ELECTRIC LIGHTWAVE, INC.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________to__________
Commission file number 0-23393
ELECTRIC LIGHTWAVE,INC.
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(Exact name of registrant as specified in its charter)
Delaware 93-1035711
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 NE 77th Avenue
Vancouver, Washington 98662
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360)816-3000
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes __X__ No ___
The number of shares outstanding of the registrant's class of common stock as of
October 23, 1998 were:
Common Stock Class A 8,547,011
Common Stock Class B 41,165,000
<PAGE>
ELECTRIC LIGHTWAVE, INC.
Index to Financial Statements
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at September 30, 1998 and December 31, 1997 (unaudited) 2
Statements of Operations for the Three Months Ended September 30, 1998 and 1997 (unaudited) 3
Statements of Operations for the Nine Months Ended September 30, 1998 and 1997 (unaudited) 4
Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ELECTRIC LIGHTWAVE, INC.
BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, 1998 December 31, 1997
ASSETS
Current assets:
<S> <C> <C>
Cash $ 11,898 $ 26,531
Trade receivables, net 14,554 12,569
Other receivables 1,156 7,688
Other current assets 746 844
--------------- --------------
Total current assets 28,354 47,632
--------------- --------------
Property, plant and equipment 462,844 328,664
Less accumulated depreciation and amortization (35,905) (25,791)
--------------- --------------
Property, plant and equipment, net 426,939 302,873
--------------- --------------
Other assets 6,528 9,457
--------------- --------------
Total assets $ 461,821 $ 359,962
=============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 38,311 $ 50,237
Taxes other than income taxes 5,923 3,136
Due to Citizens Utilities Company 3,552 944
Current portion of capital lease obligation 14,688 452
Other current liabilities 5,722 2,650
-------------- --------------
Total current liabilities 68,196 57,419
-------------- --------------
Deferred credits and other 1,727 1,800
Deferred income taxes payable 7,239 16,918
Capital lease obligation 21,849 10,511
Long-term debt 194,000 60,000
-------------- --------------
Total liabilities 293,011 146,648
-------------- --------------
Shareholders' Equity:
Common stock issued, $.01 par value
Class A 85 85
Class B 412 412
Additional paid-in-capital 320,162 316,731
Deficit (151,849) (103,914)
-------------- --------------
Total shareholders' equity 168,810 213,314
-------------- --------------
Total liabilities and shareholders' equity $ 461,821 $ 359,962
============== ==============
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
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<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
ELECTRIC LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands, except per-share amounts)
(Unaudited)
1998 1997
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<S> <C> <C>
Revenues $ 25,664 $ 17,078
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Operating expenses:
Network access 12,317 7,341
Operating expenses 7,308 3,467
Depreciation and amortization 4,090 1,998
Selling, general and administrative 21,243 9,980
----------- -----------
Total operating expenses 44,958 22,786
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Loss from operations (19,294) (5,708)
Interest expense, net 2,899 211
Interest income (157) -
----------- -----------
Net loss before income taxes (22,036) (5,919)
Income tax benefit (3,631) -
----------- -----------
Net loss $ (18,405) $ (5,919)
=========== ===========
Net loss per common share:
Basic $ (.37) $ (.14)
Diluted $ (.37) $ (.14)
Weighted average shares outstanding 49,711 41,685
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
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<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
ELECTRIC LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands, except per-share amounts)
(Unaudited)
1998 1997
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<S> <C> <C>
Revenues $ 67,164 $ 41,843
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Operating expenses:
Network access 31,389 19,287
Operating expenses 19,082 11,990
Depreciation and amortization 11,754 7,601
Selling, general and administrative 54,206 28,487
----------- -----------
Total operating expenses 116,431 67,365
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Loss from operations (49,267) (25,522)
Interest expense, net 5,500 513
Interest income (547) -
----------- -----------
Net loss before income taxes and cumulative effect of change in accounting principle (54,220) (26,035)
Income tax benefit (9,102) -
----------- -----------
Net loss before cumulative effect of change in accounting principle (45,118) (26,035)
Cumulative effect of change in accounting principle (net of $577 income tax benefit) 2,817 -
----------- -----------
Net loss $ (47,935) $ (26,035)
=========== ===========
Net loss before cumulative effect of change in accounting principle per common share:
Basic $ (.91) $ (.62)
Diluted $ (.91) $ (.62)
Net loss per common share:
Basic $ (.96) $ (.62)
Diluted $ (.96) $ (.62)
Weighted average shares outstanding 49,697 41,685
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
ELECTRIC LIGHTWAVE, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
(Unaudited)
1998 1997
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<S> <C> <C>
Net cash used for operating activities $ (29,507) $ (18,040)
-------------- ------------
Cash flows used for investing activities:
Capital expenditures (119,154) (48,717)
-------------- ------------
Cash flows from financing activities:
Debt borrowings 134,000 -
Citizens fundings - 67,293
Other, net 28 -
-------------- ------------
Net cash provided by financing activities 134,028 67,293
-------------- ------------
Net increase (decrease) in cash (14,633) 536
Cash at January 1, 26,531 611
-------------- ------------
Cash at September 30, $ 11,898 $ 1,147
============== ============
Supplemental cash flow information:
Cash paid for interest, net of capitalized portion $ 4,784 $ -
Non-cash increase in capital lease asset and obligation 25,830 -
Other non-cash transactions with Citizens:
Deferred income taxes - 8,696
Capitalized interest $ - $ 2,234
</TABLE>
The accompanying Notes are an integral part of these Financial Statements.
-5-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation and Use of Estimates
These unaudited financial statements of Electric Lightwave, Inc. (the
Company) have been prepared in accordance with generally accepted
accounting principles (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures have been
condensed or omitted. In management's opinion, these financial
statements include all adjustments and recurring accruals necessary to
present fairly the results for the interim periods shown. 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. The results of the interim periods are not necessarily
indicative of the results for the full year. Certain reclassifications
of balances previously reported have been made to conform to the
current presentation. These financial statements should be read in
conjunction with the audited financial statements and the related
notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
(b) Capitalized Interest
Property, plant and equipment include interest costs capitalized
during the installation and expansion of communications networks.
Approximately $2,079,000 and $1,408,000 of interest costs were
capitalized in the three months ended September 30, 1998 and 1997,
respectively, with approximately $5,917,000 and $2,234,000 of interest
costs capitalized in the nine months ended September 30, 1998 and
1997, respectively.
(c) Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income". This statement requires that changes in the
amounts of items such as foreign currency translation and gains/losses
on certain securities are to be displayed in a financial statement as
prominently as other financial statements. This statement is effective
for financial statements issued for periods beginning after December
15, 1997 and requires reclassification of earlier financial statements
for comparative purposes. The Company currently has no items of "other
comprehensive income" as defined in SFAS 130.
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information". This statement
establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after
December 15, 1997, but is not required to be applied to interim
financial statements in the initial year of application. As this
statement relates to disclosure only, the Company expects no effect on
its financial position, results of operations, or cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP
establishes standards for capitalization of certain costs related to
internal use software, and is effective for fiscal years beginning
after December 15, 1998. Management does not expect the adoption of
this SOP to have a material impact on the Company's financial
position, results of operations or cash flows.
-6-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(d) Reciprocal Compensation
The Company has various interconnection agreements with incumbent
local exchange carriers (ILECs) in the states in which the Company
operates, which are currently scheduled to expire throughout 1999.
These agreements govern reciprocal compensation relating to the
transport and termination of traffic between the Company and the
ILECs. Reciprocal compensation revenues are recognized by the Company
as earned, net of an allowance for disputed amounts, based on the
terms of the interconnection agreements. Total net reciprocal
compensation revenues recognized by the Company amounted to $4.3
million and $10.2 million, respectively, for the three and nine months
ended September 30, 1998.
ILECs have historically disputed certain reciprocal compensation
charges related to Internet Service Providers (ISPs) on the position
that these charges are not local traffic as defined by the
interconnection agreements. The resolution of these disputes will be
based on rulings by state public utility commissions and/or by the
Federal Communications Commission (FCC). To date, all 23 state public
utility commissions that have ruled on the issue found that ILECs
must pay compensation to competitive carriers for local calls to ISPs
located on competitive carriers' networks, including the states in
which the Company recognizes the majority of its reciprocal
compensation revenue.
(e) Net Loss Per Share
The Company follows the provisions of SFAS 128, "Earnings Per Share"
which requires presentation of both basic and diluted earnings per
share (EPS) on the face of the income statement. Basic EPS is computed
using the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock at the beginning of the
period. Certain common stock equivalents arising from stock options
outstanding during the three and nine months ended September 30, 1998
have been omitted from diluted EPS as the effect would be
anti-dilutive.
Weighted average shares outstanding have been adjusted for the effects
of application of Securities and Exchange Commission Staff Accounting
Bulletin (SAB) No. 98. Pursuant to SAB 98, all stock issued for
nominal consideration should be treated as outstanding for all periods
presented even though the effect is to reduce the net loss per share.
The application of SAB 98 had the effect of increasing outstanding
shares by 520,000 for the three and nine months ended September 30,
1997.
(2) Change in Accounting Principle
On April 3, 1998, the Accounting Standards Executive Committee of the
AICPA released SOP 98-5, "Reporting on the Costs of Start-Up Activities".
The SOP requires that at the beginning of the fiscal year of adoption, the
unamortized portion of deferred start up costs be written off and reported
as a change in accounting principle. Future costs of start-up activities
should then be expensed as incurred.
The Company adopted SOP 98-5, effective January 1, 1998. Certain 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 had been capitalized by the Company in previous
years, and were being amortized over five years. The net book value of
these deferred amounts was $3,394,000 which has been reported as a
cumulative effect of a change in accounting principle in the statement of
operations for the nine months ended September 30, 1998, net of income tax
benefit of $577,000.
-7-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(3) Commitments and Contingencies
Effective March 20, 1998, the Company amended two previous fifteen-year
lease agreements for exclusive use of long-haul routes interconnecting
Portland, Oregon and Seattle and Spokane, Washington. The previous capital
lease agreement, which became operational in February 1997 provided for
rental payments based on a percentage of the Company's monthly leased
traffic over such route with a minimum required monthly payment of
$105,000. The previous operating lease agreements provided for rental
payments based on a percentage of the Company's leased traffic and was to
become operational in the second quarter of 1998. Under an amended lease
agreement, a third route from Seattle to Spokane, Washington was added and
both previous lease agreements were combined into one capital lease with a
20 year term. The amended lease calls for rental payments based on a
percentage of the Company's leased traffic over such routes with a minimum
required monthly payment of $105,000. In order to maintain the exclusive
rights to use the long-haul routes, the Company is required to meet
minimum annual revenue commitments. The effect of the amended lease was to
increase the book value of the capital lease asset and obligation by
$2,174,000.
In May 1998, the Company entered into a 20 year operating lease agreement
with a third party in order to develop a long-haul route from Oregon to
Southern California. Rental payments are based on a percentage of the
Company's leased traffic and the route is expected to become operational
in the second quarter of 1999.
In June 1998, the Company entered into a private line services agreement
with a third party, which allows the Company to utilize the third party's
national fiber optic network for a period of nine years. The Company has a
total minimum commitment of $122 million over the term of the agreement,
including $8.9 million over the twelve months subsequent to September 30,
1998. A portion of the network was operational as of June 1998, with
construction on the remainder of the network scheduled for completion in
the second quarter of 1999.
The capital lease obligation at September 30, 1998 includes $23.7 million
of an accrued obligation to reflect construction activity on capital
leases for long-haul routes under development.
(4) Related Party Transactions
The Company is 83% owned by Citizens Utilities Company (Citizens). On May
18, 1998, Citizens announced its intent to separate its telecommunications
businesses and public service businesses into two stand-alone, publicly
traded companies, subject to regulatory approval.
A summary of the activity in the amount due to Citizens for the nine
months ended September 30, 1998 is as follows:
($ in thousands)
Balance beginning of period $ 944
Guarantee fees 5,759
Administrative services and other items 7,540
Payments to Citizens (10,691)
---------------
Balance end of period $ 3,552
===============
(5) Significant Customer
During the three and nine months ended September 30, 1998, one customer,
the ILEC operating in the majority of the Company's markets, accounted for
18% and 17%, respectively, of the Company's total revenue. The majority of
this revenue was generated from reciprocal compensation as discussed in
Note 1d. No customers accounted for 10% or more of the Company's total
revenue during the three and nine months ended September 30, 1997. At
September 30, 1998, the customer described above accounted for 22% of the
Company's net trade accounts receivable.
-8-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(6) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (ESPP). Under the ESPP,
eligible employees of the Company may subscribe to purchase shares of
Class A Common Stock at the lesser of 85% of the mean between the high and
low market prices on the first or 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. An employee may not participate in the
ESPP if the employee owns stock possessing 5% or more of the total
combined voting power or value of all classes of capital stock of the
Company. As of September 30, 1998, there were 175,460 shares of Class A
Common Stock reserved for issuance under the ESPP, which will be adjusted
for any future stock dividends or stock splits. The ESPP will terminate
when all 175,460 shares of Class A Common Stock reserved have been
subscribed for, unless terminated earlier by the Board of Directors. The
ESPP is administered by the Compensation Committee of the Board of
Directors. As of September 30, 1998, the number of employees participating
in the ESPP was 331 and the total number of shares subscribed for under
the ESPP was 44,952. No stock-based compensation expense was recorded in
the financial statements pursuant to the ESPP in accordance with APB
Opinion No. 25.
(7) Income Taxes
The income tax benefit of $3,631,000 and $9,679,000 for the three and nine
months ended September 30, 1998, respectively, primarily represents the
recognition of operating losses. A full valuation allowance against the
benefit of the Company's losses was necessary in the three and nine months
ended September 30, 1997 due to Citizens' policy not to reimburse the
Company for the tax benefits that were contributed to the consolidated tax
return of Citizens for any operating losses prior to the IPO date,
November 24, 1997. For the post IPO period, which includes the three and
nine months ended September 30, 1998, the tax benefit of the Company's
operating losses are being recognized to the extent of net deferred income
tax liabilities, since Citizens has agreed to reimburse the Company when
losses can be utilized by the Company on a stand alone basis. The
existence of net deferred income tax liabilities gives assurance that the
income tax benefit related to the net operating losses will be realized
through future turnaround of the temporary differences that have given
rise to the deferred income tax liabilities.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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This quarterly report on Form 10-Q contains forward-looking statements
that are subject to risks and uncertainties which could cause actual
results to differ materially from those expressed or implied in the
statements. Forward-looking statements are statements (including oral
representations) about future performance or results, including any
statements using the words "believe", "expect", "anticipate" or similar
words. All forward-looking statements are only predictions or statements
of current plans, which are constantly under review by the Company. All
forward-looking statements may differ from actual future results due to,
but not limited to, changes in the local and overall economy, the nature
and pace of technological changes, the number and effectiveness of
competitors in the Company's markets, success in overall strategy,
changes in legal and regulatory policy, relations with Incumbent Local
Exchange Carriers (ILECs) and their ability to provide delivery of
services including interoffice trunking, implementation of back office
service delivery systems, the Company's ability to identify future
markets and successfully expand existing ones and the mix of products and
services offered in the Company's target markets. Readers should consider
these important factors in evaluating any statement contained herein
and/or made by the Company or on its behalf. The Company has no
obligation to update or revise forward-looking statements to reflect the
occurrence of future events or circumstances.
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The following information is unaudited and should be read in conjunction
with the condensed financial statements and related notes to financial
statements included in this report, and with the Company's Management
Discussion and Analysis of Financial Condition and Results of Operations
and audited financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company is a facilities-based integrated communications provider (ICP)
providing a broad range of communications services in six major market
clusters in the western United States including: Portland, Oregon; Seattle,
Washington; Salt Lake City, Utah; Sacramento, California; Boise, Idaho; and
Phoenix, Arizona and their respective surrounding areas. The Company also
provides data services in Los Angeles and San Francisco, California and Las
Vegas, Nevada. 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.
The Company was incorporated in 1990 and is a subsidiary of Citizens
Utilities Company (Citizens).
During the third quarter of 1998, the Company announced that it expects to
complete in the fall of 1999 what it believes is the largest ringed
Synchronous Optical Network (SONET) in the western United States. The
3,000-mile SONET ring will connect Portland, Oregon; Sacramento, San
Francisco, and Los Angeles, California; Las Vegas, Nevada; Salt Lake City,
Utah and Boise, Idaho. This network will connect to other broadband
long-haul routes owned or leased by the Company, as well as another SONET
ring owned or leased by the Company interconnecting Portland, Oregon and
Seattle and Spokane, Washington, and will interconnect all of the Company's
six major market clusters. Once completed, the network will feature
Nortel's 32 wavelength dense wave division multiplexing equipment and S/DMS
Transport Node OC-192, a four fiber bi-directional line-switched ring SONET
platform, and will support voice and data traffic at OC-12, OC-48 and
OC-192 SONET speeds on a single fiber.
During 1998, the Company migrated from a frame relay based network to an
Asynchronous Transfer Mode (ATM) network backbone. ATM provides
high-bandwidth, low-delay packet switching and multiplexing, and is used to
transfer voice, video, images and character-based data, unlike frame relay,
which was not designed for voice and video applications. Management expects
the ATM network upgrade will position the Company to offer one network for
all data, voice and video transmission needs. Management also believes that
the ATM network upgrade will provide scalability, greater speed and
improved quality of service for its network backbone.
-10-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
Management believes that the Company's extensive, advanced network will
provide improved margins in an increasingly competitive industry by
allowing the Company to carry most of its traffic on its own network,
avoiding leased facility charges and certain interconnection costs. The
technologically advanced network should also help the Company maintain
higher quality service, as the SONET rings will be completely redundant and
scaleable.
The Company has embarked on a national data expansion in order to expand
its data footprint across the United States. In the second quarter of 1998,
the Company signed a nine year agreement with a third party for bandwidth
on a high-speed national fiber optic route.
The Company expects to initially offer high-speed point-to-point bandwidth,
Internet, frame relay, ATM and Transparent LAN Services in various markets
across the United States along this fiber optic route. During the second
quarter 1998, the Company deployed data services in Las Vegas and also
expects to deploy services in Denver, Chicago, Washington D.C., Atlanta,
Dallas, Houston, San Diego, Cleveland, New York City, Philadelphia, and
Boston by the end of 1998, with further cities added in 1999.
(a) Liquidity and Capital Resources
For the nine months ended September 30, 1998, the Company used the
remaining proceeds from its initial public offering and proceeds from a
bank credit facility to fund operating and capital expenditures. The bank
credit facility is a five-year $400 million revolving credit facility under
which Citizens has guaranteed all of the Company's obligations. The Company
drew $134 million on its line of credit during the first nine months of
1998, and as of September 30, 1998, $194 million was outstanding under this
facility, leaving $206 million available to draw for future capital and
operating needs.
Based on current projections, management believes that the bank credit
facility will be fully drawn during the second quarter of 1999.
Accordingly, the Company intends to obtain additional financing to continue
to fund operating losses, capital expenditures, and to service debt. The
Company is currently assessing financing alternatives. Citizens has
indicated its willingness to assist the Company in arranging this
financing, as mentioned in Form 8-K filed by the Company on October 15,
1998. The Company believes that the equity and debt markets for companies
in the CLEC industry are currently restrictive, but that Citizens' support
will allow the Company to obtain adequate financing at reasonable terms.
However, there can be no assurance that Citizens will be able to assist the
Company in arranging financing, or that the Company will be able to obtain
such financing at reasonable terms, which could have a material adverse
effect on its business, results of operations and financial condition.
The capital expenditures of the Company associated with the installation,
development and expansion of its existing and new communications 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 to $463 million at September 30,
1998 from $329 million at December 31, 1997, including an increase of $26
million due to capital lease additions. Total cash expended for capital
expenditures during 1998 was $119 million. These expenditures, together
with associated initial operating expenses, have resulted in operating
losses and negative operating cash flow and will continue to do so until an
adequate customer base and revenue stream for these networks have been
established. In addition, the Company continues to evaluate potential
acquisitions that are consistent with its business plan of generating
revenue growth through the expansion of its network and customer base. The
Company expects to incur net losses for the foreseeable future as it
continues to install, develop and expand its new and existing
communications 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.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
In June 1998, the Company entered into a private line services agreement
with a third party, which allows the Company to utilize the third party's
national fiber optic network for a period of nine years. The Company is
obligated for a minimum commitment of $122 million in a take-or-pay
arrangement, including $8.9 million over the twelve months subsequent to
September 30, 1998.
Other Matters
Reciprocal Compensation
The Company has various interconnection agreements ILECs in the states in
which the Company operates. These agreements govern reciprocal compensation
relating to the transport and termination of traffic between the Company
and the ILECs. Reciprocal compensation revenues are recognized by the
Company as earned, net of an allowance for disputed amounts, based on the
terms of the interconnection agreements. Total net reciprocal compensation
revenues recognized by the Company totaled $4.3 million and $10.2 million,
respectively, for the three and nine months ended September 30, 1998.
ILECs have historically disputed certain reciprocal compensation charges
related to Internet Service Providers (ISPs) on the position that these
charges are not local traffic as defined by the interconnection agreements.
The resolution of these disputes will be based on rulings by state public
utility commissions and/or by the Federal Communications Commission (FCC).
To date, all 23 state public utility commissions that have ruled on the
issue found that ILECs must pay compensation to competitive carriers for
local calls to ISPs located on competitive carriers' networks, including
the states in which the Company recognizes the majority of its reciprocal
compensation revenue.
Most of the Company's interconnection agreements expire in the second half
of 1999. While management believes that these agreements will be replaced
by agreements offering the Company some form of compensation regarding ISP
traffic, there is no assurance that the level of compensation will remain
consistent with current levels, which could have a material adverse effect
on the Company's revenue, income and cash flows.
New Accounting Pronouncements
Refer to Notes 1c and 2 in Part I, Item 1, of this report for an analysis
of the impact of recent accounting pronouncements on the Company.
Year 2000
Countless computer programs worldwide use a two-digit code for calendar
dates. For instance, many computers on January 1, 2000 will assume that
01-01-00 is the first day of the year 1900 rather than 2000. Massive system
failures may occur globally due to this Year 2000 (Y2K) "bug", which acts
much like a computer virus, if not properly addressed. The Company has
developed a Y2K Initiative (the Initiative) to mitigate the impact of the
Y2K issue for its internal systems and the systems that it relies on
directly and indirectly from third parties.
Under the Initiative, the Company has formed a Y2K Oversight Committee with
the full authority to establish methodologies, approve expenditures, and to
marshal additional resources as necessary. A full-time consultant project
manager, who answers regularly to the Y2K Oversight Committee, manages the
Initiative and oversees the project team. The Committee commands the full
support of Senior Management and includes high-level representation from
each of the major internal business functions. The Committee is responsible
for researching, planning, executing, implementing and completing the
Initiative for the Company.
The systems evaluated in the Initiative include the Company's
Communications Network (Network), which processes voice and data
information relating to its communications operations, as well as
Information Technology (IT) internal business systems which include certain
operational, financial and administrative functions. The Initiative is
composed of three primary phases: (I) inventory and assessment, (II)
remediation and (III) testing, contingency planning and certification. For
all systems, Phase I is nearly finished, and should be completed during the
fourth quarter 1998, Phase II is underway and should be completed during
the first quarter of 1999, and Phase III should be completed in the second
quarter of 1999.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
A component of assessing the network includes an assessment and survey of
Y2K readiness of key business partners. The network relies significantly on
the provisioning and switching capabilities of the ILECs in those markets
in which the Company provides services. The Company has not received
certification from those ILECs and other key suppliers indicating that they
are Y2K compliant, but has been notified that the ILECs have initiated
programs to mitigate their Y2K issues in 1999. However, there can be no
assurance that the systems of ILECs or other companies on which the
Company's systems rely will become Y2K compliant before 2000. Failure of
such systems to become Y2K compliant before 2000 could disrupt the
Company's operations, and have a material adverse impact on the Company's
financial condition and results of operations.
The Company currently anticipates that total costs of Y2K remediation will
be approximately $.5 million, which includes costs related to the
consultant Y2K project manager and the replacement/upgrade of certain
equipment. When Phase I is completed, this cost estimate may increase.
Management believes that several factors limit the Company's cost exposure
to Y2K issues. These factors include that over 90% of the Company's
equipment has been installed in the last three years, and management
believes that the majority of its systems are already compliant. Moreover,
its IT team has no internally developed legacy code to remediate. Further,
management expects most material cost exposures will be covered under
routine maintenance agreements. The costs of employees devoting time to the
Initiative will be absorbed by the Company's IT budget and are not
anticipated to be material.
Management cannot provide assurance that the result of the Initiative or
that the remediation costs will not be materially different from estimates.
Accordingly, contingency plans are currently being developed to address
high-risk systems. The contingency plans are expected to be in place during
the second quarter of 1999.
Within its Network, the Company is dependent on telecommunications network
vendors to provide compliant hardware and software in a timely manner.
Within IT, the Company is dependent on the development of software by
internal and external experts, and the availability of critical resources
with the requisite skill sets. At worst case, failure by the Company or by
certain of its vendors to remediate Y2K compliance issues could result in
disruption of the Company's operations, possibly impacting the Network and
the Company's ability to bill or collect revenues. However, management
believes that this worst case scenario is unlikely, and that its efforts to
mitigate Y2K issues will be successful.
(b) Results of Operations
Revenues
Revenues for the three and nine months ended September 30, 1998 increased
$8.6 million, or 50%, and $25.3 million, or 61%, respectively, over the
three and nine months ended September 30, 1997 due to the continued
expansion of the Company's network and customer base. In 1998, the Company
added Boise, Idaho as a new market cluster and began offering data services
in a number of other cities, including Los Angeles and San Francisco,
California and Las Vegas, Nevada. The Company added 390 customers and
38,113 access line equivalents over September 30, 1997 (36% and 155%
increases, respectively).
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
---------------------------------------- ----------------------------------------------
($ in thousands) ($ in thousands)
%
Increase/ %
1998 1997 (Decrease) 1998 1997 Increase
---------- --------- -------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dedicated services $ 9,009 $ 9,184 (2)% $ 26,487 $ 23,300 14%
Local dial tone services 9,987 2,893 245% 23,780 6,136 288%
Long distance services 2,512 2,655 (5)% 6,233 6,098 2%
Enhanced services 4,156 2,346 77% 10,664 6,309 69%
---------- --------- ------------ ----------
Total $ 25,664 17,078 50% 67,164 41,843 61%
========== ========= ============ ==========
$
</TABLE>
-13-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
Dedicated Services
Dedicated services revenues for the three and nine months ended September
30, 1998 decreased $.2 million, or 2%, and increased $3.2 million, or 14%,
respectively, over the three and nine months ended September 30, 1997.
Revenues increased $.9 million and $2.7 million over the three and nine
months ended September 30, 1997, respectively, due to increased sales in
existing markets. Revenues also increased $.4 million and $1.6 million over
the three and nine months ended September 30, 1997, respectively, due to
revenues generated in markets entered subsequent to September 30, 1997.
These increases were offset by decreases in revenues from a significant
customer of $1.5 million and $1.1 million over the three and nine months
ended September 30, 1997, respectively, primarily due to the expiration of
a short-term contract in the first quarter 1998.
Local Dial Tone Services
Local dial tone services revenues for the three and nine months ended
September 30, 1998 increased $7.1 million, or 245%, and $17.6 million, or
288%, respectively, over the three and nine months ended September 30,
1997. Access line equivalents increased 38,113, or 155%, from September 30,
1997 to September 30, 1998. Net reciprocal compensation revenue for the
three and nine months ended September 30, 1998 increased $4.0 million, or
1,487%, and $9.9 million, or 3,682%, respectively, over the three and nine
months ended September 30, 1997. In addition, the growth of the Integrated
Service Digital Network (ISDN) product also generated $2.1 million and $5.0
million, respectively, of increased revenue over the three and nine months
ended September 30, 1997.
Long Distance Services
Long distance services revenues for the three months ended September 30,
1998 decreased $.1 million, or 5%, from the three months ended September
30, 1997, primarily due to a $.8 million decrease in wholesale long
distance revenues coupled with a $.3 million decrease in retail long
distance revenues. These decreases were primarily the result of less long
distance traffic, offset by an increase in revenues from prepaid services
of $1.0 million. Prepaid services increased primarily due to an increased
prepaid sales force, as well as the addition of several large volume
customers in the third quarter 1998.
Long distance services revenues for the nine months ended September 30,
1998 increased $.1 million, or 2%, over the nine months ended September 30,
1997, primarily due to $.7 million increases in retail long distance
revenues and revenues from prepaid services. Retail long distance increased
primarily due to the overall expansion of the Company's sales force and the
Company's product bundling strategy. Prepaid services increased primarily
due to an increased prepaid services sales force as well as the addition of
several large volume customers in the third quarter 1998. These increases
were largely offset by a decrease in wholesale long distance revenues of
$1.2 million. Wholesale long distance declined primarily due to less long
distance traffic.
Enhanced Services
Enhanced services revenues for the three and nine months ended September
30, 1998 increased $1.8 million, or 77%, and $4.4 million, or 69%,
respectively, over the three and nine months ended September 30, 1997
primarily due to increased sales of the frame relay and Internet products
in new and existing markets as a result of strong customer demand for these
services. For the three and nine months ended September 30, 1998, frame
relay and Internet product revenues of $.4 million and $1.2 million,
respectively, were recognized in markets entered into subsequent to
September 30, 1997, including Los Angeles and San Francisco, California.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
Operating Expenses
Operating expenses increased $22.2 million, or 97%, and $49.1 million, or
73%, respectively, over the three and nine months ended September 30, 1997
due to the Company's rapid network and customer growth as reflected in
revenues, as well as additional costs incurred to develop an infrastructure
to support the Company's national data expansion.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------- -----------------------------------------
($ in thousands) ($ in thousands)
% %
1998 1997 Increase 1998 1997 Increase
-------------- ------------- --------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Network access $12,317 $ 7,341 68% $ 31,389 $19,287 63%
Operating expenses 7,308 3,467 111% 19,082 11,990 59%
Depreciation and amortization 4,090 1,998 105% 11,754 7,601 55%
Selling, general and administrative 21,243 9,980 113% 54,206 28,487 90%
----------- ---------- ---------- ----------
$44,958 $22,786 97% $116,431 $67,365 73%
=========== ========== ========== ==========
</TABLE>
Network Access
Network access expenses for the three and nine months ended September 30,
1998 increased $5.0 million, or 68%, and $12.1 million, or
63%,respectively, over the three and nine months ended September 30, 1997,
primarily due to the Company's revenue growth, including expansion of its
frame relay and Internet products, and its customer base. Network access
expenses were higher, as a percentage of revenues, in the three months and
nine months ended September 30, 1998 than in the respective periods in 1997
as a result of increased expenses related to the Company's national data
expansion effort which utilizes leased circuits outside the Company's west
coast SONET ring and owned network facilities.
Operating Expenses
Operating expenses consist of costs related to providing facilities based
network and enhanced communications services other than network access
costs. The primary components of these expenses are right-of-way and
telecommunications equipment leases as well as operations and engineering
personnel costs.
Operating expenses for the three and nine months ended September 30, 1998
increased $3.8 million, or 111%, and $7.1 million, or 59%, respectively,
over the three and nine months ended September 30, 1997, primarily due to
increases in salaries and related expenses to support the expanded delivery
of services, and an expanded customer service organization. Operating
employee head count increased by 235 employees, to 466 employees, or 100%,
over September 30, 1997, primarily due to the Company's effort to increase
customer service and technical resources available in each market. In
addition, operations maintenance costs have risen $.6 million and $1.5
million over the three and nine months ended September 30, 1997,
respectively, due to the expansion of the Company's network.
Depreciation and Amortization
Depreciation and amortization expense for the three and nine months ended
September 30, 1998 increased $2.1 million, or 105%, and $4.2 million, or
55%, respectively, over the three and nine months ended September 30, 1997,
primarily due to higher plant in service balances for newly completed
communications network facilities and electronics.
Selling, General and Administrative
Selling, general and administrative expenses for the three and nine months
ended September 30, 1998 increased $11.3 million, or 113%, and $25.7
million, or 90%, respectively, over the three and nine months ended
September 30, 1997, primarily due to increases in salaries and related
expenses to support the infrastructure needed for the delivery of services
in existing and new markets such as Boise, Idaho; Los Angeles and San
Francisco, California; Las Vegas, Nevada and Spokane, Washington, as well
as the Company's national data expansion. The Company increased its sales
force by 93 employees, to 146 employees, a 175% increase, from September
30, 1997 to September 30, 1998. In addition, the Company has expanded
advertising, direct marketing, and public relations efforts in key markets
to increase name recognition and product information in 1998.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
ELECTRIC LIGHTWAVE, INC.
<TABLE>
<CAPTION>
Interest Expense and Interest Income
For the three months For the nine months
ended September 30, ended September 30,
---------------------------------------- ---------------------------------------------
($ in thousands) ($ in thousands)
% %
1998 1997 Increase 1998 1997 Increase
---------- --------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense, net $ 2,899 $ 211 1,274% $ 5,500 $ 513 972%
Interest income 157 - n/a 547 - n/a
</TABLE>
Interest expense for the three and nine months ended September 30, 1998
increased $2.7 million, or 1,274%, and $5.0 million, or 972%, respectively,
over the three and nine months ended September 30, 1997, primarily due to
interest and guarantee fees associated with the Company's borrowings
against its bank credit facility and guarantee fees associated with the
Company's construction agency agreement. Interest expense is net of
capitalized interest of $2.1 million and $5.9 million for the three and
nine months ended September 30, 1998, respectively, and $1.4 million and
$2.2 million for the three and nine months ended September 30, 1997,
respectively.
Interest income for the three and nine months ended September 30, 1998
increased $.2 million, and $.5 million, respectively, over the three and
nine months ended September 30, 1997, primarily due to interest earned on
cash balances.
<TABLE>
<CAPTION>
Income Tax Benefit
For the three months For the nine months
ended September 30, ended September 30,
---------------------------------------- ---------------------------------------------
($ in thousands) ($ in thousands)
% %
Increase/ Increase/
1998 1997 (Decrease) 1998 1997 (Decrease)
--------- ---------- ------------ ----------- ---------- --------------
<S> <C> <C> <C> <C>
Income tax benefit $ 3,631 $ - n/a $ 9,679 $ - n/a
</TABLE>
Income tax benefit for the three and nine months ended September 30, 1998
increased $3.6 million and $9.7 million (including $.6 million netted
against cumulative effect of change in accounting principle), respectively,
over the three and nine months ended September 30, 1997, primarily due to
the recognition of the tax benefit of net operating losses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
-16-
<PAGE>
PART II. OTHER INFORMATION
ELECTRIC LIGHTWAVE, INC.
Item 1. Legal Proceedings
The Company is party to various legal proceedings arising in the normal course
of business. The outcome of these matters is not predictable. However,
management believes that the ultimate resolution of all such matters, after
considering its level of insurance coverage, will not have a material adverse
effect on the Company's financial position, results of operations, or its cash
flows.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) The exhibits below are filed as part of this report:
Exhibit No. Description
27.1 Financial Data Schedule for the nine months ended September 30, 1998.
27.2 Restated Financial Data Schedule for the nine months ended September
30, 1997.
b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
September 30, 1998:
* July 13, 1998, under Item 5, "Other Events", a press release discussing
how the Company's independence and strategic options are not limited by
Citizens Utilities' separation announcement.
* July 24, 1998, under Item 5, "Other Events", a press release announcing
the naming of Guenther E. Greiner to the Board of Directors.
* August 7, 1998, under Item 7, "Financial Statements and Exhibits",
financial data schedule for the nine months ended September 30, 1997.
* August 12, 1998, under Item 5, "Other Events", a press release
discussing the Company's second quarter 1998 financial results.
-17-
<PAGE>
ELECTRIC LIGHTWAVE, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC LIGHTWAVE, INC.
(Registrant)
By: /s/ Kerry D. Rea
________________________________
Kerry D. Rea
Vice President and Controller
October 29, 1998
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Electric Lightwave, Inc.'s Consolidated Financial Statements for the period
ended September 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,898
<SECURITIES> 0
<RECEIVABLES> 14,554
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,354
<PP&E> 462,844
<DEPRECIATION> 35,905
<TOTAL-ASSETS> 461,821
<CURRENT-LIABILITIES> 68,196
<BONDS> 215,849
0
0
<COMMON> 497
<OTHER-SE> 168,313
<TOTAL-LIABILITY-AND-EQUITY> 461,821
<SALES> 0
<TOTAL-REVENUES> 67,164
<CGS> 0
<TOTAL-COSTS> 31,389
<OTHER-EXPENSES> 19,082
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,500
<INCOME-PRETAX> (54,220)
<INCOME-TAX> (9,102)
<INCOME-CONTINUING> (45,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,817
<NET-INCOME> (47,935)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Electric Lightwave, Inc.'s Consolidated Financial Statements for the period
ended September 30, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,147
<SECURITIES> 0
<RECEIVABLES> 10,187
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,725
<PP&E> 249,499
<DEPRECIATION> 23,144
<TOTAL-ASSETS> 248,570
<CURRENT-LIABILITIES> 19,459
<BONDS> 10,374
0
0
<COMMON> 412
<OTHER-SE> (17,161)
<TOTAL-LIABILITY-AND-EQUITY> 248,570
<SALES> 0
<TOTAL-REVENUES> 41,843
<CGS> 0
<TOTAL-COSTS> 19,287
<OTHER-EXPENSES> 11,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513
<INCOME-PRETAX> (26,035)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,035)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
