX CONSIDERATIONS APPLICABLE TO A NON-U.S. HOLDER
As used herein, a "non-U.S. holder" is a holder that is not (i) a citizen
or resident of the United States, (ii) a corporation or partnership created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate or trust the income of which is subject to United Sates
federal income taxation regardless of its source, or (iv) a trust which is
subject to the supervision of a court within the United States and the control
of one or more United States fiduciaries. An individual may, among other ways,
be deemed to be a resident alien (as opposed to a non-resident alien) by virtue
of being present in the United States on at least 31 days in the calendar year
and for an aggregate of 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident
aliens are subject to U.S. federal tax as if they were U.S. citizens.
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DIVIDENDS
As indicated above, the Company has no current intention to pay dividends
on its Common Stock. The following discussion of U.S. federal income taxes would
apply in the event taxable dividends are declared in the future and are paid to
non-U.S. holders. In general, dividends payable in cash or property (or which
are otherwise taxable) received by a non-U.S. holder of Common Stock will be
subject to withholding of U.S. federal income tax at a 30% rate or such rate as
may be specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business by the non-U.S.
holder within the United States. Dividends that are effectively connected with
such holder's conduct of a trade or business in the United States are subject to
tax on a net income basis at rates applicable to U.S. holders and are not
generally subject to withholding. Any such effectively connected dividends
received by a non-U.S. corporation may also, under certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or such rate as may
be specified by an applicable income tax treaty.
Under current U.S. Treasury regulations, dividends paid to an address
outside the United States are presumed to be paid to a resident of such country
for purposes of the withholding rules discussed above, and, under the current
interpretation of U.S. Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under proposed U.S. Treasury regulations,
not currently in effect, however, a non-U.S. holder of Common Stock who wishes
to claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements. Currently certain
certification and disclosure requirements must be complied with in order to
claim an exemption from withholding under the effectively connected income
exemption.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the U.S. Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock including stock
dividend shares unless (i) the gain is effectively connected with a trade or
business of the non-U.S. holder in the United States, (ii) in the case of a non-
U.S. holder who is an individual and holds the Common Stock as a capital asset,
such holder is present in the United States for 183 or more days in the taxable
year of the sale and certain other conditions are met, or (iii) the Company is
or has been a "U.S. real property holding corporation" for federal income tax
purposes. The Company has not been, is not and does not anticipate becoming, a
"U.S. real property holding corporation" for U.S. federal income tax purposes.
An individual non-U.S. holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated U.S.
federal income tax rates. An individual non-U.S. holder described in clause
(ii) above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. source capital losses (even though the individual is
not considered a resident of the United States). If a non-U.S. holder that is a
foreign corporation falls under clause (i) above, it will be subject to tax on
its gain under regular
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graduated U.S. federal income tax rates and, in addition, may be subject to the
branch profits tax equal to 30% of its effectively connected earnings and
profits within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable income
tax treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual non-U.S. holder at
the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
U.S. REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, the Company must report annually to the
IRS and to each non-U.S. holder the amount of dividends payable in cash or
property received by such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
returns reporting such dividends and withholding may also be made available to
the tax authorities in the country in which the non-U.S. holder resides under
the provisions of an applicable income tax treaty.
Backup withholding (which generally is a withholding tax imposed at the
rate of 31% on certain payments to persons that fail to furnish certain
information under the U.S. information reporting requirements) will generally
not apply to dividends paid to a non-U.S. holder at an address outside the
United States (unless the payer has knowledge that the payee is a U.S. person).
Under proposed U.S. Treasury regulations not currently in effect, however, a
non-U.S. holder will be subject to back-up withholding unless applicable
certification requirements are met. Backup withholding and information
reporting generally will apply to dividends paid to addresses inside the United
States on shares of Common Stock to beneficial owners that are not "exempt
recipients" and that fail to provide in the manner required by regulation
certain identifying information.
In general, backup withholding and information reporting will not apply to
a payment of the proceeds of a sale of Common Stock to or through a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a non-U.S. holder and certain other conditions are met, or
(ii) the beneficial owner otherwise establishes an exemption.
Payment to or through a U.S. office of a broker of the proceeds of a sale
of Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
non-U.S. holder, or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
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The backup withholding and information reporting rules are currently under
review by the U.S. Treasury Department and their application to the Common Stock
could be changed by future regulations.
UNDERWRITING
The Underwriters of the U.S. Offering named below (the "U.S. Underwriters")
for whom Lehman Brothers Inc. is acting as representatives (the
"Representatives") have severally agreed, subject to the terms and conditions
set forth in the U.S. Underwriting Agreement (the "Underwriting Agreement") with
the Company, to purchase from the Company, and the Company has agreed to sell to
each U.S. Underwriter, the aggregate number of shares of Class A Common Stock
set forth opposite their respective names below.
NUMBER
OF
U.S. UNDERWRITERS SHARES
- ----------------- ------
Total....................................................... [______]
========
The managers of the Internatioanl Offering of the Class A Common Stock
outside the United States (the "International Managers"), for whom Lehman
Brothers International (Europe) is acting as lead managers (the "Lead
Managers"), have severally agreed, subject to the terms and conditions of the
International Underwriting Agreement (the "International Underwriting
Agreement"), to purchase from the Company, and the Company has agreed to sell to
each International Manager, the aggregate number of shares of Class A Common
Stock set forth opposite their respective names below.
NUMBER
OF
INTERNATIONAL MANAGERS SHARES
- ---------------------- ------
Total........................................................ [______]
========
The U.S. Underwriting Agreement and the International Underwriting
Agreement (collectively, the "Underwriting Agreements") provide that the
obligations of the U.S. Underwriters and the International Managers,
respectively, to purchase shares of Class A Common Stock are subject to the
approval of certain legal matters by counsel and to certain other conditions.
Each Underwriting Agreement provides that, if any shares of Class A Common Stock
are purchased pursuant to such Underwriting Agreement, all the shares of Class A
Common Stock agreed to be purchased pursuant to such Underwriting Agreement must
be so purchased. The offering price and underwriting discounts and commissions
for the U.S. Offering
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and the International Offering are identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an additional ___________ and ____________
shares of Class A Common Stock, respectively, at the initial public offering
price less the aggregate underwriting discount, solely to cover over-allotments.
The options may be exercised at any time up to 30 days after the date of this
Prospectus. To the extent that the U.S. Underwriters and International Managers
exercise such options, each of the U.S. Underwriters or International Managers,
as the case may be, will be committed, subject to certain conditions, to
purchase a number of option shares proportionate to such U.S. Underwriter's and
International Manager's initial commitment.
The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer the shares of Class A Common Stock
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus, and to certain selected dealers (who may include
the U.S. Underwriters and the International Managers) at such public offering
price less a selling concession not in excess of $__ per share. The selected
dealers may reallow a commission not in excess of $____ per share on sales to
certain other dealers. After the initial offering of the Class A Common Stock,
the public offering price, concession to selected dealers and reallowance to
other dealers may be changed.
The Company and Citizens have agreed to indemnify the U.S. Underwriters and
the International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, and to contribute to payments which the U.S.
Underwriters and the International Managers may be required to make in respect
thereof.
The U.S. Underwriters and the International Managers have entered into an
Agreement Among U.S. Underwriters and International Managers (the "Agreement
Among") pursuant to which each U.S. Underwriter has agreed that, as part of the
distribution of the shares of Class A Common Stock offered in the U.S. Offering,
(a) it is not purchasing any of such shares for the account of anyone other than
a U.S. or Canadian Person (as defined below) and (b) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the U.S. Offering outside the
United States or Canada or to anyone other than a U.S. or Canadian Person. In
addition, pursuant to the Agreement Among, each International Manager has agreed
that, as part of the distribution of the shares of Class A Common Stock offered
in the International Offering, (a) it is not purchasing any of such shares for
the account of any U.S. or Canadian Person and (b) it has not offered or sold,
and will not offer, sell, resell or deliver, directly or indirectly, any of such
shares or distribute any prospectus relating to the International Offering
within the United States or Canada or to any U.S. or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Underwriting Agreements and the Agreement
Among, including: (i) certain purchases and sales between the U.S. Underwriters
and the International Manager; (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion; (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as an International Manager or by an International Manager
who also is acting as a U.S. Underwriter and (iv) other transactions
specifically approved by the U.S. Underwriters and International Managers. As
used herein, "U.S. or Canadian Person" means any resident or citizen of the
United States or Canada, any corporation, pension, profit
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sharing or other trust or other entity organized under or governed by the laws
of the United States or Canada or any political subdivision thereof (other than
the foreign branch of any United States or Canadian Person), any estate or trust
the income of which is subject to United States or Canadian federal income
taxation regardless of the source of its income, and any United States or
Canadian branch of a person other than a United States or Canadian Person. The
term "United States" means the United States of America (including, the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction. The term "Canada" means the provinces
of Canada, its territories, its possessions and other areas subject to its
jurisdiction.
Pursuant to the Agreement Among, sales may be made among the U.S.
Underwriters and the International Managers of such number of shares of Class A
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the public offering price as then in effect for Class A Common Stock being
sold by the U.S. Underwriters and International Managers, less an amount not
greater than the selling concession unless otherwise determined by mutual
agreement. To the extent that there are sales pursuant to the Agreement Among,
the number of shares initially available for sale by the U.S. Underwriters and
the International Managers may be more or less than the amount specified on the
cover page of this Prospectus.
Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior tot he date six months after the date of issue of the
shares of Class A Common Stock, will not offer or sell any shares of Class A
Common Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purpose of their business or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act of 1986 with
respect to anything done by it in relation to the Class A Common Stock in, from
or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on, and will only issue or pass on, to any person in the United Kingdom,
any document received by it in connection with the issue of the Class A Common
Stock if that person is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the public offering price.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Class A Common Stock to accounts over which they
exercise discretionary authority.
The Company and Citizens, as the holder of the Class B Common Stock, have
agreed not to offer, sell, contract to sell, file a registration statement
pursuant to the Securities Act (except for certain registration statements
relating to the issuance of stock and stock options to employees) or otherwise
dispose of any shares of Common Stock without the prior written consent of
Lehman Brothers Inc. on behalf of the Representatives, for a period of 180 days
after the date of this Prospectus.
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Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price of the Class A Common Stock has
been determined by negotiations among the Company and the Underwriters. Among
the principal factors considered in making such determination were the past and
present operations of the Company, the historical results of operations of the
Company and the trend of its revenues and earnings, the prospects for future
earnings of the Company, an assessment of the Company's management, the history
of and prospects for the industry in which the Company competes, the prices of
similar securities of generally comparable companies and the general condition
of the securities markets at the time of the Offering. There can be no
assurance that an active trading market will develop for the Class A Common
Stock or that the Class A Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The Company will apply for listing the Class A Common on the Nasdaq
National Market under the symbol "ELIX."
Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase shares of Class A
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Class A Common
Stock. Such transactions may consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Common Stock.
If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering (i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus), the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any
short position by exercising all or part of the over-allotment options described
herein.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Class A Common Stock, they may
reclaim the amount of the selling concession from the Underwriters and selling
group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security by purchasers in the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Certain of the U.S. Underwriters and International Managers have provided,
from time to time, and expect to provide in the future, brokerage and investment
banking services to the Company and its affiliates for which they receive
customary fees and compensation.
LEGAL MATTERS
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The legality of the Class A Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Winthrop, Stimson, Putnam &
Roberts, New York, New York, and for the Underwriters by Simpson Thacher &
Bartlett (a partnership which includes professional corporations), New York, New
York. Legal matters relating to required authorization, if any, of the Common
Stock Series A by the public utilities commissions in the various states will be
passed upon by local counsel to the Company in the states of Washington, Oregon,
California, Utah, Nevada, Arizona and Idaho. Winthrop, Stimson, Putnam &
Roberts and Simpson Thacher & Bartlett may rely upon such counsel as to certain
matters governed by the laws of such states.
EXPERTS
The financial statements of Electric Lightwave, Inc. as of December 31,
1995 and 1996 and for each of the years in the three-year period ended December
31, 1996, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
ELI has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 under the Securities Act with respect to the
Class A Common Stock being offered in the Offering. For the purposes hereof,
the term "Registration Statement" means the original Registration Statement and
any and all amendments thereto, including the schedules and exhibits to such
original Registration Statement or any such amendment. This Prospectus does not
contain all of the information set forth in the Registration Statement, to which
reference hereby is made. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions.
ELI is not currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result
of the Offering, ELI will become subject to the informational requirements of
the Exchange Act and in accordance therewith will file periodic reports, proxy
and information statements and other information relating to its business,
financial statements and other matters. Any interested party may inspect the
Registration Statement, the reports, proxy and information statements and other
information without charge, at the public reference facilities of the SEC at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices in Chicago (Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60601), and in New York
(Seven World Trade Center, Suite 1300, New York, New York 10048). Any
interested party may obtain copies of all or any portion of the Registration
Statement, the reports, proxy statements and other information at prescribed
rates from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
SEC also maintains a web site (http://www.sec.gov.) that contains reports, proxy
and information statements and other information regarding Citizens.
Citizens is subject to the informational requirements of the Exchange Act
and its periodic reports, proxy statements and other information relating to its
business, financial statements and other matters may be inspected and obtained
as described above.
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The Company intends to distribute to all holders of the shares of Class A
Common Stock offered hereby annual reports containing audited consolidated
financial statements and a report thereon by its independent certified public
accountants and quarterly reports containing unaudited consolidated financial
information for each of the first three quarters of each fiscal year.
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GLOSSARY
Access. 1) Point at which entry is gained into a circuit or a network
interconnection may be switched or dedicated. 2) Ability to obtain data from a
storage device or peripheral. 3) Type of connection between customer premises
equipment and an interexchange carrier's network.
Access Charge. When the local facilities of the local exchange carrier are
used for the origination or termination of long distance calls, the access
charge is the fee paid by the long distance carrier to the local telephone
companies for the use of local facilities to gain access to or make connection
with, the originating and terminating telephone subscribers.
Access Line. 1) Circuit between a subscriber and a switching center. 2)
Private lines feeding a common control switching arrangement or enhanced private
switched communications service switch from a PBX.
Asynchronous Transfer Mode (ATM). 1) High bandwidth, low-delay packet
switching and multiplexing technique used to transfer voice, video, images and
character-based data. 2) Method of formatting, multiplexing, cross-connecting
and switching information in 53-byte cells (see below). 3) Transmission method
that operates over various physical media. including Synchronous Optical Network
(SONET), Synchronous Digital Hierarchy (SDH) and digital cross-connect (DCS)
systems. ATM is recently commercialized switching and transmission technology
that is one of a general class of packet technologies that relay traffic by way
of an address contained within the first five bits of a standard fifty-three
bit-long packet or cell. ATM-based packet transport was specifically developed
to allow switching and transmission of mixed voice, data and video at varying
rates. The ATM includes a protocol that specifies how diverse kinds of traffic,
mixed voice, data and video, are transformed into standardized packets whose
transport can be managed uniformly within the network. The ATM format can be
used by many different information systems, including LANs.
Backbone. The core high-density infrastructure of a network. The portion
of the network that transports information from one central location to another
central location where it is off-loaded onto a local system.
Bandwidth. Difference between the top and bottom limiting frequency band.
2) Indicates the information-carrying capacity of a channel. Analog
transmission is usually expressed in kHz or MHz. Digital transmission in bps or
Mbps. Fiber-optic bandwidth is usually given as its capacity to transmit
information in a specific time period for a specific length (e.g., 10 Mbps/km).
BOC (Bell Operating Company). A local exchange carrier owned by any of the
seven Regional Bell Operating Companies, which are holding companies established
following the Divestiture to serve as parent companies for the BOCs.
Broadband. 1) Transmission facility having a bandwidth greater than 20
kHz. capable of high-speed data transmission. 2) Analog transmission technique
used with data and video transmission that provides multiple channels for uses
through frequency division multiplexing. Broadband communications systems can
transmit large quantities of voice, data and video by way of digital or analog
signals. Examples of broadband communication systems include DS-3 fiber optic
systems, which can transmit 672 simultaneous voice conversations, or a broadcast
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television station signal, that transmits high resolution audio and video
signals into the home. Broadband connectivity is also an essential element for
interactive multimedia applications.
CAP (Competitive Access Provider). A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
Central Office. 1) Location of telephone switching equipment at which
customer's lines are terminated and interconnected. 2) Switching center that
provides local access to the public network. Synonyms: end office, local
office, wire center, or switching center. CAPs may connect with local telephone
company networks either at this location or through a remote location.
Centrex(TM). A telephone company switched service that uses central office
switching equipment to route internal calls from one extension to another, to
route incoming calls directly to the appropriate extension, to handle direct
dialing of outbound calls, and to provide many PBX-like service features.
Centrex offers dial tone and other features similar to those of Private Branch
Exchange ("PBX"), except the switching equipment is located at the carrier's
premises and not at the customer's premises. Centrex uses a separate dedicated
line between each telephone at the customer premises and the switch at the
telephone company's central office. Centrex features include direct dialing
within a given telephone system, direct dialing of outgoing telephone calls and
automatic identification of incoming telephone calls. This is a value-added
service that carriers can provide to a wide range of business customers.
CLEC (Competitive Local Exchange Carrier). A CAP that also provides
switched local services, such as local dial tone and Centrex, in competition
with the incumbent local exchange carrier.
Co-location. The ability of a telecommunications carrier, such as a CAP or
CLEC, to interconnect its network to the ILEC's network by extending its
facilities to the ILEC's central office. Physical co-location occurs when the
interconnecting carrier places its network equipment within the ILEC's central
offices. Virtual co-location is an alternative to physical co-location under
which the ILEC permits a carrier to interconnect its network to the ILEC's
network in a manner which is technically, operationally and economically
comparable to physical co-location, even though the interconnecting carrier's
network connection equipment is not physically located within the central
offices.
Common Carrier. Government-regulated, private company that furnishes the
general public with telecommunications services and facilities (e.g., telephone
or telegraph company).
Customer Premises Equipment. Equipment employed on the premises of a
person (other than a carrier) to originate, route, or terminate
telecommunications.
Dedicated Lines. Telecommunications lines dedicated to, or reserved for
use by, a particular customer along predetermined routes and charged on a flat,
usually monthly basis (in contrast to links which are temporarily established
and in contrast to telecommunications lines within the ILEC's public switched
network.
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Dedicated Access. Connection between a customer's premises and a long
distance carrier. All transmissions on this dedicated line are automatically
routed to the carrier. Provided by a local phone company, alternate access
provider or long distance carrier.
Dialing Parity. "Dialing Parity" means that a person that is not an
affiliate of a local exchange carrier is able to provide telecommunications
services in such a manner that customers have the ability to route
automatically, without the use of any access code, their telecommunications to
the telecommunications services provider of the customer's designation from
among two or more telecommunications services providers (including such local
exchange carrier).
Digital. A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude any distortion (such as graininess
or snow in the case of video transmission, or static or other background
distortion in the case of audio transmission). Digital transmission and
switching technologies offer a threefold improvement in speed and capacity over
analog techniques, allowing much more efficient and cost-effective transmission
of voice, video, and data.
Diverse routing. A telecommunications network configuration in which
signals are transmitted simultaneously along two different paths so that if one
path is cut or impaired, traffic can continue on the other path without
interrupting service.
Divestiture. The 1984 divestment of AT&T of its wholly owned BOCs from its
Long Lines Division and manufacturing operations and generally prohibited BOCs
from providing long distance telephone service between LATAs.
Dominant Carrier. A carrier found by the FCC [or a local state commission]
to have market power, i.e., the power to control prices for its services.
DS-0, DS-1, DS-3. Standard North American telecommunications industry
digital signal formats, which are distinguishable by bit rate (the number of
binary digits (0 and 1) transmitted per second). DS-0 service has a bit rate of
64 kilobits per second. DS-1 service (also referred to as T1) has a bit rate of
1.544 megabits per second (the equivalent of 24 DS0 circuits) and DS-3 service
(also referred to as T-3) has a bit rate of 44.736 megabits per second (the
equivalent of 28 DS1 circuits). A DS-0 can transmit a single uncompressed voice
conversation.
Enhanced Service. Any for-profit telecommunications service that adds
value to users' voice and data messages during the course of transmission.
Examples of enhanced services would include storage of a spoken message within
the network for forwarding or retrieval at some future time, or processing data
within the network and sending the results to the intended recipient.
Ethernet. A local area network technology used for connecting computers,
printers, workstations terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 100 megabits per
second. Ethernet is the most popular LAN technology.
Exchange. A central office telephone switch.
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Exchange Access. The offering of access to telephone exchange services or
facilities for the purpose of the origination or termination of telephone toll
services i.e., intraLATA and long distance.
FCC. Federal Communications Commission.
FDDI (Fiber Distributed Data Interface). Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.
Fiber mile. The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
Fiber Optics. Means of providing a high-speed transmission, using light to
send images through a flexible bundle of glass fibers. The technology involves
sending coded laser light pulses across glass strands in order to transmit
digital information. Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission.
Frame Relay. Frame Relay is a high-speed data packet switching service
used to transmit data between computers. Frame relay employs statistical
multiplexing over a shared network, intended for use between intelligent end-
points and implemented over high-quality transmission facilities that connect
programmable switches. Frame Relay supports data units of variable lengths at
access speeds ranging from 56kbs to 1.5mbs. This service is ideal for
connecting LANS, but is not appropriate for voice and video applications due to
the variable delays which can occur. Frame Relay was designed to operate at
higher speeds on modern fiber optic networks. Frame relay reduces redundant
processing within the packet network by relieving intermediate relay nodes of
responsibility for ensuring that data is transmitted accurately. The
intermediate nodes check only the outer "frame" of a data packet that gives the
addresses and routing instructions. Accuracy of packet "payload" is checked
only after the packet arrives at the terminating location. Frame relay is being
used in private data networks. Some U.S. interexchange carriers offer frame
relay in data networking applications and many manufacturers offer frame relay
equipment.
Hubs. Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
ILECs (Incumbent Local Exchange Carrier). The local phone companies either
a BOC or an independent (such as GTE), which provides local exchange services.
Interconnection. Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
IntraLATA Long Distance. IntraLATA long distance calls, also known as
short-haul calls, are those calls that originate and terminate within the same
LATA, but are outside the local calling area. Such calls are usually priced on
a measured basis. At present, the RBOCs are prohibited from providing IntraLATA
long distance service within their service areas.
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InterLATA service. Telecommunications between a point located in a local
access and transport area and a point located outside such area.
Internet. The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
ISDN (Integrated Services Digital Network). ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, and other enhanced services,
such as high-speed data file transfer, desk top videoconferencing,
telepublishing, telecommuting, telepresence learning (distance learning), remote
collaboration (screened sharing), data network linking and home information
services. It also supports a multitude of value-added switched service
applications such as Incoming Calling Line Identification. ISDN's combined
voice and data networking capabilities reduce costs for end users and result in
more efficient use of available facilities. ISDN combines standards for highly
flexible customer to network signaling with both voice and data within a common
facility.
IXC (Inter-Exchange Carriers). Usually referred to as long distance
providers. There are many facilities-based IXCs including AT&T, MCI, WorldCom,
Sprint and Frontier, as well as a select few CAPs that are authorized for IXC
service.
Kilobit. One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "kilobits per
second." One kilobit is approximately sufficient to encode a standard telegram.
LAN (Local Area Network). The interconnection of computers for the purpose
of sharing files, programs and peripheral devices such as printers and high-
speed modems. More generally, a private data communications network linking a
variety of data devices, such as computer terminals, personal computers and
minicomputers, all housed in a defined building, plant or geographic area. LANs
are generally confined to a single customer's premises and may be extended or
interconnected to other locations through the use of bridges and routers. LANs
range widely in size and complexity, from simple user-installable networks
connecting together a few personal computers to vast networks tying thousands of
terminals to multiple mainframe computers. LANs will allow a computer user to
access a computer other than the user's own in order to send and retrieve
electronic mail and data files at transmission rates generally between 100Kbps
and 50Mbps. LANs are owned or leased by customers; they generally do not employ
circuits from telephone common carriers or other network service provider. LANs
may, however, provide a bridge or gateway to other public or private networks.
Some telephone common carriers offer data communications services with
capabilities resembling those of LANs, as an alternative to the purchase of a
LAN.
LATA (Local Access Transport Area). The approximately 164 geographic areas
which define the regions in which each RBOC is allowed to provide service, as
defined in the divestiture order known as the Modified Final Judgment ("MFJ")
unless and until redefined by the FCC pursuant to the Telecommunications Act of
1996. These LATAs roughly reflect the population density of their respective
states (California has 11 LATAs while Wyoming has only one). The BOCs are
generally prohibited from providing long distance service between LATA in their
territory.
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LEC (Local Exchange Carrier). A company providing local telephone
services, also referred to in the industry as a "local exchange telephone
company." These include the BOCs, GTE and more than 1,000 other independents.
The term includes ILECs and CLECs, that is, Incumbent and Competitive Local
Exchange Carriers.
Local competition. The term "local competition" describes the events which
are presently in an early state in the local arena to afford true "co-carrier"
status to CAPs. Specifically, the ILECs, who once had a monopoly on local
exchange telephone service, are beginning to experience competition at the local
level from CAPs, CLECs, and other providers of local exchange services.
Critical issues such as number portability, dialing parity, reciprocal
compensation arrangements, and number assignments must be negotiated in order to
ensure that true co-carrier status is achieved for CAPs and CLECs.
Local exchange. (1) A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted without
toll charges to the calling or called party. (2) An exchange where subscribers'
lines are terminated.
Local exchange carrier. Any person that is engaged in the provision of
telephone exchange service or exchange access.
Local Exchange Services. Local Exchange Services generally refers to all
services provided by an ILEC or CLEC including local dial tone, the provision of
telephone numbers, calling within the local exchange area, Centrex and Long
Distance Access Services. Sometimes also referred to as Local Telephone
Services and Local Telecommunications Services.
Local Loop. Communications lines/services between the telephone subscriber
and the phone company switching center.
Local Telecommunications or Local Telephone Services. See Local Exchange
Services.
Long distance access services. Long distance access services are the
services provided by an ILEC or CLEC to a long distance company that connect the
IXC POP to end users, including special access services and switched access
services.
Long Distance Carrier. A company providing inter-LATA or long distance
services between local exchanges on an intrastate or interstate basis. Long
distance carriers may also be long distance reseller companies. A long distance
carrier may offer services over its own or another carrier's facilities. Major
long distance carriers include AT&T, MCI, Sprint, WorldCom and Frontier, and may
also include resellers of long distance capacity.
Megabit. One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second." One megabit is approximately sufficient to encode a 3-inch by 5-inch
photograph.
Multiplex. 1) To interleave or simultaneously transmit two or more
messages on a single channel. 2) Optical or electronic communications
arrangements whereby multiple devices share a common transmission channel,
though only one may transmit at a time. 3) Process or equipment that combines
data from two or more individual circuits onto a higher speed circuit for
transmission. Two methods are used; (a) splitting the total available bandwidth
into narrower bands and transmitting all channels at the same time (frequency
division) or (b) allotting a common channel to several different messages or
transmitting devices, one at a time in sequence (time division).
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Network. Any system designed to provide one or more access paths for
communications between users at different geographic locations. Communications
networks may be designed for voice, text, data, facsimile image and/or video.
They may feature limited access (private networks) or open access (public
networks) and will employ whatever switching and transmission technologies are
appropriate.
NNI. Network-to-Network Interfaces.
Node. An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
Number portability. The ability of users of telecommunications services to
retain, at the same location, existing telecommunications numbers without
impairment of quality, reliability, or convenience when switching from one
telecommunications carrier to another. If number portability does not exist,
customers will have to change phone numbers when they change local exchange
carriers.
Off-net. A customer of the Company that is not physically connected to one
of the Company's networks but who is accessed through interconnection with an
ILEC network.
On-net. A customer of the Company that is physically connected to one of
the Company's networks.
PBX. A Private Branch Exchange is a switching system within the user's
premises which allows calls from outside to be routed directly to the individual
instead of through a central number. PBX also provides for the automatic
selection of outgoing lines in accordance with user-defined criteria. PBX may
also allow for calling within an office by way of four digit extensions.
Centrex is a service which can simulate this service from an outside switching
source, thereby eliminating the need for a large capital expenditure on a PBX.
Physical Co-location. Physical Co-location occurs when a CAP or CLEC
places its own network connection equipment inside the ILEC central office. A
recent Court of Appeals decision found that, while ILECs must allow CAPs or CLEC
to interconnect with their facilities, ILECs are not required by law to allow
CAPs or CLECs to place its own equipment inside the ILEC central office. The
1996 Act overturned the decision.
Points of Presence (POPs). Physical locations where a long distance
carrier has installed transmission equipment in a service area that serves as,
or relays calls to, a network switching center of that long distance carrier and
connects with the lines of the local telephone company serving the LATA within
which the POP is located.
PRI. Primary rate interface, a service offering of ISDN which operates at
T-1 bandwidth. See ISDN.
Private line. 1) A telephone access line provided to a single subscriber
connecting different locations of the same subsidiaries and used exclusively by
that subscriber (does not include long distance carriers' POPs). 2) A
dedicated, non-switched telecommunications channel provided between two or more
points and leased or purchased by a telecom subscriber for high-volume voice,
data, audio or video transmissions. 3) Leased, owned or otherwise dedicated
channel. 4) Channel and channel equipment furnished to a user as a unit for
exclusive use without interexchange switching arrangements.
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Public switched network. That portion of a ILEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the ILEC's
central offices.
Public Utility Commission (PUC). A state regulatory body, established in
most states, which regulates utilities, including telephone companies providing
intrastate services.
Regional Bell Operating Company (RBOC). One of regional companies created
by the AT&T divestiture to take over ownership of the Bell operating companies
within their region. They are Ameritech, Bell Atlantic, BellSouth, NYNEX, SBC
Corporation (formerly Southwestern Bell) and U S WEST. The RBOCs also have set
up numerous unregulated subsidiaries engaged in variety of communications-
related and non-communications businesses. The divestiture agreement barred
RBOCs from providing inter-LATA services within their service areas and from
manufacturing telecommunications equipment and certain other business
activities, such as providing long distance service, but provided mechanisms for
review, waiver, modification or removal of the prohibitions. The RBOCs are also
known as regional holding companies. In this Prospectus, the term RBOC may
include the Bell operating companies.
Redundant. A telecommunications facility using two separate electronic
devices to transmit a telecommunications signal so that if one device
malfunctions, the signal may continue without interruption.
Resale. To hire circuits or services from a major carrier and resell them
to individual users.
Reseller. A carrier that does not operate its own transmission facilities
(although it may own its own switches or other equipment), but obtains
communications services from another carrier for resale to the public for
profit.
Route Mile. A geographical measure defined as one physical mile of fiber
optic cable, regardless of the number of fibers or telecommunications paths
within that cable.
Signaling System #7. Sophisticated network signaling system that utilizes
out-of-band signaling where signaling information is sent over a separate
channel than the call itself. improves call processing set-up times and frees
circuits for voice, data and video transmissions.
Special access services. The lease of private, dedicated
telecommunications lines or "circuits" along the network of an ILEC or a CAP,
which lines or circuits run to or from the long distance carrier POPs. Examples
of special access services are telecommunications lines running between POPs of
a single long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from an end user to its long distance carrier
POP. Special access services do not require the use of switches.
Switch. A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of interconnecting different circuits to create a
temporary transmission path between users. In operation a switch may be a
sophisticated computer that accepts instructions from a caller in the form of a
telephone number. Like an address on an envelope, the numbers tell the switch
where to route the call. The switch opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switches allow
local telecommunications service providers to connect calls directly to their
destination, while providing advanced features and recording
92
<PAGE>
connection information for future billing. Nortel DMS-500, Cascade, Titan 3/1
and Alcatel 1/0 are brand names for switches and related equipment.
Switched access. 1) Method to test telecommunications circuits using
electromechanical circuitry. 2) Calls transmitted partially on shared or common
transport circuits. Used primarily by residential or small business companies
using regular home or business lines.
Switched access services. Switched access services are the services
provided by an ILEC or CLEC through its switching facilities to a long distance
carrier, in addition to switched access transport, to connect the IXC POP to end
users, for the purpose of originating or terminating toll calls. Long distance
companies pay switched access charges to the ILECs and CLEC for each switched
call originated or terminated on the ILEC's or CLEC's network.
Switched access transport. Transportation of switched traffic along
dedicated lines between the ILEC central offices and long distance carrier POPs.
Switched traffic. Telecommunications traffic along the public switched
network that is charged on a per-minute or other range sensitive basis. This
traffic is generally switched at the ILEC's central offices.
Synchronous Optical Network (SONET). SONET is the electronics and network
architecture which enable transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic is simply reversed and sent to its destination around the other side of
the ring.
Telephone Exchange Service. The term "telephone exchange service" means
(A) service within a telephone exchange, or within a connected system of
telephone exchanges within the same exchange area operated to furnish to
subscribers intercommunicating service of the character ordinarily furnished by
a single exchange, and which is covered by the exchange service charge, or (B)
comparable service provided through a system of switches, transmission
equipment, or other facilities (or combination thereof) by which a subscriber
can originate and terminate a telecommunications service.
Telephone Toll Service. The term "telephone toll service" means telephone
service between stations in different exchange areas for which there is made a
separate charge not included in contracts with subscribers for exchange service.
Token Ring. A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 megabits per second or 16 megabits per second.
Toll services. Otherwise known as EAS or intraLATA toll services are those
calls that are beyond the local calling area but originate and terminate within
the same LATA; such calls are usually priced on a measured basis.
Traffic. A generic term that includes any and all calls, messages and data
sent and received by means of telecommunications.
Trunk. 1) Group of circuits that carry call traffic in and out of the
switch; 2) Circuit or channel connecting two exchanges or two switching
devices; 3) Circuit capable of being switched at both ends.
93
<PAGE>
Unbundling. 1) The separate pricing of hardware, software and related
services. 2) The separate pricing of each component or element of a
communications product or service, so that the customer may select only those
components or elements it needs without having to accept unnecessary element or
components.
800 Service. A telecommunications service for businesses that allows calls
to be made to a specific location at no charge to the calling party. Use of the
"800" service code denotes calls that are to be billed to the receiving party.
A computer database in the provider's network translates the 800 number into a
conventional telephone number.
94
<PAGE>
ELECTRIC LIGHTWAVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..................................................... F-1
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996....
and for the Six Months Ended June 30, 1996 and 1997 (unaudited).................. F-2
Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (unaudited)....... F-3
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996
and for the Six Months Ended June 30, 1996 and 1997 (unaudited)........... F-4
Statements of Changes in Stockholder's Equity (Deficiency) for the Years Ended
December 31, 1994, 1995 and 1996 and for the Six Months
Ended June 30, 1997 (unaudited)........................................... F-5
Notes to Financial Statements.................................................... F-6
</TABLE>
95
<PAGE>
The Board of Directors and Stockholder
Electric Lightwave, Inc.
We have audited the balance sheets of Electric Lightwave, Inc. (a wholly-
owned subsidiary of Citizens Utilities Company) as of December 31, 1995 and 1996
and the consolidated statements of operations, stockholder's equity (deficiency)
and cash flows for each of the years in the three-year period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Electric Lightwave, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
September 4, 1997
F-1
<PAGE>
ELECTRIC LIGHTWAVE, INC.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the six months ended
For the years ended December 31, June 30,
--------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ------------ -----------
(Unaudited)
Revenues $ 8,152 $ 15,660 $ 31,309 $ 13,374 $ 24,765
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Network access expenses 6,155 8,728 24,081 9,527 15,206
Sales and marketing expenses 4,534 5,704 8,462 3,940 6,271
Depreciation and amortization 2,476 7,064 7,192 3,453 5,603
Administrative services
expenses 1,300 1,511 2,254 851 1,594
Other operating expenses 3,228 12,603 18,703 6,218 15,905
---------- ---------- ----------- ------------ -----------
Total operating expenses 17,693 35,610 60,692 23,989 44,579
---------- ---------- ----------- ------------ -----------
Loss from operations (9,541) (19,950) (29,383) (10,615) (19,814)
Interest expense, net 873 372 - - 302
---------- ---------- ----------- ------------ -----------
Net loss $ (10,414) $ (20,322) $ (29,383) $ (10,615) $ (20,116)
========== ========== =========== ============ ===========
Pro forma net loss per share $ $ $
=========== ============ ===========
Pro forma weighted average shares
outstanding
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
F-2
<PAGE>
ELECTRIC LIGHTWAVE, INC.
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------------------------- ------------------
1995 1996 1997
------------------ ------------------ ------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 143 $ 611 $ 1,109
Trade receivables, net 3,097 4,610 7,364
Other receivables 45 8,329 167
Other current assets 168 224 404
------------------ ----------------- -----------------
Total current assets 3,453 13,774 9,044
------------------ ----------------- -----------------
Property, plant and equipment 127,297 189,334 235,953
Less accumulated depreciation and
amortization (11,307) (17,337) (20,703)
------------------ ----------------- -----------------
Property, plant and equipment, net 115,990 171,997 215,250
Other assets 9,458 9,885 9,541
------------------ ----------------- -----------------
Total assets $ 128,901 $ 195,656 $ 233,835
================== ================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 18,596 $ 18,892 $ 21,201
Taxes other than income taxes 1,577 2,329 3,766
Other current liabilities 1,177 2,493 3,933
------------------ ----------------- -----------------
Total current liabilities 21,350 23,714 28,900
------------------ ----------------- -----------------
Deferred credits 1,313 1,435 1,488
Capital lease obligation - - 10,664
Deferred income taxes payable 2,628 5,826 8,944
Due to Citizens Utilities Company 64,941 155,395 194,669
Shareholder's equity (deficiency) 38,669 9,286 (10,830)
------------------ ----------------- -----------------
Total liabilities and
shareholder's
equity (deficiency) $ 128,901 $ 195,656 $ 233,835
================== ================= =================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
F-3
<PAGE>
ELECTRIC LIGHTWAVE, INC.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For six months ended
For the years ended December 31, June 30,
-------------------------------- ----------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flow from operating activities:
Net loss $(10,414) $(20,322) $(29,383) $(10,615) $(20,116)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and
amortization 2,476 7,064 7,192 3,453 5,603
Administrative services expenses
charged by Citizens 1,300 1,511 2,254 851 1,594
Changes in operating assets and
liabilities:
Receivables (805) (1,698) (9,797) (1,883) 5,408
Accounts payable and other accrued
liabilities 3,056 10,444 295 (13,508) 2,309
Taxes other than income taxes 520 967 765 970 1,437
Other (230) 464 (219) (2,720) (1,014)
--------- --------- --------- ----------- ------------
Net cash used for operating
activities (4,097) (1,570) (28,893) (23,452) (4,779)
Cash flow used for investing activities:
Capital expenditures (60,774) (16,129) (59,169) (18,402) (33,595)
--------- --------- --------- ----------- ------------
Cash flow from financing activities:
Citizens fundings 67,636 26,862 88,530 41,963 38,872
Repayment of debt (2,729) (9,111) - - -
--------- --------- --------- ----------- ------------
Net cash provided by financing
activities 64,907 17,751 88,530 41,963 38,872
Change in cash 36 52 468 109 498
Cash at beginning of period 55 91 143 143 611
--------- --------- --------- ----------- ------------
Cash at end of period $ 91 $ 143 $ 611 $ 252 $ 1,109
========= ========= ========= =========== ============
Supplemental cash flow information:
Cash paid for interest $ 1,086 $ 630 $ -
========= ========= =========
Other non-cash transactions:
Issuance of preferred stock in
exchange for reduction of amount
due to Citizens $ 57,255 $ - $ -
========= ========= =========
Acquisition of minority interest by
Citizens $ - $ 3,000 $ -
========= ========= =========
Deferred income taxes charged to
due to Citizens $ 519 $ 1,160 $ 3,198
========= ========= =========
Capitalized interest added to due
to Citizens $ 2,466 $ 2,619 $ 2,868
========= ========= =========
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
F-4
<PAGE>
ELECTRIC LIGHTWAVE, INC.
Statements of Shareholder's Equity (Deficiency)
For the years ended December 31, 1994, 1995 and
1996 and for the six months ended June 30, 1997
(unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------- ----------------------------------
Shares Amount Shares Amount
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance January 1, 1994 23 $ - 1 $ -
Issuance of preferred
shares to Citizens 76 - - -
Net loss - - - -
-------------- -------------- --------------- --------------
Balance December 31, 1994 99 - 1 -
Acquisition of minority
interest by Citizens - - - -
Net Loss - - -
-------------- -------------- --------------- --------------
Balance December 31, 1995 99 - 1 -
Conversion of preferred
stock to common stock (99) - 99 -
Net loss - - - -
-------------- -------------- --------------- --------------
Balance December 31, 1996 - - 100 -
Net loss (unaudited) - - - -
-------------- -------------- --------------- --------------
Balance June 30, 1997 (unaudited) - $ - 100 $ -
============== ============== =============== ==============
<CAPTION>
Additional Shareholder's
Paid-in- Equity
Capital Deficit (Deficiency)
--------------- --------------- -------------------
<S> <C> <C> <C>
Balance January 1, 1994 $ 19,000 $ (9,850) $ 9,150
Issuance of preferred
shares to Citizens 57,255 - 57,255
Net loss - (10,414) (10,414)
--------------- --------------- -------------------
Balance December 31, 1994 76,255 (20,264) 55,991
Acquisition of minority
interest by Citizens 3,000 - 3,000
Net Loss - (20,322) (20,322)
--------------- --------------- -------------------
Balance December 31, 1995 79,255 (40,586) 38,669
Conversion of preferred
stock to common stock - - -
Net loss - (29,383) (29,383)
--------------- --------------- -------------------
Balance December 31, 1996 79,255 (69,969) 9,286
Net loss (unaudited) - (20,116) (20,116)
--------------- --------------- -------------------
Balance June 30, 1997 (unaudited) $ 79,255 $ (90,085) $ (10,830)
=============== =============== ===================
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
F-5
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
(1) Organization and Description of Business
----------------------------------------
The Company is a full service, facilities based provider of
communications services in five major market clusters in and around the
western United States cities of Portland, Oregon; Seattle, Washington;
Salt Lake City, Utah; Sacramento, California; and Phoenix, Arizona. The
Company targets retail customers, primarily large- and medium-sized
communications-intensive businesses, and wholesale customers, primarily
telecommunications service providers, that require state-of-the-art
communications and data services.
The Company is a subsidiary of Citizens Utilities Company ("Citizens").
The Company has invested solely in its telecommunications networks and
is experiencing significant recurring losses and negative cash flows
during the construction and start up phase of its business. Since the
Company does not presently generate operating profits or sufficient
operating cash flows to meet operating and capital requirements, the
Company is dependent upon its ability to obtain financing from either
Citizens or external sources. Currently, the Company's sources of
funding are Citizens and a lease facility guaranteed by Citizens.
Citizens has indicated its intent to continue to provide the necessary
operating and capital funding through the successful completion of the
Company's initial public offering ("Offering"), currently expected to
be completed before the end of 1997.
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation and Use of Estimates
The financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to
make estimates and assumptions which affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
(b) Revenue Recognition
Revenues from telecommunications services are recognized when the
services are provided. The revenue from long-term leases of fiber optic
cable is recognized on a straight line basis over the terms of the
related leases.
(c) Trade and Other Receivables
The Company's trade customers are primarily large- and medium-sized
communications-intensive businesses and telecommunications service
providers that require state-of-the-art communications and data
services. Trade accounts receivable is shown net of an allowance for
doubtful accounts in amounts of approximately $75,000, $1,166,000 and
$1,073,000 at December 31, 1995, 1996 and June 30, 1997, respectively.
At December 31, 1996, the Company's trade receivables are concentrated
in and around the five cities referred to in note 1. Other receivables
at December 31, 1996 include approximately $6.7 million due under a
construction agency agreement, which amount was received by the Company
in January, 1997.
F-6
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost and include certain
costs which are capitalized during the installation and expansion of
telecommunications networks including interest costs related to
construction of approximately $2,466,000, $2,619,000, and $2,868,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Depreciation is computed using the straight line method over the
estimated useful lives of the assets. Leasehold improvements are
amortized using the straight line method over the shorter of the
estimated useful lives of the assets or the remaining terms of the
leases. A capital lease included in telecommunications networks is
being amortized using the straight line method over the life of the
capital lease. The estimated useful lives of owned assets are as
follows:
Telecommunications networks 25 years
Electronics and related equipment 7 - 8 years
Office equipment and other 5 - 7 years
The Company's telecommunications networks are subject to technological
risks and rapid market changes due to new products and services and
changing customer demand. These changes may result in future
adjustments to the estimated useful lives of these assets.
(e) Other Assets
Other assets include third party direct costs incurred in connection
with negotiating and securing initial rights-of-way and developing
network design for new market clusters or locations, which costs are
deferred until service is ready to commence. Such costs are then
amortized over a 5 year period utilizing the straight line method. Also
included in other assets at December 31, 1995 and 1996 is goodwill of
$4,866,000 and $4,680,000, respectively, resulting from the acquisition
of the minority interests in the Company by Citizens, which amounts
were recorded in the Company's accounts. Goodwill is being amortized
utilizing the straight line method over a 25 year period.
(f) Income Taxes
The Company is included in the consolidated federal income tax return
of Citizens. The Company utilizes the asset and liability method of
accounting for income taxes. Under the asset and liability method,
deferred income taxes are recorded for the tax effect of temporary
differences between the financial statements and the tax bases of
assets and liabilities using tax rates expected to be in effect when
the temporary differences are expected to turn around. Citizens' policy
has been to record tax provisions, assets and liabilities at the
subsidiary level on a stand alone basis. However, Citizens reimburses
the Company on an annual basis (through reductions in the "Due to
Citizens" account) for the benefit of the Company's changes in
temporary differences utilized by Citizens in its consolidated federal
income tax return, but not for the book losses or permanent tax
adjustments until such items can be used on a stand alone basis.
F-7
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
(g) Impairment
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of," the Company reviews for the
impairment of long-lived assets and certain identifiable intangibles
to be held and used by the Company whenever events or changes in
circumstances indicate that the carrying amount of the asset may not
be recoverable.
The Company assesses the recoverability of an asset by determining
whether the amortization of the asset balance over its remaining life
can be recovered through projections of undiscounted future cash flows
of the related asset. The amount of asset impairment, if any, is
measured based on projected discounted future cash flows using a
discount rate reflecting the Company's average cost of funds.
(h) Employee Stock Plans
The Company currently participates in the Management Equity Incentive
Plan ("MEIP") of Citizens, which may grant awards of Citizens Common
Stock to eligible officers, management employees and non-management
exempt employees of Citizens and its subsidiaries in the form of
incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock or other stock-based awards and
in the Employee Stock Purchase Plan ("ESPP") of Citizens in which
employees of Citizens and its subsidiaries may subscribe to purchase
shares of Citizens' common stock at 85% of the lower of the average
market price on the first day of the purchase period or the last day
of the purchase period.
Prior to January 1, 1996, the Company accounted for the Citizens
employee stock option plans in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted SFAS 123, "Accounting
for Stock-Based Compensation", which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value based method defined in SFAS 123 had been
applied. The Company elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS 123 (see Note 6). The Company had no stock plans involving its
own stock as of December 31, 1996.
(i) Pro Forma Net Loss Per Share
Historical net loss per share is not presented because it is not
meaningful. Pro forma share and pro forma per share amounts will be
presented to reflect the recapitalization of the Company contemplated
as part of its Offering (see last paragraph of note 5). Pro forma net
loss per common and common equivalent share is based on the weighted
average number of common shares outstanding during the year, as
adjusted for the effects of the application of Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 83 (__ shares in all
periods). Pursuant to SAB No. 83, options granted within one year of
the Company's Offering which have an exercise price less than the
Offering price are treated as outstanding for all periods presented
(using the treasury stock method at the assumed Offering price) even
though the effect is to reduce the loss per share.
F-8
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
(j) Interim Financial Information
The financial statements and notes related thereto as of June 30, 1997
and for the six months ended June 30, 1996 and 1997 are unaudited, but
in the opinion of management, include all normal recurring adjustments
necessary for a fair presentation of financial position and results of
operations. The operating results for the interim periods are not
necessarily indicative of a full year's operations.
(3) Property, Plant and Equipment:
-----------------------------
The components of property, plant and equipment at December 31, 1995 and
1996 and at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
-------------------(in thousands)-----------------
December 31, June 30
----------------------------- ----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Telecommunications networks $80,501 $113,997 $125,151
Electronics and related equipment 14,997 20,417 20,486
Office equipment, leasehold improvements and other 4,414 11,201 12,593
Construction work in progress 24,980 37,433 72,616
Inventory 2,405 6,286 5,107
--------- --------- --------
Property, plant and equipment 127,297 189,334 235,953
Accumulated depreciation and amortization (11,307) (17,337) (20,703)
--------- --------- --------
Property, plant and equipment, net $115,990 $171,997 $215,250
========= ========== ========
</TABLE>
Telecommunications networks include a capital lease at June 30, 1997 in the
amount of $11,320,000.
Inventory consists primarily of new and reusable parts to maintain and build
fiber optic networks.
The Company has leased fiber optic cable included in its telecommunications
networks to an unrelated long distance carrier for 10 years beginning in 1995
and to Citizens for 10 years. The lease agreement with the long distance
carrier provided for $1,500,000 in cash at inception, which amount is being
amortized utilizing the straight line method over the lease period, and $144,000
per month over the 10 year lease period. The lease agreement with Citizens
calls for monthly rentals of $30,000 over the 10 year lease period (see note 6).
F-9
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
(4) Income Taxes:
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
-------(in thousands)--------
December 31,
-----------------------------
1995 1996
-------- ---------
<S> <C> <C>
Benefit of operating loss carryforwards $ 14,108 $ 24,348
Less valuation allowance (14,108) (24,348)
--------- --------
$ - $ -
--------- --------
Deferred income tax liability,
primarily property, plant and equipment $ 2,628 $ 5,826
========= ========
</TABLE>
The benefit of the operating loss carryforwards represent amounts due from
Citizens for the utilization by Citizens of the Company's operating losses in
the consolidated federal income tax return, and is net of amounts reimbursed to
the Company by Citizens for the benefit of the Company's changes in temporary
differences. A 100% valuation allowance has been recognized to offset the
benefit of the operating loss carryforwards since Citizens' policy is to
reimburse the Company for such losses only when the Company becomes profitable.
Since the Company has a history of recurring losses, a full valuation allowance
has been provided each year against the benefit of the operating loss
carryforwards.
The effective income tax rates were zero for the years ended December 31, 1994,
1995 and 1996 as a result of the Company incurring net operating losses for
which the tax benefit thereon was fully reserved. The tax expense consisted of
deferred tax expenses of $519,000, $1,160,000 and $3,198,000 net of current tax
benefits of $519,000, $1,160,000 and $3,198,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
Upon consummation of the Offering, the Company will no longer be included in the
consolidated federal income tax return of Citizens, and in such case would file
its own federal income tax return. However, for state income tax return
purposes, the Company intends to enter into a tax sharing agreement with
Citizens, whereby, the Company's state income tax liability would be computed on
a stand alone basis. Additionally, upon completion of the Offering, the
Company, on a stand alone basis, may not have any federal net operating loss
carryovers, and in such case Citizens would not reimburse the Company for losses
incurred prior to the Offering, except as described above.
(5) Capital Stock:
--------------
At December 31, 1993, the Company had authorized 1,750,000 shares of
preferred stock, $.01 par value, and 2,000,000 shares of common stock, $.01
par value. The preferred shares were convertible into common stock on a
one-for-one basis and contained voting rights whereby each share entitled
the holder to one vote on all matters. At December 31, 1993, the Company
had 1,750,000 shares of preferred stock outstanding, all of which were
owned by Citizens, and 125,009 shares of common stock outstanding, of which
66,259 were owned by Citizens. In 1994, the Company increased its
authorized preferred to 10,750,000 shares and issued 5,725,527 additional
shares of preferred stock to Citizens for $57,255,000, raising the number
of outstanding preferred shares to 7,475,527. The shares were paid for by
recording $57,255,000 of the amount due to Citizens as additional paid-in-
capital.
F-10
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
During 1995, Citizens acquired 58,750 shares of common stock from the minority
shareholder of the Company for $3,000,000 giving Citizens 100% ownership of the
Company. Such amount has been recorded in the Company's accounts as goodwill
and additional paid-in-capital.
During 1996, all of the preferred stock was converted into 7,475,527 shares of
common stock. On June 14, 1996 there was a reverse stock split of common stock
in the amount of 100 for 7,600,536. The split reduced the shares of common stock
outstanding from 7,600,536 to 100 shares, and the number of authorized shares
was reduced to 500 shares of preferred and 500 shares of common. All share and
per share data have been restated to reflect the reverse stock split.
On , 1997, the Board of Directors effected a ___ for ____ common stock split to
____ shares increasing the number of outstanding common shares from ____ to ____
shares. All share and per share data has been retroactively adjusted to provide
for the stock split.
Prior to the completion of the Offering, the Company intends to amend its
Certificate of Incorporation to change its authorized capital stock to ____
shares, including ____ shares of Class A Common Stock, $.01 par value per share,
___ shares of Class B Common Stock, $.01 par value per share, and ____ shares of
preferred stock, $.01 par value per share. At that time, the outstanding common
stock will convert to Class B common stock and the Company will declare a stock
split of ____ for one. Upon completion of the Offering of ______ shares of
Class A Common Stock to the public, there will be no preferred stock outstanding
and Citizens will own all of the outstanding shares of Class B Common Stock.
Each share of Class A Common Stock will entitle the holder to one vote and each
share of Class B Common Stock will entitle the holder to 10 votes on each matter
to be voted upon by the holders of the Common Stock. As a result, after the
completion of the Offering, Citizens will have __% of the voting control of the
Company (____% if the underwriters' overallotment options are exercised in
full). With the exception of voting rights, the rights and privileges of Class
A and Class B Common Stock are identical. Class B Common Stock is convertible
into Class A Common Stock on a one-for-one basis.
(6) Related Party Transactions:
--------------------------
Transactions with Citizens
The Company has been a subsidiary of Citizens since 1990. In connection
with this ownership interest, Citizens has advanced funds to the Company to
finance operations, construction and capital expenditures. Interest is not
charged on Citizens advances for operations and capital expenditures,
except for intercompany advances used to fund construction-in-progress.
Subsequent to the construction period, the advances become non-interest
bearing. Interest on Citizens advances are recorded as an increase to the
amount due to Citizens. The amount of interest charged on construction-in-
progress has in turn been capitalized as part of property plant and
equipment.
The Company is also charged by Citizens for administrative services which
includes an allocation of Citizens' corporate overhead. The overhead
allocation rate is based on four factors: the Company's plant assets,
operating expenses, number of customers and payroll expenses. Effective
with the completion of the Offering, the Company will enter into an
Administrative Services Agreement ("Agreement") under which Citizens will
provide administrative services to the Company, including but not limited
to, certain financial management services, information services, legal and
contract services and human resources services. Under the terms of such
Agreement, the Company will pay Citizens for reimbursable costs as defined
in the Agreement plus an administrative charge.
F-11
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
A summary of the activity in the amount due to Citizens is as follows:
<TABLE>
<CAPTION>
-------------------(in thousands)----------------
Years Ended Six months ended
December 31, June 30,
------------------------------ -----------------
1994 1995 1996 1997
------------------------------ -----------------
<S> <C> <C> <C> <C>
Balance beginning of period $ 21,481 $35,109 $ 64,941 $155,395
Cash advances from Citizens, net 67,636 26,862 88,530 38,872
Acquisition of preferred stock (57,255) - - -
Deferred income taxes (519) (1,160) (3,198) (3,119)
Interest 2,466 2,619 2,868 1,927
Administrative services fees 1,300 1,511 2,254 1,594
-------- ------- -------- --------
Balance end of period $ 35,109 $64,941 $155,395 $194,669
========= ======= ======== ========
</TABLE>
Prior to the completion of the Offering, $20.7 million of the amount due to
Citizens as of June 30, 1997 will be contributed to additional paid-in-capital
and the remaining $174 million will become long-term debt payable to Citizens.
Funds provided to the Company by Citizens subsequent to June 30, 1997 will be
treated as long-term debt payable to Citizens. In 1994, 1995 and 1996,
Citizens had been charging interest on the amount due to Citizens only to the
extent that the Company was allowed to capitalize interest under Generally
Accepted Accounting Principles. Effective with the completion of the Offering,
interest on the long-term debt payable to Citizens will be at an annual rate of
___%, will be non-amortizing and will mature in ______.
Telecommunications Services
Citizens entered into a lease for fiber optic cable from the Company for 10
years and calls for rentals of $30,000 per month. Also during 1996, Citizens
and the Company combined their purchasing power of long-haul services in
arrangements Citizens entered into with a long distance carrier in order to
receive a lower unit cost. The Company reimbursed Citizens $7.6 million in 1996
representing the cost of the Company's usage of these long-haul services plus
5%. This arrangement with Citizens was replaced effective May 1, 1997 with a
24-month term agreement which removed the 5% additional fee.
Stock Plans
At December 31, 1996, Company employees participated in two Citizens stock based
compensation plans which are described below. The Company applies APB Opinion
No. 25 and related interpretations in accounting for the Citizens employee stock
plans. Accordingly, no compensation cost has been recognized in the financial
statements for options issued pursuant to the MEIP or ESPP. The following
tables reflect MEIP and ESPP information for Company employees and exclude full
time employees and officers of Citizens. Had the Company determined
compensation cost based on the fair value at the grant date for the MEIP and
ESPP under SFAS 123, the Company's pro forma net loss would have been as
follows:
($ in thousands) 1995 1996
- -------------------------------------------------------------
Net loss As reported $ 20,322 $ 29,383
Pro forma $ 20,343 $ 29,474
Under the Citizens' MEIP, the exercise price of stock options and SARs shall be
equal to or greater than the fair market value of the underlying Citizens common
stock on the date of grant. Stock options are generally
F-12
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
not exercisable on the date of grant but vest over a period of time. A summary
of Citizens shares subject to option for Company employees is as follows:
Shares Weighted
Subject to Average Option
Option Price Per Share
---------- ---------------
Balance at January 1, 1994 36,184 $ 13.52
Options granted 73,138 11.56
Options exercised - -
Options canceled or lapsed - -
--------- ---------
Balance at December 31, 1994 109,322 12.60
Options granted 27,831 10.57
Options exercised - -
Options canceled or lapsed 19,722 12.29
--------- ---------
Balance at December 31, 1995 117,431 12.19
Options granted 102,877 11.08
Options exercised - -
Options canceled or lapsed 5,909 11.52
--------- ---------
Balance at December 31, 1996 214,399 $ 11.84
========= =========
The following table summarizes information about Citizens shares
subject to option for Company employees under the MEIP at December 31, 1996.
<TABLE>
<CAPTION>
Options Exercisable Options Outstanding
- ---------------------------------------------------------- --------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Range of Exercise Life in Number Exercise
Outstanding Exercise Prices Price Years Exercisable Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
214,399 $9.85 - $14.96 $11.84 6.5 45,817 $12.06
</TABLE>
The weighted-average fair value of options granted during 1995 and 1996 were
$2.12 and $1.51, respectively. For purposes of the pro forma calculation under
SFAS 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996:
1995 1996
- -----------------------------------------------------------------------
Dividend yield 5.6% 6.2%
Expected volatility 20% 20%
Risk-free interest rate 6.25% 5.63%
Expected life 7 years 7 years
The ESPP allows eligible employees of Citizens and its subsidiaries to
subscribe to purchase shares of Citizens Common Stock at 85% of the lower of the
average market price on the first day of the purchase period or on the last day
of the purchase period. An employee may elect to have up to 20% of annual base
pay withheld in equal installments throughout the designated payroll-deduction
period for the purchase of shares. The value of an employee's subscription may
not exceed $25,000 in any one calendar year. As of December 31, 1996, 175
Company employees were participating in the ESPP.
F-13
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
The weighted-average fair value of purchase rights granted in 1995 and 1996 was
$3.18 and $3.30, respectively. For purposes of the pro forma calculation under
SFAS 123, compensation cost is recognized for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes Model with the
following assumptions for subscription periods beginning in 1995 and 1996:
1995 1996
- --------------------------------------------------------------------------------
Dividend yield 6.2% 6.4%
Expected volatility 20% 20%
Risk-free interest rate 5.56% 5.30%
Expected life 6 months 6 months
(7) Commitments and Contingencies:
-----------------------------
In 1995, the Company entered into a $110 million construction agency
agreement and an operating lease agreement in connection with the
construction of certain telecommunications networks and fiber cable links.
The Company serves as agent for the construction of these projects and upon
completion of each project has agreed to lease the facilities for a three
year term, with one year renewals available through April 30, 2002. At
December 31, 1995, 1996 and at June 30, 1997, the Company was leasing
assets with an original cost of $36.8 million, $57.3 million and $87.4
million, respectively, under this agreement. The Company has the option to
purchase the facilities at the end of the lease terms for the amount of the
lessor's investment in the facilities, which is expected to be $110
million. In the event the Company chooses not to exercise this option, the
Company is obligated to arrange for the sale of the facilities to an
unrelated party and is required to pay the lessor any difference between
the net sales proceeds and the lessor's investment in the facilities.
However, any amount required to be paid to the lessor is subject generally
to a maximum of 80% of the lessor's investment, giving effect to lease
payments previously made. The performance of these lease obligations is
guaranteed by Citizens. Effective with the completion of the Offering, the
Company has agreed to pay to Citizens an annual guarantee fee equal to
3.25% per annum of the lessor's investment in the leased assets.
The Company conducts certain of its operations in leased premises and also
leases certain equipment. Obligations, renewals and maintenance costs vary
by lease.
The Company has entered into an operating lease contract and a capital
lease contract with a third party in order to develop long-haul routes
between Portland, Oregon and Seattle, Washington and between Portland,
Oregon and Spokane, Washington. The operating lease agreement provides for
rental payments based on a percentage of the Company's monthly leased
traffic over such route and is expected to become operational before the
end of 1997. The capital lease agreement provides for a monthly minimum
lease payment of $105,000 plus a percentage of leased traffic over such
route in excess of certain minimums and became operational in February
1997. Both agreements have terms of 15 years.
The Company has entered into an operating lease contract to develop a local
network in Phoenix, Arizona. The operating lease provides for rental
payments based on a percentage of the network's operating income for a
period of 15 years.
Future minimum rental commitments for all long-term noncancelable operating
leases as of December 31, 1996 are:
F-14
<PAGE>
ELECTRIC LIGHTWAVE,INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1994, 1995 and 1996
(Information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 is unaudited)
Year Amount
---------------------------
1997 $ 7,727,000
1998 7,364,000
1999 7,401,000
2000 7,295,000
2001 6,176,000
2002 to 2007 4,306,000
---------------------------
Total $40,269,000
===========================
Total rental expense included in the Company's results of operations for the
years ended December 31, 1994, 1995 and 1996 was $663,000, $2,475,000 and
$5,193,000, respectively.
The Company is also a party to contracts with several unrelated long distance
carriers. The contracts provide for fees based on leased traffic subject to
minimum monthly fees which aggregate $2.6 million for 1997, $12.1 million for
1998 and $16.8 million for 1999.
The Company's budgeted capital expenditures for 1997 are $82 million and certain
commitments have been entered into in connection therewith.
Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's results of operations, financial position or liquidity.
F-15
<PAGE>
SCHEDULE II
Electric Lightwave, Inc.
Valuation and Qualifying Accounts
($ in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Cost Charge to Balance at
beginning and other end
Accounts of period Expense accounts Deductions of period
- -------------------------- ------------------- ---------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
1994:
Allowance for doubtful
accounts $ -- (36) --- --- $ (36)
Deferred income taxes
valuation allowance $ (3,442) --- (3,603) --- $ (7,045)
1995:
Allowance for doubtful
accounts $ (36) (111) --- 72 $ (75)
Deferred income taxes
valuation allowance $ (7,045) --- (7,063) --- $ (14,108)
1996:
Allowance for doubtful
accounts $ (75) (3,010) --- 1,919 $ (1,166)
Deferred income taxes
valuation allowance $(14,108) --- (10,240) --- $(24,348)
</TABLE>
F-16
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF CLASS A COMMON
STOCK OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- --------------------
TABLE OF CONTENTS
Page
Prospectus Summary............................................................3
Risk Factors.................................................................10
Forward-looking Statements...................................................21
Use Of Proceeds..............................................................21
Dilution.....................................................................22
Dividend Policy..............................................................23
Capitalization...............................................................24
Selected Financial and Operating Data........................................25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................26
Business.....................................................................33
Existing Market Clusters and Long-Haul Networks
Combined Network Information at June 30, 1997................................38
Government Regulation........................................................52
The Local Telecommunications Services Industry...............................57
Management...................................................................58
Relationship With Citizens...................................................66
Security Ownership by Principal Stockholder..................................71
Description of Capital Stock.................................................73
Shares Eligible for Future Sale..............................................75
Certain Tax Considerations...................................................76
Underwriting.................................................................79
Legal Matters................................................................82
Experts......................................................................83
Additional Information.......................................................83
Glossary.....................................................................85
Index to Financial Statements................................................95
UNTIL _______, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[ ] SHARES
[LOGO]
ELECTRIC LIGHTWAVE, INC.
CLASS A COMMON STOCK
-----------
PROSPECTUS
-------------
U.S. Underwriters
LEHMAN BROTHERS
International Managers
LEHMAN BROTHERS
[__________], 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities to be registered hereby. With
the exceptions of the Securities and Exchange Commission registration fee
and the NASDAQ registration fee, the amounts set forth below are estimates.
Securities and Exchange Commission registration fee ............. $ 60,607
NASDAQ registration fee.......................................... 5,000
Transfer agent and registrar fees................................ 10,000
Costs of printing and engraving.................................. 70,000
Legal fees and expenses.......................................... 60,000
Accounting fees and expenses..................................... 30,000
Blue Sky fees and expenses....................................... 10,000
Miscellaneous expenses........................................... 10,000
TOTAL.................................................... $ 255,607
============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of
Delaware, Electric Lightwave, Inc. (the "Company") has agreed to indemnify
each director and officer of the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by him in connection with the defense or settlement
of any threatened, pending or completed action, suit or proceeding, in
which he is involved by reason of the fact that he is or was a director or
officer of the Company if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe that his conduct was unlawful. If, however,
any threatened, pending or completed action, suit or proceeding is by or in
the right of the Company, the director or officer shall not be indemnified
in respect of any claim, issue or matter as to which he is adjudged to be
liable to the Company unless the Court of Chancery of Delaware determines
otherwise.
Article Seventh of The Company's Certificate of Incorporation
provides that no director of the Company shall be personally liable to the
Company or any of its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the Company or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (iii) under Section 174 of the General
Corporation Law of Delaware, or (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's By-Laws provide that the Company shall indemnify
its officers and directors to the fullest extent permitted by the General
Corporation Law of Delaware.
II-1
<PAGE>
The Company participated in the directors' and officers'
insurance coverage of Citizens Utilities Company relating to loss,
liabilities and expenses incurred in connection with any legal proceeding
arising from his or her being or having been a director or officer of the
Company.
The Company has agreed to indemnify and hold harmless Citizens
and its other subsidiaries and their directors, officers, employees and
agents from all losses, liabilities and costs and expenses resulting from
liabilities of the Company or material breaches by the Company arising out
of the offering of the shares of Class A Common Stock contemplated by this
registration statement. Citizens has undertaken a reciprocal obligation to
indemnify the Company and its directors, officers, employees and agents
against losses, liabilities, costs and expenses resulting from liabilities
of Citizens or material breaches by Citizens arising out of such offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In 1994, the Company issued 5,725,527 shares of preferred stock
of the Company to Citizens for $57,255,270 in a private placement.
Exemption from registration is claimed under Section 4.2 of the Securities
Act of 1933. No underwriters were involved in such issuance. In 1996, 76
shares of common stock were issued upon conversion of such preferred stock
to common stock. Exemption from registration under the Securities Act is
claimed under Section 3(a)(9) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
An Exhibit Index, containing a list of all exhibits to this
registration statement, commences on page II-5.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not
required, is not material or is otherwise included in the financial
statements or related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with
II-2
<PAGE>
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(i) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) hereunder the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(ii) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has caused this Amendment No. 3 to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Vancouver, State of Washington, on October 17, 1997.
ELECTRIC LIGHTWAVE, INC.
/s/Robert J. DeSantis
-----------------------------
By: Robert J. DeSantis
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the registration statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
- ---------------------------------- ------------------------------
<S> <C> <C>
*Daryl A. Ferguson Chief Executive Officer, Vice October 17, 1997
- -----------------------------------
Daryl A. Ferguson Chairman and Director
*Leonard Tow Chairman of the Board October 17, 1997
- -----------------------------------
Leonard Tow
*David B. Sharkey Director October 17, 1997
- -----------------------------------
David B. Sharkey
/s/Robert J. DeSantis Principal Financial Officer October 17, 1997
- -----------------------------------
Robert J. DeSantis
*Kerry Rea Principal Accounting Officer October 17, 1997
- -----------------------------------
Kerry Rea
*Stanley Harfenist Director October 17, 1997
- -----------------------------------
Stanley Harfenist
*Robert A. Stanger Director October 17, 1997
- -----------------------------------
Robert A. Stanger
*Maggie Wilderotter Director October 17, 1997
- -----------------------------------
Maggie Wilderotter
*By Robert J. DeSantis
- -----------------------------------
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
1.1* Underwriting agreement
3.1 Amended and Restated Certificate of Incorporation
3.2 By-laws
4.1 (Contained in Exhibit 3.1)
5.1* Opinion regarding legality of the securities being registered
10.1** License Agreement between the Company and the United States of America
Department of Energy acting by and through the Bonneville Power
Administration dated March 29, 1996
10.2** License Agreement between the Company and the United States of America
Department of Energy acting by and through the Bonneville Power
Administration dated November 11, 1996
10.3** License Agreement between the Company and the United States of America
Department of Energy acting by and through the Bonneville Power
Administration dated July 18, 1997
10.4** Optical Fiber License Agreement between the Company and Salt River
Project Agricultural Improvement and Power District dated as of
September 11, 1996
10.5**** Participation Agreement between the Company, Shawmut Bank Connecticut,
National Association, the Certificate Purchasers named therein, the
Lenders named therein, BA Leasing & Capital Corporation and Citizens
Utilities Company dated as of April 28, 1995, and the related
operating documents
10.6**** Agreement For Lease of Dark Fiber between the Company and Citizens
Utilities Company dated as of March 24, 1995
10.7 Form of Administrative Services Agreement between the Company and
Citizens Utilities Company dated as of _______, 1997
10.8**** Form of Tax Sharing Agreement between the Company and Citizens
Utilities Company dated as of _______, 1997
10.9**** Form of Indemnification Agreement between the Company and Citizens
Utilities Company dated as of _______, 1997
10.10* Form of Registration Rights Agreement between the Company and Citizens
Utilities Company dated as of _______, 1997
10.11 Form of Customers and Service Agreement between the Company and
Citizens Utilities Company dated as of _______, 1997
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
10.12* Promissory Note of the Company dated _________, 1997
10.13* Equity Incentive Plan of the Company
10.14* Form of Option Agreement for the Company's Equity Incentive Plan
10.15*** Citizens Utilities Company 1996 Equity Incentive Plan, as amended
10.16* Form of Guaranty Fee Agreement dated as of ___________, 1997 between
the Company and Citizens Utilities Company
11.1* Statement regarding computation of per share earnings
23.1**** Consent of KPMG Peat Marwick LLP
23.2* Consent of Winthrop, Stimson, Putnam & Roberts (to be contained in
Exhibit No 5.1)
24.1 Powers of attorney
27.1**** Financial Data Schedule
- ---------------------
* To be filed by Amendment.
** Previously filed. Portions of such exhibit are omitted pursuant to a
request for confidential treatment.
*** The 1996 Equity Incentive Plan is incorporated by reference to Citizens'
Proxy Statement dated March 29, 1996, File No. 001-11001. Amendment No. 1
to the 1996 Equity Incentive Plan is incorporated by reference to
Citizens' Current Report on Form 8-K dated August 7, 1997, File No. 001-
11001.
**** Previously filed.
II-6
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ELECTRIC LIGHTWAVE, INC.
-----------------------
ELECTRIC LIGHTWAVE, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is
ELECTRIC LIGHTWAVE, INC.,
The date of filing its original Certificate of Incorporation with
the Secretary of State was July 18, 1990.
2. The provisions of the Certificate of Incorporation of the
Corporation are hereby amended and restated and integrated into the single
instrument which is hereinafter set forth, and which is entitled Amended and
Restated Certificate of Incorporation of Electric Lightwave, Inc.
3. The amendment and the restatement of the Certificate of
Incorporation herein certified have been duly adopted by the stockholder and the
Board of Directors, respectively, of the Corporation in accordance with the
provisions of Section 242 and of Section 245 of the General Corporation Law of
the State of Delaware.
4. The text of the Amended and Restated Certificate of Incorporation
shall upon the effective date of this Amended and Restated Certificate of
Incorporation read as follows:
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ELECTRIC LIGHTWAVE, INC.
-----------------------
FIRST: The name of the corporation (hereinafter called the "Corporation"),
is Electric Lightwave, Inc.
SECOND: The registered office of the corporation is to be located at 1013
Centre Road, Wilmington in the State of Delaware. The name of its registered
agent at that address is Corporation Service Company. .
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue shall be 180,000,000 shares of capital
stock, which shall be classified into three classes as follows:
110,000,000 shares of Class A Common Stock, par value $.0l per share;
60,000,000 shares of Class B Common Stock, par value $.0l per share
(the Class A Common Stock and the Class B Common Stock are sometimes together
referred to as the "Common Stock");
10,000,000 shares of Preferred Stock, par value $.0l per share (the
"Preferred Stock").
The express terms of the Class A Common Stock, Class B Common Stock,
and Preferred Stock are as follows:
DIVISION A. THE COMMON STOCK
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<PAGE>
1. VOTING RIGHTS -
-------------
(a) Each holder of Class A Common Stock shall be entitled to one vote
for each share of Class A Common Stock held by such stockholder in the election
of directors and on all other matters presented to the stockholders, and each
holder of Class B Common Stock shall be entitled to ten votes for each share of
Class B Common Stock held by such stockholder in the election of directors and
on all other matters presented to stockholders.
(b) The holders of Class A Common Stock and Class B Common Stock (and
Preferred Stock, if any class or series of Preferred Stock shall be entitled to
vote as a single class with the Common Stock, pursuant to the designations,
powers, preferences, privileges and rights of such class or series) shall vote
together as a single class, to the fullest extent permitted by the Delaware
General Corporation Law. The holders of the shares of Class A Common Stock and
Class B Common Stock shall vote as one class on any proposed amendment to the
Certificate of Incorporation that would increase the authorized number of shares
of Common Stock or any class thereof or any other class or series of stock or
decrease the number of authorized shares of any class or series of stock (but
not below the number thereof then outstanding), except as otherwise required by
the Delaware General Corporation Law.
2. DIVIDENDS - After there shall have been paid or declared and set apart
---------
for payment full cumulative dividends for all past dividend periods and the then
current dividend period on any class or series of Preferred Stock, as provided
for in the terms and provisions of any class or series of Preferred Stock (with
any interest required to be paid thereon), and after there shall have been set
apart a sum or sums sufficient to provide for all past and then current purchase
fund installments for the Preferred Stock in the terms and provisions, if any,
of any class or series of any Preferred Stock (with any interest required to be
paid thereon), then out of any funds lawfully available therefor dividends may
be paid upon the Common Stock and upon any class of stock ranking as to
dividends or distribution of assets subordinate to the Preferred Stock if, when
and as declared by the Board of Directors in its discretion, and shares of any
outstanding class of stock of the corporation ranking as to dividends or
distribution of assets subordinate to the Preferred Stock may be purchased,
acquired, redeemed or otherwise retired by
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<PAGE>
the corporation. Class A Common Stock and Class B Common Stock share equally,
on a share-for-share basis, in any dividends declared by the Board of Directors.
If at any time a distribution of the Class A Common Stock or Class B Common
Stock is to be paid in shares of Class A Common Stock, Class B Common Stock or
any other securities of the Corporation or any other person, such dividends may
be declared and paid only as follows: (1) a share distribution consisting of
Class A Common Stock to holders of Class A Common Stock and Class B Common
Stock, on an equal per share basis; or to holders of Class A Common Stock only,
but in such event there shall also be a simultaneous share distribution to
holders of Class B Common Stock consisting of shares of Class B Common Stock on
an equal per share basis; (2) a share distribution consisting of Class B Common
Stock to holders of Class B Common Stock and Class A Common Stock, on an equal
per share basis; or to holders of Class B Common Stock only, but in such event
there shall also be a simultaneous share distribution to holders of Class A
Common Stock consisting of shares of Class A Common Stock on an equal per share
basis; and (3) a share distribution of shares of any class of securities of the
Corporation or of any other person other than the Common Stock, either on the
basis of a distribution of identical securities, on an equal per share basis to
the holders of Class A Common Stock and Class B Common Stock, or on the basis of
a distribution of one class of securities to the holders of Class A Common Stock
and another class of securities to holders of Class B Common Stock, provided
that the securities so distributed do not differ in any respect, other than
relative voting rights and related differences, in designations, conversion and
share distribution provisions, with the holders of Class B Common Stock
receiving the class having the higher relative voting rights, provided that if
the securities so distributed constitute capital stock of a subsidiary of the
Corporation, such rights shall not differ to a greater extent than the
corresponding existing differences in voting rights, designations, conversion
and distribution provisions between Class A Common Stock and Class B Common
Stock. If the Corporation shall in any manner subdivide or combine the
outstanding shares of Class A Common Stock or Class B Common Stock the
outstanding shares of the other class of Common Stock shall be proportionally
subdivided or combined in the same manner and on the same basis as the
outstanding shares of Class A Common Stock or Class B Common Stock, as the case
may be, that have been subdivided or combined.
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<PAGE>
3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
------------------
winding up of the corporation, or any reduction of its capital, resulting in a
distribution of its assets to its stockholders, whether voluntary or
involuntary, after there shall have been paid or set apart for the holders of
the Preferred Stock the full preferential amount to which they are respectively
entitled under and pursuant to the terms and provisions of all outstanding
series and classes of Preferred Stock, the holders of the Common Stock shall be
entitled to receive as a class, pro rata, the remaining assets of the
corporation available for distribution to its stockholders.
4. EXCHANGE RIGHTS. Holders of Class B Common Stock may at any time
----------------
convert all or a portion of their Class B Common Stock to Class A Common Stock
at a one for one ratio by submitting certificates representing the to be
exchanged shares to the Corporation for exchange, or if the to be exchanged
shares are not in certificate form, by instructing the Corporation to make the
exchange on its records.
5. GENERAL. Except as above provided with respect to voting rights, each
-------
share of Class A Common Stock and each share of Class B Common Stock shall be
identical and have the same rights, privileges, qualifications, limitations and
restrictions.
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<PAGE>
DIVISION B. THE PREFERRED STOCK
------------ -------------------
A. Subject to the provisions of this Article FOURTH and the General
Corporation Law of the State of Delaware, the Board of Directors are authorized
to establish one or more series of Preferred Stock and, to the extent now or
hereafter permitted by the General Corporation Law of the State of Delaware, (i)
to fix and determine the designation, number of shares, preferences,
limitations, qualifications and special and relative rights or privileges of
each series, (ii) to increase the number of shares of any such series previously
determined by it and to decrease such previously determined number of shares to
a number not less than that of the shares of such series then outstanding, (iii)
to change the designation or number of shares, or the relative rights,
preferences and limitations of the shares, of any theretofore established
series, no shares of which have been issued, and (iv) to cause to be executed
and filed without further approval of the stockholders such amendment or
amendments to this Restated Certificate of Incorporation as may be required in
order to accomplish any of the foregoing. In particular, but without limiting
the generality of the foregoing, the Board of Directors shall have authority to
determine with respect to any series of Preferred Stock:
(1) the dividend rate or rates on the shares of such series and any
preference, restriction, limitation or condition upon the payment of such
dividends, and whether dividends shall be cumulative and, if so, the date
or dates from which dividends shall accumulate, and the dates on which
dividends, if declared, shall be payable;
(2) whether the shares of such series shall be redeemable and, if
redeemable, the time, price, terms, conditions and manner of redemption;
(3) the rights of the holders of shares of such series in the event of
the liquidation, dissolution or winding up of the corporation, whether
voluntary or involuntary, or any other distribution of its assets;
(4) whether the shares of such series shall be subject to the operation
of a sinking, purchaser or retirement fund and, if so, the terms and
provisions of such fund;
(5) whether the shares of such series shall be convertible into shares of
any other class or classes or of any other series of the same or any other
class or classes of stock of the corporation and if convertible, the price
or price or the rate or rates of
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<PAGE>
conversion and the method, if any, of adjusting the same, and the other
terms and conditions, if any, on which shares shall be so convertible;
(6) the conditions and extent of voting powers, if any, of the shares of
such series; and
(7) such other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or
restrictions of such series to the fullest extent now and hereafter
permitted by Delaware Law.
B. In the event that at any time the Board of Directors shall have
established and designated one or more series of Preferred Stock consisting of a
number of shares less than all of the authorized shares of Preferred Stock, the
remaining authorized shares of Preferred Stock shall be deemed to be shares of
one or more undesignated series of Preferred Stock until designated by the Board
of Directors as being a part of a series previously established or a new series
then being established by the Board of Directors.
FIFTH: The Board of Directors is expressly authorized to make, alter and
repeal the bylaws of the Corporation.
SIXTH: The Corporation expressly elects not to be governed by Section 203
of the General Corporation Laws of the State of Delaware.
SEVENTH: (A) A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for monetary damages for breach of
fiduciary duty-as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its shareholders, (ii) for acts
of omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is amended
after the effective date of this ARTICLE to authorize corporate action further
eliminating or limiting the personal liability of directors, then
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<PAGE>
the liability of a director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended.
(B) No modifications or repeal of the provisions of this ARTICLE shall
adversely affect any right or protection of any director of the Corporation
existing at the date of such modification or repeal or create any liability or
adversely affect any such right or protection for any acts or omissions of such
director occurring prior to such modification or repeal.
IN WITNESS WHEREOF, said Electric Lightwave, Inc. has caused this
Certificate to be signed by Robert J. DeSantis its Vice President and attested
to by Charles J, Weiss, its Secretary, on this 16th day of October, 1997.
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
ELECTRIC LIGHTWAVE, INC.
As amended October ___, 1997
<PAGE>
BYLAWS
OF
ELECTRIC LIGHTWAVE, INC.
TITLE
1. The title of this corporation is ELECTRIC LIGHTWAVE, INC.
LOCATION OF OFFICES
2. The principal office of the corporation in Delaware shall be in
Wilmington
and the resident agent in charge thereof shall be PRENTICE HALL CORPORATION
SYSTEM, INC., 1013 Centre Road.
The corporation may also have an office or offices at such other
places within or without the State of Delaware as the Board of Directors may
from time to time designate.
CORPORATE SEAL
3. The corporate seal shall be circular in form and have inscribed thereon
the name of the corporation, the year of its incorporation (1990) and the words
"Incorporated Delaware".
MEETINGS OF STOCKHOLDERS
4. All meetings of stockholders shall be held at the offices of the
corporation or such other place as shall be designated by the Board of Directors
of the corporation.
Annual Meetings of stockholders shall be held on a date and at a time
designated by the Board of Directors of the corporation. At each annual meeting
the stockholders shall elect a Board of Directors, such election to be by
majority of the stock present or represented by proxy, and entitled to vote at
the meeting.
Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, each stockholder shall, at every meeting of the stockholders,
be entitled to one vote for each share of stock held by him or her, in person or
by written proxy signed by him or her, but no proxy shall be voted on after one
year from its date. Such right to vote shall be subject to the right of the
Board of Directors to close the transfer books or to fix a record date for
voting stockholders as hereinafter provided.
Special meetings of the stockholders may be called by the Chief Executive
Officer and shall be called on the request in writing or by vote of a majority
of the Board of Directors or on demand in writing of stockholders of record
owning twenty-five percent (25%) in amount of the capital stock outstanding and
entitled to vote.
Notice of each meeting of stockholders, whether annual or special, shall be
mailed by the secretary to each stockholder of record, at his or her post office
address as shown by the
<PAGE>
stock books of the Company, at least ten days and not more than sixty days prior
to the date of the meeting. If the transfer books are closed or a record date is
fixed in connection with an annual meeting, as permitted by Bylaw 19, the notice
of the meeting shall be given to the stockholders of record as of the time said
books are closed or record date is fixed, but if the transfer books are not
closed or a record date is not fixed, said notice shall be given to the
stockholders of record at the time the notice is mailed.
The holders of a majority of the stock outstanding and entitled to vote
shall constitute a quorum, but the holders of a smaller amount may adjourn any
meeting from time to time without further notice until a quorum is secured.
At the annual meeting of stockholders, only such business shall be conducted
as shall have been brought before the meeting (a) pursuant to the corporation's
notice of meeting, (b) by or at the direction of the Board of Directors or (c)
by any stockholder of the corporation who is a stockholder of record at the time
of giving of the notice provided for below, who shall be entitled to vote at
such meeting and who complies with the procedures set forth below; provided that
any such business proposed by a stockholder is otherwise proper for
consideration under applicable law, the corporation's certificate of
incorporation and these Bylaws.
For business to be brought before an annual meeting by a stockholder, the
stockholder must have given notice thereof in writing to the Secretary of the
corporation, delivered to or mailed and received at the principal office of the
corporation no earlier than the January 1 and no later than the February 15
preceding the annual meeting. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the meeting (a)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, and the name and address of the beneficial owner, if any, on
whose behalf the proposal is made, (c) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder of
record and by the beneficial owner, if any, on whose behalf the proposal is
made, together with documentary support for any claim of beneficial ownership,
(d) any material interest of such stockholder of record and the beneficial
owner, if any, on whose behalf the proposal is made in such business and (e) any
information, in addition to that required above, which may be required from time
to time by Regulation 14A of the Securities Exchange Act of 1934 with respect to
security holder proposals.
The Chairman of the meeting, in addition to making any other determinations
that may be appropriate to the conduct of the meeting, shall determine whether
such notice has been duly given and whether such business is otherwise proper
for consideration (using as a non-exclusive guideline the provisions of Rule
14a-8(c) under the Securities Exchange Act of 1934), and shall direct that any
business not properly brought before the meeting shall not be transacted.
DIRECTORS
5. The property and business of the corporation shall be managed and
controlled by its Board of Directors, which shall consist of not less than three
nor more than seven members.
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<PAGE>
The number of Directors shall be fixed from time to time, within the limits
prescribed, by resolution of the Board of Directors. Vacancies in the Board of
Directors (except vacancies resulting from the removal of directors by
stockholders), including vacancies in the Board of Directors resulting from any
increase in the number of Directors, may be filled by a majority of the
Directors then in office, though less than a quorum.
Directors shall otherwise be elected by the stockholders at the annual
meeting and shall hold office until the next annual election and until their
successors are elected and qualified. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, at all elections of Directors of
this corporation each stockholder shall be entitled to one vote for each share
of stock owned by him or her, in person or by written proxy signed by him or
her, and election shall be by majority vote of the stock present or represented
by proxy and entitled to vote at the meeting. The stockholders of this
corporation shall have no preemptive right to subscribe to any issue of shares
of stock of this corporation now or hereafter made.
The Board of Directors shall have an Executive Committee. The Executive
Committee of the Board shall consist of (3 three) members, to be appointed by
and to serve at the pleasure of the Board. The Chairman of the Board shall be
the Chairman of the Executive Committee. During intervals between meetings of
the Board, the Committee shall have the power and authority of the Board of
Directors of the management of the business affairs and property of the
corporation.
Nominations of persons for election to the Board of Directors of the
corporation may be made by any stockholder of the corporation who is a
stockholder of record at the time of giving of the notice provided for below,
who shall be entitled to vote for the election of Directors at the meeting and
who complies with the notice procedures set forth below.
Nominations by stockholders shall be made pursuant to notice in writing to
the Secretary of the corporation, delivered to or mailed and received at the
principal office of the corporation no earlier than the January 1 and no later
than the February 15 preceding the annual meeting. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election as a Director all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (including such person's written consent to
being named in the proxy statement as a nominee and to serve as a Director if
elected); (b) as to the stockholder giving the notice; (i) the name and address,
as they appear on the corporation's books, of such stockholder and (ii) the
class and number of shares of the corporation which are beneficially owned by
such stockholder and also which are owned of record by such stockholder and
(iii) documentary support for such claim of beneficial ownership; (c) as to the
beneficial owner, if any, on whose behalf the nomination is made, (i) the name
and address of such person, (ii) the class and number of shares of the
corporation which are beneficially owned by such person and (iii) documentary
support for such claim of beneficial ownership; and (d), a description of all
arrangements or understandings between the stockholder giving notice, the
beneficial owner and each nominee and any other
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<PAGE>
person or persons (naming such person or persons) relating to the nomination to
be made or resulting directorship.
The Board of Directors or a Nominating Committee established by the Board
of Directors shall determine whether a stockholder nomination was made in
accordance with the procedures prescribed herein and whether the stockholder's
nominee should be recommended as a member of the slate of nominees to be
proposed at the annual meeting, and the Board of Directors or its Nominating
Committee may disregard any nomination not made in accordance with these Bylaws.
The Chairman of the meeting shall not nominate for election to the Board of
Directors any stockholder nominee who has been disregarded by the Board of
Directors or its Nominating Committee.
POWERS OF DIRECTORS
6. The Board of Directors shall have all such powers as may be exercised
by the Corporation, subject to the provisions of the statutes, the Certificate
of Incorporation, and the Bylaws.
MEETINGS OF DIRECTORS
7. Meetings of the Board of Directors shall be held at such place within
or without the State of Delaware as may from time to time be fixed by resolution
of the Board of Directors, or as may be specified by the Chief Executive Officer
in the call of any meeting. Regular meetings of the Board of Directors shall be
held at such times as may from time to time be fixed by resolution of the Board
of Directors and special meetings may be held at any time upon the call of two
(2) Directors, the Chief Executive Officer or the Chief Operating Officer, by
oral, telegraphic or written notice duly served or sent or mailed to each
Director not less than five (5) days before such meeting. A meeting of the
Board may be held without notice immediately after the annual meeting of
stockholders at the same place at which such meeting is held. Notice need not
be given of regular meetings of the Board held at times fixed by resolution of
the Board. Meetings may be held at any time without notice if all the Directors
are present or if those not present waive notice of the meeting in writing.
Members of the Board of Directors (or any committees thereof) may
participate in a meeting of the Board of Directors (or of such committees) by
means of conference telephone or other communications equipment via which all
persons participating can hear each other. Such participation in the
substantive discussion and determinations of a meeting shall constitute presence
in person at such meeting.
A majority of the Directors shall constitute a quorum, but a smaller number
may adjourn any meeting from time to time without further notice until a quorum
is secured.
OFFICERS OF THE COMPANY
8. The officers of the Company shall be a Chairman of the Board of
Directors, a Vice Chairman of the Board of Directors, a President, one or more
vice presidents (with such
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<PAGE>
duties and titles as may be assigned to them), a secretary, a treasurer, one or
more assistant vice presidents (with such duties and titles as may be assigned
to them), and such other officers as may from time to time be chosen by the
Board of Directors.
The officers of the Company shall hold office until their successors are
elected and qualified. If the office of any officer or officers becomes vacant
for any reason, the vacancy shall be filled by the affirmative vote of a
majority of the whole Board of Directors.
DUTIES OF THE CHAIRMAN
9. The Chairman presides at all meetings of the Board of Directors and at
all meetings of the shareholders. It shall be his or her prerogative to see
that all orders, resolutions, and policy determinations of the Board of
Directors are carried into effect. He or she acts in a general oversight and
advisory capacity with respect to the affairs of the Company. He or she
provides leadership to the Board in reviewing and deciding upon matters which
constitute major policies of the Company, what the Company does and the manner
in which the Company business is conducted. Any of such duties may be delegated
by the Chairman to the Vice-Chairman.
DUTIES OF THE CHIEF EXECUTIVE OFFICER
10. It shall be the duty of the Chief Executive Officer to carry into
effect all orders, resolutions, and policy determinations of the Board of
Directors; to execute all contracts and agreements; to keep the seal of the
Company; and to sign and to affix the seal of the Company to any instrument
requiring the same, which seal shall be attested by the signature of the
Secretary or Treasurer or Assistant Secretary or Assistant Treasurer. He or she
shall have the general supervision and direction of the other officers of the
Company.
He shall submit a report of the operations of the Company for the year to
the Directors at their meeting next preceding the annual meeting of the
stockholders and to the stockholders at their annual meeting.
He shall have the general duties and powers of supervision and management
usually vested in the chief executive officer of a corporation.
The Chief Executive may also hold another office with the Company.
Accordingly, the duties and responsibilities of the position may be assigned by
the Board of Directors to any Company officer.
DUTIES OF THE PRESIDENT
11. Unless otherwise decided by the Board of Directors, the President
shall be the chief operating and administrative officer of the Company. It
shall be his or her duty to see that all orders and policy determination
conveyed by the Chairman are carried into effect. He or she shall have the
general supervision and direction of the operations and administration of the
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<PAGE>
affairs of the Company and general supervision and direction of the other
officers and employees of the Company and shall see that their duties are
properly performed.
VICE PRESIDENT
12. The vice president or vice presidents, in the order of their
seniority, shall be vested with all the powers and required to perform all the
duties of the President in his or her absence or disability and shall perform
such other duties as may be prescribed by the Board of Directors.
CHIEF EXECUTIVE PRO TEM
13. In the absence or disability of the Chairman, Vice-Chairman and
President, the Board may appoint a chief executive pro tem.
SECRETARY
14. The secretary shall attend all meetings of the corporation and the
Board of Directors. He or she shall act as clerk thereof and shall record all
of the proceedings of such meetings in a book kept for that purpose. He or she
shall give proper notice of meetings of stockholders and Directors and shall
perform such other duties as shall be assigned to him or her by the Chairman,
Vice-Chairman, President or the Board of Directors.
TREASURER
15. The treasurer shall have custody of the funds and securities of the
corporation and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. He or she
shall disburse the funds of the corporation as may be ordered by the Board, or
Chairman, Vice-Chairman or President, taking proper vouchers for such
disbursements and shall render to the Chairman, Vice Chairman, President and
Directors, whenever they may require it, an account of all his or her
transactions as treasurer and of the financial condition of the corporation.
He shall keep an account of stock and income notes registered and
transferred in such manner and subject to such regulations as the Board of
Directors may prescribe.
He shall give the corporation a bond, if required by the Board of
Directors, in such sum and in form and with security satisfactory to the Board
of Directors for the faithful performance of the duties of his or her office and
the restoration to the corporation, in case of his or her death, resignation, or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession, belonging to the corporation. He or she
shall perform such other duties as the Board of Directors may from time to time
prescribe or require.
DUTIES OF OFFICERS MAY BE DELEGATED
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<PAGE>
16. In case of the absence or disability of any officer of the corporation
or for any other reason deemed sufficient by a majority of the Board, the Board
of Directors may delegate his or her powers or duties to any other officer or to
any Director for the time being. The duties relating to the execution of
contracts and agreements and the signing of instruments and affixing the seal of
the Company and other matters may be delegated to any officer, from time to
time, as the Board shall see fit.
CERTIFICATES OF STOCK
17. Certificates of stock shall be signed by the Chairman, Vice-Chairman,
President or a vice president and either the treasurer, assistant treasurer,
secretary or assistant secretary. If a certificate of stock be lost or
destroyed, another may be issued in its stead upon proof of such loss or
destruction and the giving of a satisfactory bond of indemnity, in an amount
sufficient to indemnify the corporation against any claim.
TRANSFER OF STOCK
18. All transfers of stock of the corporation shall be made upon its books
upon presentation of the certificate or certificates therefor, properly endorsed
by the holder of the shares in person or by his or her lawfully constituted
representative, and upon surrender of such certificate or certificates of stock
for cancellation.
CLOSING OF TRANSFER BOOKS
19. The Board of Directors shall have the power to close the stock
transfer books of the corporation for a period not exceeding sixty days
preceding the date for any meeting of stockholders or for payment of any
dividend or for the allotment of rights or when any change or conversion or
exchange of capital stock shall go into effect, or for a period of not exceeding
sixty days in connection with obtaining the consent of stockholders for any
purpose. In lieu of so closing the books, the Board of Directors may fix in
advance a date, not exceeding sixty days preceding the said above mentioned
dates, as a record date for the determination of the stockholders entitled to
notice of or to vote at any such meeting, and any adjournment thereof, or
entitled to dividends or other rights hereinbefore mentioned, or to give such
consent.
STOCKHOLDERS OF RECORD
20. The corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and accordingly shall not
be bound to recognize any equitable or other claim to or interest in such share
on the part of any other person whether or not it shall have express or other
notice thereof, save as expressly provided by the laws of Delaware.
FISCAL YEAR
21. The fiscal year of the corporation shall begin on the first day in
January in each year.
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<PAGE>
DIVIDENDS
22. Dividends, to the extent not restricted by provisions of the
corporation's Certificate of Incorporation or by subsisting agreements of the
corporation, may be declared by the Board of Directors and paid in cash, in
property, or in shares of the capital stock of the corporation to the extent
permitted by law, out of net assets in excess of its capital or out of its net
profits, provided there shall be no impairment of the capital of the corporation
represented by its issued and outstanding stock of all classes having a
preference upon the distribution of assets.
BOOKS AND RECORDS
23. The books, accounts, and records of the corporation may be kept within
or without the State of Delaware, at such place or places as may from time to
time be designated by the Bylaws or by resolution of the Directors.
NOTICES
24. Notice required to be given under the provisions of these Bylaws to
any Director, officer or stockholder shall not be construed to mean personal
notice, but may be given in writing by depositing the same in a post office or
letter box, in a postpaid sealed or unsealed wrapper, addressed to such
stockholder, officer or Director at such address as appears on the books of the
corporation, and such notice shall be deemed to be given at the time when the
same shall be thus mailed. In computing the number of days notice required for
any meeting, the day on which the notice shall be deposited in the mail or sent
by telegraph shall be excluded.
WAIVER OF NOTICE
25. Any stockholder, officer, or Director may waive in writing, or by
telegraph, any notice required to be given under these Bylaws, whether before or
after the time stated therein.
INDEMNIFICATION OF
DIRECTORS AND OFFICERS
26. (a) Right of Indemnification. The Corporation shall, to the fullest
extent permitted by applicable law as then in effect, indemnify any person (the
"indemnitee") who was or is involved in any manner (including, without
limitation, as a party or a witness) or was or is threatened to be made so
involved in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, any action or proceeding by or in the right of
the Corporation to procure a judgement in its favor) (a "Proceeding") by reason
of the fact that he or she is or was a director or officer of the Corporation,
or is or was serving at the request of the Corporation as a director or officer
of another corporation, or of a partnership, joint venture, trust or other
enterprise (including, without limitation, service with respect to any employee
benefit plan), whether the basis of any such Proceeding is alleged action in an
official capacity as director or officer or in any other capacity while serving
as a director or officer, against all expenses, liability and loss (including,
without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid or to be paid in settlement) actually and reasonably
incurred by him or her in
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connection with such Proceeding. Such indemnification shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of his or her heirs, executors, administrators and legal representatives. The
right to indemnification conferred in this Bylaw shall include the right to
receive payment of any expenses incurred by the indemnitee in connection with
such Proceeding in advance of the final disposition of the Proceeding,
consistent with applicable law as then in effect. All rights to indemnification
conferred in this Bylaw, including rights to the advancement of expenses and the
evidentiary, procedural and other provisions of this Bylaw, shall be contract
rights with the same effect as if embodied in a separate written agreement for
each indemnitee, executed and delivered by the Company and such indemnitee. The
Corporation may, by action of its Board of Directors, provide indemnification
for employees, agents, attorneys and representatives of the Corporation with the
same, or with more or less, scope and extent as herein provided for officers and
directors. No amendment to the Restated Certificate of Incorporation or
amendment or repeal of this Bylaw purporting to have the effect of modifying or
repealing any of the provisions of this Bylaw in a manner adverse to the
indemnitee shall abridge or adversely affect any right to indemnification or
other similar rights and benefits with respect to any acts or omissions
occurring prior to such amendment or repeal. This Bylaw shall be applicable to
all Proceedings, whether arising from acts or omissions occurring before or
after the adoption of this Bylaw. The phrase "this Bylaw" shall refer to Bylaws
26 and 27. For all purposes, except the corporate procedure required for
amendment of Bylaws 26 and 27, Bylaws 26 and 27 shall be considered as one
Bylaw.
(b) ByLaw Not Exclusive. The right of indemnification, including the right
to receive payment in advance of expenses, conferred in this Bylaw shall not be
exclusive of any other rights to which any person seeking indemnification may
otherwise be entitled under any provision of the Restated Certificate of
Incorporation, Bylaw, agreement, applicable corporate law and statute, vote of
disinterested directors or stockholders or otherwise. The indemnitee is free to
proceed under any or all of the rights or procedures available to him or her.
(c) Burden of Proof. In any determination, review of a determination,
action, arbitration, or other proceeding relating to the right to
indemnification conferred in this Bylaw, the Corporation shall have the burden
of proof that the indemnitee has not met any standard of conduct or belief which
may be required by applicable law to be applied in connection with a
determination that the indemnitee is not entitled to indemnity and also the
burden of proof on any of the issues which may be material to a determination
that the indemnitee is not entitled to indemnification. Neither a failure to
make such a determination of entitlement nor an adverse determination of
entitlement to indemnity shall be a defense of the Corporation in an action or
proceeding brought by the indemnitee or by or on behalf of the Corporation
relating to indemnification or create any presumption that the indemnitee has
not met any such standard of conduct or belief or is otherwise not entitled to
indemnity. If successful in whole or in part in such an action or proceeding,
the indemnitee shall be entitled to be further indemnified by the Corporation
for the expenses actually and reasonably incurred by him or her in connection
with such action or proceeding.
(d) Advancement of Expenses. All reasonable expenses incurred by or on
behalf of indemnitee in connection with any Proceeding shall be advanced from
time to time to the
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indemnitee by the Corporation promptly after the receipt by the Corporation of a
statement from the indemnitee requesting such advance, whether prior to or after
final disposition of such Proceeding.
(e) Insurance, Contracts and Funding. The Corporation may purchase and
maintain insurance to protect itself and any person who is, or may become an
officer, director, employee, agent, attorney, trustee or representative (any of
the foregoing being herein referred to as a "Representative") of the Corporation
or, at the request of the Corporation, a Representative of another corporation
or entity, against any expenses, liability or loss asserted against him or her
or incurred by him or her in connection with any Proceeding in any such
capacity, or arising out of his or her status as such, whether or not the
Corporation would have the power to indemnify him or her against such expense,
liability or loss under the provisions of this Bylaw or otherwise. The
Corporation may enter into contracts with any Representative of the Corporation,
or any person serving as such at the request of the Corporation for another
corporation or entity, in furtherance of the provisions of this Bylaw. Such
contracts shall be deemed specifically approved and authorized by the
stockholders of the Corporation and not subject to invalidity by reason of any
interested directors. The Corporation may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification of any person entitled thereto.
(f) Severability; Statutory Alternative. If any provision or provisions
of this Bylaw shall be held to be invalid, illegal or unenforceable for any
reason whatsoever (i) the validity, legality and enforceability of all of the
remaining provisions of this Bylaw shall not in any way be affected or impaired
thereby; and (ii) to the fullest extent possible, the remaining provisions of
this Bylaw shall be construed so as to give effect to the intent manifested by
the provision held invalid, illegal or unenforceable. In the event that the
indemnitee elects, as an alternative to the procedures specified in this Bylaw,
to follow one of the procedures authorized by applicable corporate law or
statute to enforce his or her right to indemnification and notifies the
Corporation of his or her election, the Corporation agrees to follow the
procedure so elected by the indemnitee. If, in accordance with the preceding
sentence the procedure therefor contemplated herein or the procedure elected by
the indemnitee in any specific circumstances (or such election by the
indemnitee) shall be invalid or ineffective in bringing about a valid and
binding determination of the entitlement of the indemnitee to indemnification,
the most nearly comparable procedure authorized by applicable corporate law or
statute shall be followed by the Corporation and the indemnitee.
INDEMNIFICATION PROCEDURES;
PRESUMPTIONS AND REMEDIES
27. In furtherance, but not in limitation, of the foregoing provisions of
this Bylaw, the following procedures, presumptions and remedies shall apply with
respect to advancement of expenses and the right to indemnification under this
Bylaw:
(a) Advancement of Expenses. The advancement or reimbursement of
expenses to an indemnitee provided in paragraph (d) of Bylaw 26 shall be made
within 20 days after the receipt by the Corporation of a request therefor from
the indemnitee. Such request shall reasonably
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evidence the expenses incurred or about to be incurred by the indemnitee and, if
required by law at the time of such advance, shall include or be accompanied by
an undertaking by or on behalf of the indemnitee to repay the amounts advanced
if it should ultimately be determined that the indemnitee is not entitled to be
indemnified against such expenses.
(b) Procedure for Determination of Entitlement to Indemnification.
(i) To obtain indemnification (except with respect to the advancement
of expenses), an indemnitee shall submit to the Chief Executive Officer
or Secretary of the Corporation a written request, including such
documentation and information as is reasonably available to the
indemnitee and reasonably necessary to determine whether and to what
extent the indemnitee is entitled to indemnification (the "Supporting
Documentation"). The Secretary of the Corporation shall promptly advise
the Board of Directors in writing that the indemnitee has requested
indemnification. The determination of the indemnitee's entitlement to
indemnification shall be made not later than 60 days after receipt by
the Corporation of the written request and Supporting Documentation.
(ii) The indemnitee's entitlement to indemnification shall be
determined in one of the following ways: (A) by a majority vote of the
Disinterested Directors (as hereinafter defined) (which term shall mean
the Disinterested Director, if there is only one); (B) by a written
opinion of the Independent Counsel (as hereinafter defined) if (x) a
majority of the Disinterested Directors so directs; (y) there is no
Disinterested Director, or (z) a Change of Control (as hereinafter
defined) shall have occurred and the indemnitee so requests in which
case the Disinterested Directors shall be deemed to have so directed;
(C) by the stockholders of the Corporation (but only if a majority of
the Disinterested Directors determines that the issue of entitlement to
indemnification should be submitted to the stockholders for their
determination); or (D) as provided in paragraph (c) of Bylaw 27.
(iii) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to clause (ii) of
paragraph (b) of Bylaw 27, a majority of the Disinterested Directors
shall select the Independent Counsel, but only an Independent Counsel to
which the indemnitee does not reasonably object; provided, however, that
if a Change of Control shall have occurred, the indemnitee shall select
such Independent Counsel, but only an Independent Counsel to which the
Board of Directors does not reasonably object.
(c) Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this Bylaw, the indemnitee shall be presumed to be
entitled to indemnification upon submission of a request for indemnification
together with the Supporting Documentation, and thereafter in any determination
or review of any determination, and in any arbitration, proceeding or
adjudication the Corporation shall have the burden of proof to overcome that
presumption in reaching a contrary determination. In any event, if the person
or persons empowered under clause (ii) of paragraph (b) of Bylaw 27 to determine
entitlement to indemnification shall not
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have been appointed or shall not have made a determination within 60 days after
receipt by the Corporation of the request therefor together with the Supporting
Documentation, the indemnitee shall be deemed to be entitled to indemnification.
In either case, the indemnitee shall be entitled to such indemnification, unless
(i) the indemnitee misrepresented or failed to disclose a material fact in
making the request for indemnification or in the Supporting Documentation or
(ii) such indemnification is prohibited by law, as finally determined by
adjudication. The termination of any Proceeding, or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea of
nolo contendre or its equivalent, shall not, of itself, adversely affect the
right of the indemnitee to indemnification or create any presumption with
respect to any standard of conduct or belief or any other matter which might
form a basis for a determination that the indemnitee is not entitled to
indemnification. With regard to the right to indemnification for expenses, (i)
if and to the extent that the indemnitee has been successful on the merits or
otherwise in any Proceeding, or (ii) if a Proceeding was terminated without a
determination of liability on the part of the indemnitee with respect to any
claim, issue or matter therein or without any payments in settlement or
compromise being made by the indemnitee with respect to a claim, issue or matter
therein, or (iii) if and to the extent that the indemnitee was not a party to
the Proceeding, the indemnitee shall be deemed to be entitled to
indemnification, which entitlement shall not be defeated or diminished by any
determination which may be made pursuant to clauses (A), (B) or (C) of clause
(ii) of paragraph (b) of Bylaw 27. The indemnitee shall be presumptively
entitled to indemnification in all respects for any act, omission or conduct
taken or occurring which (whether by condition or otherwise) is required,
authorized or approved by any order issued or other action by any commission or
governmental body pursuant to any federal statute or state statute regulating
the corporation or any of its subsidiaries by reason of its status as a public
utility or public utility holding company or by reason of its activities as
such. To the extent permitted by law, the presumption shall be conclusive on all
parties with respect to acts, omissions or conduct of the indemnitee if he or
she acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the best interests of the corporation or its subsidiary. No
presumption adverse to an indemnitee shall be drawn with respect to any act,
omission or conduct of the indemnitee if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation or its subsidiary taken or occurring in the absence
of, or inconsistent with, any order issued or action by any commission or
governmental body.
(d) Remedies of Indemnitee.
(i) In the event that a determination is made pursuant to paragraph
(b) of Bylaw 27 that the indemnitee is not entitled to indemnification
under this Bylaw, (A) the indemnitee shall be entitled to seek an
adjudication of his or her entitlement to such indemnification in an
appropriate court of the State of Delaware or any other court of
competent jurisdiction; (B) any such judicial proceeding shall be de novo
and the indemnitee shall not be prejudiced by reason of such adverse
determination; and (C) in any such judicial proceeding the corporation
shall have the burden of proof that the indemnitee is not entitled to
indemnification under this Bylaw.
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(ii) If a determination shall have been made or deemed to have been
made, pursuant to paragraphs (b) or (c) of Bylaw 27, that the indemnitee
is entitled to indemnification, the corporation shall be obligated to pay
the amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination, unless (A) the indemnitee
misrepresented or failed to disclose a material fact in making the
request for indemnification or in the Supporting Documentation or (B)
such indemnification is prohibited by law, in either case as finally
determined by adjudication. In the event that (x) advancement of
expenses is not timely made by the corporation pursuant to this Bylaw or
(y) payment of indemnification is not made within five days after a
determination of entitlement to indemnification has been made or deemed
to have been made pursuant to paragraphs (b) or (c) of Bylaw 27, the
indemnitee shall be entitled to seek judicial enforcement of the
corporation's obligations to pay to the indemnitee such advancement of
expense of indemnification. Notwithstanding the foregoing, the
Corporation may bring an action, in an appropriate court in the State of
Delaware or any other court of competent jurisdiction, contesting the
right of the indemnitee to receive indemnification hereunder due to the
occurrence of a circumstance described in subclause (A) of this clause
(ii) of paragraph (d) of Bylaw 27 or a prohibition of law (both of which
are herein referred to as a "Disqualifying Circumstance. In any such
enforcement action or other proceeding whether brought by the indemnitee
or the corporation, indemnitee shall be entitled to indemnification
unless the corporation can satisfy the burden or proof that
indemnification is prohibited by reason of a Disqualifying Circumstance.
(iii) The corporation shall be precluded from asserting in any
judicial proceeding commenced pursuant to this paragraph (d) that the
procedures and presumptions of this Bylaw are not valid, binding and
enforceable and shall stipulate in any such court or before any such
arbitrator or arbitrators that the corporation is bound by all the
provisions of this Bylaw.
(iv) In the event that the indemnitee, pursuant to this Bylaw, seeks a
judicial adjudication of his or her rights under, or to recover damages
for breach of, this Bylaw, or is otherwise involved in any adjudication
with respect to his or her right to indemnification, the indemnitee shall
be entitled to recover from the corporation, and shall be indemnified by
the corporation against, any expenses actually and reasonably incurred by
him or her if the indemnitee prevails in such judicial adjudication. If
it shall be determined in such judicial adjudication that the indemnitee
is entitled to receive part but not all of the indemnification or
advancement of expenses sought, the expenses incurred by the indemnitee
in connection with such judicial adjudication shall be prorated
accordingly.
(e) Definitions. For purposes of indemnification under this Bylaw or
otherwise:
(i) "Change in Control" means a change in control of the corporation
of a nature that would be required to be reported in response to Schedule
14A of Regulation 14A
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promulgated under the Securities Exchange Act of 1934
(the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided that, without limitation, such a change in
control shall be deemed to have occurred if (A) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Act) other than Citizens
Utilities Company is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Act), directly or indirectly, of securities of the
corporation representing 20 percent or more of the combined voting power of
the corporation's then outstanding securities without the prior approval of
at least two-thirds of the members of the Board of Directors in office
immediately prior to such acquisition; (B) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which, members of the Board of Directors in
office immediately prior to such transaction or event constitute less than
a majority of the Board of Directors thereafter; or (C) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new
Director whose election or nomination for election by the corporation's
stockholders was approved by a vote of at least two-thirds of the Directors
then still in office who were Directors at the beginning of such period)
cease for any reason to constitute at least a majority of the Board of
Directors.
(ii) "Disinterested Director" means a Director of the corporation who
is not or was not a material party to the Proceeding in respect of which
indemnification is sought by the indemnitee.
(iii) "Independent Counsel" means a law firm or a member of a law firm
that neither presently is, nor in the past five years has been, retained to
represent (A) the corporation or the indemnitee in any manner or (B) any
other party to the Proceeding giving rise to a claim for indemnification
under this Bylaw. Notwithstanding the foregoing, the term "Independent
Counsel" shall not include any person who, under the applicable standards
of professional conduct then prevailing under the law of the State of
Delaware, would have a conflict of interest in representing either the
corporation or the indemnitee in an action to determine the indemnitee's
rights under this Bylaw.
(f) Acts of Disinterested Directors. Disinterested Directors considering or
acting on any indemnification matter under this Bylaw or under governing
corporate law or otherwise may consider or take action as the Board of Directors
or may consider or take action as a committee or individually or otherwise. In
the event that Disinterested Directors consider or take action as the Board of
Directors, one-third of the total number of Directors in office shall constitute
a quorum.
AMENDMENTS OF BYLAWS
28. These Bylaws may be amended or altered by the vote of a majority of
the whole Board of Directors at any meeting provided that notice of such
proposed amendment shall have been given in the notice given to the Directors of
such meeting. Such authority in the Board of Directors is subject to the power
of the stockholders to change or repeal any Bylaws by a
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majority vote of the stockholders present and represented at any annual meeting
or at any special meeting called for such purpose, and Bylaws adopted by the
stockholders (other than Bylaw 27) shall not be repeated, altered or amended by
the Board of Directors.
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EXHIBIT 10.7
FORM OF ADMINISTRATIVE SERVICES AGREEMENT
-----------------------------------------
THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement") is executed
as of __________, 1997, by and between Citizens Utilities Company, a Delaware
corporation ("Citizens"), and Electric Lightwave, Inc., a Delaware corporation
("ELI").
W I T N E S S E T H:
WHEREAS, ELI is in the Telecommunications Business;
WHEREAS, Citizens owns all of the issued and outstanding Class B
Common stock, par value $.01 per share, of ELI, and, as parent of ELI, Citizens
has been providing ELI certain management, administrative and other services;
WHEREAS, ELI is effecting an initial public offering (the "Offering")
of shares of its Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), and, upon completion of the Offering, ELI will cease to be a
wholly owned subsidiary of Citizens and Citizens and ELI will be separate public
companies; and
WHEREAS, in order continue to enjoy the benefits of Citizens'
experience and skills after the Offering in the operation of ELI's business
which would not be available to ELI on a cost effective basis, ELI desires to
retain Citizens to continue to provide (or cause to provide) certain Services
(as defined herein) to ELI, and Citizens desires to accept such retention, all
on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and for other good and valuable consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
---------
RETENTION OF CITIZENS; LIMITATIONS OF AUTHORITY
-----------------------------------------------
1.1 Retention of Citizens.
---------------------
ELI hereby retains Citizens to provide the Services to ELI, and Citizens
hereby accepts such retention by ELI, all in accordance with the terms and
conditions of this Agreement. Citizens may utilize employees of its Affiliates
or consultants in providing Services hereunder. ELI may request that Citizens
expand, reduce or terminate the Services provided by Citizens to ELI, in which
case the parities will discuss, without obligation, such expansion, reduction or
termination as well as an additional charge or deduction in charges for such
Services. As used in this Agreement:
<PAGE>
(a) "Affiliate" shall mean any person or entity that, directly or
---------
indirectly, alone or through one or more intermediaries, controls, is
controlled by or is under common control with Citizens; provided, that for
the purposes of this Agreement ELI shall not be considered to be an
Affiliate of Citizens.
(b) "Operating Company" shall mean the operating companies, divisions
-----------------
and operational centers of Citizens and its controlled companies which
receive services from Citizens' Stamford Administrative Offices and other
Responsibility Centers. Each Operating Company is allocated an appropriate
portion of the total cost of such services.
(c) "Responsibility Center" shall mean the Stamford Administrative
---------------------
Offices and any other Responsibility Center of Citizens from which services
are rendered to the Operating Companies. The cost of such services are
charged out to each Operating Company in accordance with the Allocation
Formula.
(d) "Services" shall mean the various services provided hereunder
--------
from time to time by Citizens and its Affiliates to ELI, as further
described in Section 2.2 hereof.
(e) "Telecommunications Business" shall mean the business of ELI in
---------------------------
providing telecommunications services as a competitive local exchange
carrier and otherwise.
1.2 Performance of Services. (a) Citizens shall perform the Services
-----------------------
with the same degree of care, skill and prudence customarily exercised for its
own operations. Except as otherwise provided in this Section 1.2, it is
understood and agreed that the Services will be substantially identical in
nature and quality to the Services performed by Citizens for ELI during the
years prior to the execution of this Agreement, except with respect to any
modifications which may be necessary to ELI becoming a public company.
(b) Each party acknowledges that the Services will be provided only with
respect to the Telecommunications Business or as otherwise mutually agreed by
the parties. ELI agrees to use the Services in accordance with all applicable
federal, state and local laws, regulations and tariffs and in accordance with
reasonable conditions, rules, regulations and specifications which are or may be
set forth in any manuals, materials, documents or instructions of Citizens.
Citizens reserves the right to take all actions in order to assure that the
Services are provided in accordance with any applicable laws, regulations and
tariffs.
(c) ELI shall provide any input or information needed by Citizens to
perform the Services pursuant to the provisions of this Agreement in a manner
consistent with the practices employed by the parties during the year prior to
the execution of this Agreement. Should the failure to provide such input or
information render the performance of the Services impossible or unreasonably
difficult, Citizens may, upon reasonable notice to ELI, refuse to provide such
Services.
1.3 Authority of ELI. Citizens understands that discretion and control over
----------------
the Telecommunications Business of ELI shall remain vested in ELI. Accordingly,
operational control and management over the Telecommunications Business
including, without limitation, (i) the oversight of the management of the
Telecommunications Business, (ii) the formulation and
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implementation of policy decisions for the Telecommunications Business, (iii)
the supervision of the employment of personnel of ELI, (iv) the payment of all
financial obligations and expenses arising from the operation of the
Telecommunications Business, and (v) the receipt of all monies and profits
derived from the operation of such Telecommunications Business, shall be vested
in ELI.
1.4 Limitation of Authority. Except as otherwise stated herein, without the
-----------------------
prior written consent of ELI as evidenced by a resolution of its Board of
Directors, Citizens shall not be authorized or required under this Agreement on
behalf of ELI to:
(a) purchase or acquire, or sell, lease, trade, exchange or otherwise
dispose of any assets of ELI;
(b) incur any expense or any obligation which could result in a
liability in excess of $250,000 not set forth in a construction or
operating budget approved by ELI (or otherwise approved by ELI in writing)
nor, upon adoption by ELI of any such budget, incur any expenses in amounts
greater than 110% of approved amounts;
(c) cancel or compromise any claim or debt owed to ELI in excess of
$100,000; or
(d) create or consent to the creation of any lien or charge on any
assets of ELI.
1.5 Powers of Officers and Directors. Nothing herein shall be construed to
--------------------------------
release the officers and directors of ELI from the performance of their
respective duties or limit the exercise of their powers as prescribed by law or
otherwise.
ARTICLE II
----------
THE SERVICES
------------
2.1 Services Provided by Citizens. During the term of this Agreement and
-----------------------------
subject to the terms and provisions hereof, Citizens shall provide, or cause its
Affiliates or consultants to provide, such of the Services as ELI (acting
through its Board of Directors) and Citizens mutually may consider necessary or
desirable or as Citizens determines may be appropriate for the normal operation
of the Telecommunications Business of ELI.
2.2 Description of the Services. The Services to be provided to ELI, as
---------------------------
determined in accordance with Section 2.1 hereof, consist of various services
required in the conduct of ELI's Telecommunications Business, including, by way
of illustration and not limitation, the following:
(a) Financial management, including:
--------------------
(i) Accounting and reporting services - accounting policies and
procedures, billing and time reporting support, fixed asset,
construction
3
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accounting, capital asset recovery and analysis, accounting internal
auditing and internal and external reporting and analysis;
(ii) Taxes - including federal, state and local tax filings
compliance and audit, tax research and planning, benefit plan
compliance and tax policy;
(iii) Treasury- including cash management and banking, investment
management, corporate finance, risk management and insurance
services;
(iv) Financial Analysis and Planning-including financial
forecasting assistance, acquisition analysis, actuarial services and
financial analysis; and
(v) Investor Relation-includes assistance with the establishment
of an investor relation program.
(b) Information services, including negotiating enterprise-wide
--------------------
purchase agreements, providing access to data bases and enterprise
application systems, procedures and processes relating to customer
satisfaction, enterprise management, deploy solutions and customer surveys.
(c) Legal and contract services, including the representation of ELI
---------------------------
in state and federal regulatory proceedings and before state and federal
courts. (ii) the drafting and review of relevant legislation; (iii) the
provision of advice and counsel regarding telecommunications matters
affecting ELI; (iv) the drafting, negotiation and interpretation of various
contracts; (v) the provision of advice, counsel and assistance regarding
mergers and acquisitions, antitrust, labor and employment matters; and (vi)
the supervision of outside counsel retained by ELI.
(d) Human resources services, including (i) the design of benefit and
------------------------
compensation programs; (ii) the maintenance of human resource systems
(which systems will keep employee information that will be necessary for
benefit and compensation program design, for implementation of such design
and for insuring compliance with the Employee Retirement Income Security
Act of 1974, as amended, the Internal Revenue Service and the Securities
and Exchange Commission); (iii) equal employment opportunity compliance,
management training, union fee avoidance programs and interpretation of
corporate policies.
(e) Corporate planning services, including assistance with corporate
---------------------------
budgeting.
ARTICLE III
-----------
COMPENSATION
------------
3.1 Service Costs. ELI shall pay Citizens and its Affiliates, as the case may
be, for all reasonable costs incurred by Citizens or its
4
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Affiliates attributable to the performance by Citizens or its Affiliates of the
Services, including without limitation (a) all costs incurred by Citizens or its
Affiliates to vendors or other third parties in providing Services and related
supplies and goods; (b) the directly allocated costs of employees of Citizens
and its Affiliates (based on the average salary and all other compensation and
costs of the relevant Responsibility Centers) allocated to ELI in accordance
with Citizens' then current practice in allocating the cost of services to its
Operating Companies to the extent that the same can be based on the time of
employees of Citizens and its Affiliates expended in providing such Services;
(c) a portion of the non-directly allocated costs (including direct costs of
employees of Citizens and its Affiliates at the relevant Responsibility Centers
and all other costs and expenses of the relevant Responsibility Centers), which
are not based on time expended, all based on Citizens' then current procedure
(hereinafter referred to as the "Allocation Formula") used by Citizens for
charging unallocated costs of Citizens' relevant Responsibility Centers to the
Citizens Operating Companies as a component of the cost of services rendered;(d)
all other costs directly attributable to the rendering of the Services; and (e)
an amount equal to 25% of the aggregate of (b) and (c) above.
3.2 Billing Procedure. Citizens shall submit to ELI a quarterly
-----------------
statement showing in reasonable detail the calculation for the Reimbursable
Costs and the Fee, which amounts shall be due and payable, except as expressly
provided herein, within thirty (30) days of receipt of such statement by ELI.
ARTICLE IV
----------
CONFIDENTIALITY
---------------
Each party hereto may from time to time be provided information that
is confidential and proprietary to the other party hereto. Accordingly, each
party agrees that it will not reveal such information or any of it, which is not
otherwise in the public domain, to a third party without the consent of the
other party except as required by law or as necessary to perform obligations or
enforce rights hereunder; that such information will be distributed only to
those of its own employees and officers who have a reasonable need for it in
order to carry out the purposes of this Agreement; that such information will
not be used in any manner except for the purpose for which provided; and that
upon termination of this Agreement, all documents containing such confidential
and proprietary information upon request will be returned promptly to the party
to which such information belongs. Each party shall take such steps as are
reasonably necessary to protect the confidential or proprietary information of
the other. For purposes hereof, confidential or proprietary information shall
include customer lists and other customer information, and financial, technical
or business information relating to one party and provided by such party to the
other.
5
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ARTICLE V
---------
INDEMNIFICATION
---------------
ELI shall indemnify, defend and hold Citizens and its Affiliates (and
their respective officers, directors, partners, employees and agents) harmless
from any claims, costs, damages (including consequential damages), losses or
expenses (including reasonable attorneys' fees) arising out of or relating to
this Agreement or the performance of Services under this Agreement except where
attributable to the gross negligence or willful misconduct of Citizens or its
Affiliates. Neither Citizens nor any of its Affiliates (nor any of their
respective officers, directors, partners, employees and agents) shall be liable,
in damages or otherwise, to ELI for any error or judgment or other act or
omission performed or omitted by Citizens or any of its Affiliates under or
otherwise in respect of this Agreement, except if such error of judgment or
other act or omission results from willful misconduct or gross negligence of the
party sought to be changed. All of the obligations of Citizens hereunder have
been undertaken by Citizens and its Affiliates solely for the benefit of ELI and
nothing set forth in this Agreement shall (or shall be deemed to) grant to any
other person any interest (whether as a third party beneficiary or otherwise)
herein.
ARTICLE VI
----------
TERM AND TERMINATION
--------------------
6.1 Term. This Agreement shall commence on _______, 1997 and
----
terminate on December 31, 2002, unless earlier extended or terminated in
accordance with the terms of this Agreement.
6.2 Renewal-Termination upon Notice. This Agreement will
-------------------------------
automatically renew for additional terms of two (2) years each, unless either
party provides written notice to the other party not less than six (6) months
prior to the end of the initial term or any such renewal term of its intent to
terminate this Agreement.
6.3 Termination upon Bankruptcy, Etc. Each party shall have the right
--------------------------------
to terminate this Agreement immediately upon written notice to the other party
if the other party: (1) makes an assignment for the benefit of creditors; (2)
has an Order for Relief under Titles 7 or 11 of the United States Code entered
by any United States court against such party; (3) has a trustee or receiver
appointed by any court for a substantial part of such party's assets; or (4)
attempts to make an unauthorized assignment of this Agreement.
6.4 Termination upon Material Breach. In the event of material breach
of any provision of this Agreement by a party, the non-defaulting party shall
give the defaulting party written notice, and:
(a) If such breach is for ELI's non-payment, ELI shall cure the
breach within thirty (30) calendar days of such notice. If ELI does not
cure such breach by such date, Citizens may, at its sole option, elect to
terminate this Agreement by giving written notice of such election to ELI.
6
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(b) If such breach is for any other material failure to perform in
accordance with this Agreement, the defaulting party shall cure such breach
within ninety (90) calendar days of the date of such notice. If the
defaulting party does not cure such breach within such period (or is not
working diligently in good faith to cure such breach in cases where a
breach cannot reasonably be expected to be cured within ninety (90) days),
the non-defaulting party may, at its sole option, elect to terminate this
Agreement by giving written notice to the breaching party no earlier than
ninety (90) calendar days after the date of its notice of breach to the
defaulting party (or immediately upon such further notice to the defaulting
party if the defaulting party is not working diligently in good faith to
cure such breach in cases where a breach cannot be reasonably be expected
to be cured within ninety (90) days).
6.5 Termination upon Change of Control. Citizens may terminate this
----------------------------------
Agreement by written notice to ELI upon a Change of Control (as defined below)
with respect to ELI. A "Change in Control" shall be deemed to have occurred if:
(i) Citizens or its Affiliates shall own shares representing less than a
majority of the voting power of the then outstanding common stock of ELI; (ii) a
majority of the seats (other than vacant seats) on the Board of Directors of ELI
shall at any time be occupied by persons who were neither (1) nominated by
Citizens or by the Board of Directors of ELI, nor (2) appointed by directors of
ELI so nominated; or (iii) any person or group, other than Citizens or its
Affiliates, shall otherwise directly or indirectly have the power to exercise a
controlling influence over ELI.
6.6 Survival upon Termination. Notwithstanding the foregoing, the
-------------------------
provisions of Article IV (Confidentiality) and Article V (Indemnification) shall
survive the termination or expiration of this Agreement, and shall remain in
full force and effect for a period of three years following termination or
expiration.
6.7 Waiver. The failure of either party to exercise any right to elect to
------
terminate this Agreement shall not constitute a waiver of the rights granted
herein with respect to any subsequent default.
ARTICLE VII
GENERAL
7.1 Relationship; Self-Dealing. Nothing contained in this Agreement shall
--------------------------
be construed as creating a partnership, joint venture or similar arrangement of
or between Citizens and ELI. Citizens and its Affiliates may engage in, acquire
or possess an interest in other business ventures of any nature or description,
independently or with others, whether currently existing or hereafter created,
which may be in direct or indirect competition with ELI, and ELI shall not have
any rights in or to such independent ventures or the income or profits derived
therefrom, or to any opportunities offered or created thereby. Such activities
or arrangements shall not constitute a breach of this Agreement.
7.2 Entire Agreement. This Agreement constitutes the entire understanding
----------------
between the parties and supersedes any prior understandings respecting the
subject matter thereof.
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7.3 Amendment; Waiver. This Agreement shall not be amended, modified,
-----------------
waived, released or discharged except by a writing signed by an officer or
authorized representative of each of the parties.
7.4 Successors and Assigns. No party hereto shall assign its rights and
----------------------
obligations under this Agreement or any part thereof, nor shall any party assign
or delegate any of its rights or duties hereunder without the prior written
consent of the other party, and any assignment made without such consent shall
be void; provided, that the rights and obligations of Citizens hereunder may be
assigned to and assumed by an Affiliate of Citizens without the consent or
approval of ELI.
7.5 Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and permitted
assigns. Nothing in this Agreement, expressed or implied, is intended or shall
be construed to confer upon any person other than the parties and successors and
assigns permitted by Section 7.4 hereof any right, remedy or claim under or by
reason of this Agreement.
7.6 Further Assurances. The parties shall execute and deliver such further
------------------
instruments and perform such further acts as may reasonably be required to carry
out the intent and purposes of this Agreement.
7.7 Headings. All article, section and paragraph titles or captions
--------
contained in this Agreement are for convenience only and shall not be deemed
part of the text of this Agreement.
7.8 Pronouns. All pronouns and any variations thereof shall be deemed to
--------
refer to the masculine, feminine, neuter, singular or plural as the context may
require.
7.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, and each of such counterparts shall for all purposes be deemed to
be an original, but all such counterparts together shall constitute but one
instrument.
7.10 Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the others shall be in writing and shall be
deemed to have been duly given on the next business day after the same is sent,
if delivered personally or sent by telecopy or overnight delivery, or five
calendar days after the same is sent, if sent by registered or certified mail
return receipt requested, postage prepaid, as set forth below, or to such other
persons or addresses as may be designated in writing in accordance with the
terms hereof by the party to receive such notice.
(a) If to Citizens, to:
Citizens Utilities Company
High Ridge Park
Stamford, CT 06905
Facsimile No.: (203) 329-4651
Attn: Robert J. DeSantis
8
<PAGE>
(b) If to ELI, to:
Electric Lightwave, Inc.
8100 N.E. Parkway Drive, Suite 150
Vancouver, Washington 98662
Facsimile No.: (360-604-5333)
Attn:
7.11 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of [NEW YORK] without giving effect to the
principles of conflict of laws thereof.
7.12 Force Majeure. In the event that either party hereto shall be
-------------
delayed, hindered in, or prevented from the performance of any act required
hereunder by reason of failure of power, riots, insurrection, war, labor
disputes, Acts of God or other reasons of a similar nature not the fault of the
party delayed in performing the work or doing the acts required under the terms
of this Agreement, then performance of such work or act shall be excused for the
period of said delay and the period for the performance of any such work or act
shall be extended for a period equivalent to the period of such delay. In the
event that either party shall be indefinitely prevented from the performance of
any work or act required hereunder by reason of any such cause, performance of
such work or act shall be indefinitely excused.
7.13 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if one or more of the provisions of this Agreement is
subsequently declared invalid or unenforceable, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions of this Agreement. In the event of such declaration of
invalidity or unenforceability, this Agreement, as so modified, shall be applied
and construed so as to reflect substantially the intent of the parties and
achieve the same economic effect as originally intended by the terms hereof. In
the event that the scope of any provision to this Agreement is deemed
unenforceable by a court of competent jurisdiction, the parties agree to the
reduction of the scope of such provision as such court shall deem reasonably
necessary to make such provision enforceable under the circumstances.
7.13 No Agency. This Agreement shall not be deemed expressly or by
---------
implication to create an agency, employee, or servant relationship between or
among any of the parties hereto, or any Affiliates of the parties hereto for any
purpose whatsoever.
9
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
hereinabove indicated.
ELECTRIC LIGHTWAVE, INC.
By:________________________________________
Name:
Title:
CITIZENS UTILITIES COMPANY
By:________________________________________
Robert J. DeSantis
Vice President
10
<PAGE>
EXHIBIT 10.11
FORM OF CUSTOMERS AND SERVICE AGREEMENT
THIS CUSTOMERS AND SERVICE AGREEMENT (this "Agreement") is made as of the ____
day of ______________, 1997, between Citizens Utilities Company, a Delaware
corporation ("Citizens"), and Electric Lightwave Inc., a Delaware corporation
("ELI").
RECITALS
A. Citizens owns all of the issued and outstanding Class B Common stock
of ELI.
B. ELI is effecting an initial public offering (the "Offering") of shares
of its Class A Common Stock (the "Class A Common Stock").
C. In order to preserve and continue to maximize the business
opportunities available to both ELI and Citizens after the Offering,
ELI and Citizens desire to execute and deliver this Agreement.
AGREEMENTS
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of their
mutual promises and obligations herein contained and intending to be legally
bound hereby, the parties do hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, in addition to the terms defined
in the Preamble and Recitals, the following terms will have the following
meanings, applicable to both the singular and plural forms of the terms
described.
"Affiliate" means any company, firm or person ("person") which directly or
indirectly controls, is controlled by, or is under common control with a person.
A person is regarded in control of another person if it owns, or directly or
indirectly controls, at least 50% of the voting stock or other ownership
interest of the other person, or if it directly or indirectly possesses the
power to direct or cause the direction of the management and policies of the
other person by any means whatsoever; provided, however, that for the purposes
of this Agreement, ELI and its subsidiaries shall not be Affiliates of Citizens,
and Citizens and its subsidiaries (other than persons which are subsidiaries of
ELI) shall not be Affiliates of ELI.
"Citizens" shall include Citizens Affiliates.
<PAGE>
"Citizens Area" means a geographic area (designated by telephone exchange or
otherwise) in which Citizens is the Incumbent Local Exchange Carrier (as defined
by the Telecommunications Act of 1996).
"Citizens Retail Customer" means a retail customer of Citizens.
"Citizens Potential Retail Customer" means a potential Citizens Retail
Customer with a place of business or residence in a Citizens Area.
"Citizens Services" means telecommunications services offered or rendered by
Citizens.
Citizens Wholesale Customer" means a wholesale customer of Citizens.
"Effective Date" means the date on which the first purchase and sale of shares
of Class A Common Stock pursuant to the Offering occurs.
"ELI" shall include ELI Affiliates.
"ELI Retail Customer" means a retail customer of ELI.
"ELI Location" means a geographic location in which ELI is offering or
rendering telecommunications services and, if a franchise, certificate, permit
or other governmental authorization is required by law, regulation or order, the
same shall have been obtained.
"ELI Potential Retail Customer" means a potential ELI Retail Customer with a
place of business or residence in an ELI Location.
"ELI Services" means telecommunications services offered or rendered by ELI.
"ELI Wholesale Customer" means a wholesale customer of ELI.
"Less Dense Area" shall mean (a) a service territory that is not an ELI
Location or Citizens Area on the Effective Date and that is part of, or
includes, a Metropolitan Statistical Area ("MSA") or a portion of an MSA, which
MSA has a population of less than 300,000, and (b) a service territory which is
part of, or which includes, an MSA or a portion of an MSA, which MSA has a
population of 300,000 or more, which territory was acquired by Citizens in a
transaction ("Transaction") in which the consideration allocated to territories
which are part of, or include, MSAs with a population of 300,000 or more was 50%
or less of the total consideration paid in the Transaction.
"More Dense Area" shall mean a service territory that is not an ELI Location
or Citizens Area on the Effective Date and that is not a Less Dense Area.
1.2 INTERNAL REFERENCES. Unless the context indicates otherwise, references
to articles, sections and paragraphs shall refer to the corresponding articles,
sections and paragraphs in this Agreement, and references to the parties shall
mean the parties to this Agreement.
2
<PAGE>
ARTICLE 2
COMPETITION AND BUSINESS OPPORTUNITIES
2.1 SERVICES OF ELI. ELI agrees that, during the term of this Agreement, ELI
will not offer or sell ELI Services to a Citizens Retail Customer or Citizens
Potential Retail Customer in a location (a) that is within a Citizens Area that
existed on the Effective Date; or (b) that is within a Less Dense Area which
becomes a Citizens Area after the Effective Date and before it becomes an ELI
Location. ELI may continue to provide ELI Services to any ELI [Retail] Customer
existing on the Effective Date pursuant to existing contracts or other customer
agreements and any renewals or extensions thereof.
2. 2 SERVICES OF CITIZENS. Citizens agrees that, during the term of this
Agreement, Citizens will not offer or sell Citizens Services to an ELI Retail
Customer or ELI Potential Retail Customer in a location (a) that is within an
ELI Location that existed on the Effective Date; or (b) that is within a More
Dense Area which becomes an ELI Location after the Effective Date and before it
becomes a Citizens Area. Citizens may continue to provide Citizens Services to
any existing Citizens [Retail] Customer existing on Effective Date pursuant to
existing contracts or other customer agreements and any renewals or extensions
thereof.
2.3 OTHER AREAS. ELI may offer and sell ELI Services to a Citizens Retail
Customer or a Citizens Potential Retail Customer in any area not restricted by
Sections 2.1 or 2.5. Citizens may offer and sell Citizens Services to an ELI
Retail Customer or an ELI Potential Retail Customer in any area not restricted
by Sections 2.2 or 2.5.
2.4 WHOLESALE CUSTOMERS. (a) During the term of this Agreement, ELI may not
offer or sell to a Citizens Wholesale Customer ELI Services of the same nature
and serving the same geographic area as the services which the customer is then
currently receiving under contract from Citizens.
(b) During the term of this Agreement, Citizens may not offer or sell to an
ELI Wholesale Customer Citizens Services of the same nature and serving the same
geographic area as the services which the customer is then currently receiving
under contract from ELI.
2.5 LONG DISTANCE RETAIL CUSTOMERS. (a) During the term of this Agreement,
ELI will not offer or sell long distance ELI Services to a Citizens Retail
Customer or a Citizens Potential Retail Customer located in a Citizens Area,
except that ELI may offer and such services to a Citizens Retail Customer or a
Citizens Potential Retail Customer which is located in a service territory that
was or became an ELI Location before it became a Citizens Area.
(b) During the term of this Agreement, Citizens will not offer or sell long
distance Citizens Services to an ELI Retail Customer or an ELI Potential Retail
Customer
3
<PAGE>
located in a ELI Area, except that Citizens may offer and sell such services to
an ELI Retail Customer or an ELI Potential Retail Customer which is located in a
service territory that was or became an Citizens Area before it became an ELI
Location.
2.6 WAIVER. The foregoing limitations on ELI's and Citizen's offering or
selling telecommunications services apply only to the extent that both ELI and
Citizens are offering or selling the same telecommunications service to the same
customers or potential customers and shall not apply to the extent that both
Citizens and ELI agree in writing to waive such limitations in the case of
specific customers, services or geographic areas.
ARTICLE 3
TERM AND TERMINATION
3.1 TERM. The term of this Agreement shall commence on the Effective Date
and, unless terminated earlier pursuant to Section 3.2, shall continue until the
first to occur of (a) the date on which Citizens and its Affiliates own shares
representing less than a majority of the ordinary voting power of the
outstanding capital stock of ELI, or (b) the date on which the designees or
representatives of Citizens cease to constitute a majority of the board of
directors of ELI.
3.2 TERMINATION. Citizens shall have the right to terminate this Agreement
upon the occurrence of any material breach of this Agreement by ELI or any of
its Affiliates that is not cured within thirty (30) days after receipt of
written notice of such breach from Citizens.
ARTICLE 4
RESOLUTION OF DISPUTES
4.1 ARBITRATION. Any dispute, controversy or claim between Citizens and ELI
arising out of or relating to this Agreement or any agreements or instruments
relating hereto or delivered in connection herewith, will be resolved by
arbitration conducted in Stamford, Connecticut under the auspices and according
to the Commercial Arbitration Rules of the American Arbitration Association. The
arbitration shall be conducted in accordance with the United States Arbitration
Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this
Agreement.
4
<PAGE>
ARTICLE 5
MISCELLANEOUS PROVISIONS
5.1 GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of New York without regard to principles of conflicts of
laws of any jurisdiction.
5.2 NOTICES. Any notice permitted or required by this Agreement shall be
deemed given when sent by personal service, by certified or registered mail
return receipt requested, postage prepaid, by facsimile transmission or by
overnight delivery by a nationally recognized courier and addressed as follows:
IF TO CITIZENS: Citizens Utilities Company
High Ridge Park
P. O. Box 3801
Stamford, Connecticut 06905
Attn: Robert J. DeSantis
Fax No.: (203) 329-4651
IF TO ELI: Electric Lightwave Inc.
8100 N.E. Parkway Drive, Suite 200
Vancouver, Washington 98662
Attn:
Fax No.: (360) 604-5333)
Actual receipt of notice or other communication shall overcome any deficiency in
manner of delivery thereof.
5.3 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed by both parties to this Agreement,
shall be deemed to be an original, and all of which counterparts together shall
constitute one and the same instrument.
5.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties with respect to its subject matter, superseding all prior oral and
written communications, proposals, negotiations, representations,
understandings, courses of dealing, agreements, contracts, and the like between
the parties.
5.5 AMENDMENTS. This Agreement may be changed, amended, modified, or
rescinded only by an instrument in writing signed by the party against which
enforcement of such change, amendment, modification or rescission is sought.
5.6 WAIVERS. No waiver by any party of any condition, or breach of any
provision of this Agreement, in any one or more instances, shall be deemed to be
or
5
<PAGE>
construed as a waiver of any other condition or of the breach of any other
provision of this Agreement.
5.7 RELATIONSHIP. Nothing in this Agreement shall be deemed to create a
partnership, joint venture or agency relationship between the parties. Both
parties are independent contractors and neither party is to be considered the
agent or legal representative of the other for any purpose whatsoever under this
Agreement.
5.8 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the parties and their respective successors and assigns, except that
no obligation under this Agreement may be delegated, nor may any rights under
this Agreement be assigned by either party, without the prior written consent of
the other party, except by operation of law. Any such purported assignment of
this Agreement by either party without the prior written consent of the other
party shall be void and without effect. Except as expressly provided in this
Agreement, the parties hereto intend that this Agreement shall not benefit or
create any right or cause of action in or on behalf of any person other than the
parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
CITIZENS UTILITIES COMPANY
By: _____________________________
Name:
Title:
ELECTRIC LIGHTWAVE INC.
By ________________________________
Name:
Title:
7
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EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of Electric Lightwave, Inc. (the "Company") constitutes and appoints
Robert J. DeSantis and Daryl A. Ferguson, and each of them, singly or jointly,
with full power of substitution, to act for him in any and all capacities,
including director, principal executive officer, principal financial officer
and/or controller or principal accounting officer of the Company to sign on his
behalf the Registration Statement on Form S-1 and any amendments or supplements
thereto of the Company, and to file the same with all exhibits thereto with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or their substitute or substitutes, may
do or cause to be done by virtue hereof.
Dated October 17, 1997
/s/ David B. Sharkey
------------------------------------
David B. Sharkey
/s/ Daryl A. Ferguson
------------------------------------
Daryl A. Ferguson
/s/ Robert J. DeSantis
------------------------------------
Robert J. DeSantis
/s/ Kerry Rea
------------------------------------
Kerry Rea
/s/ Leonard Tow
------------------------------------
Leonard Tow
/s/ Stanley Harfenist
------------------------------------
Stanley Harfenist
/s/ Robert A. Stanger
------------------------------------
Robert A. Stanger
/s/ Maggie Wilderotter
------------------------------------
Maggie Wilderotter
