SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report:
May 5, 1998
---------------
(Date of earliest event reported)
Electric Lightwave, Inc.
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(Exact name of Registrant as specified in charter)
Delaware 0-23393 93-1035711
- ---------------------------- ------------------------ ----------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4400 NE 77th Avenue, Vancouver, Wa 98662
- ----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(360)892-1000
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(Registrant's telephone number, including area code)
8100 NE Parkway Drive, Suite 150
Vancouver, Wa 98662
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(Former name or address, if changed since last report)
<PAGE>
Item 5. Other Events
Exhibit 99 Financial results for the quarter ended March 31, 1998.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Electric Lightwave, Inc.
--------------------------
Registrant
By:/s/ Kerry Rea
-----------------------------
Vice President and Controller
Date: May 5, 1998
EXHIBIT 99
ELECTRIC LIGHTWAVE, INC.
Index to Financial Statements
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<CAPTION>
<S> <C>
Page No.
Balance Sheets at March 31, 1998 and December 31, 1997 2
Statements of Operations for the Three Months Ended March 31, 1998 and 1997 3
Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 4
Notes to Financial Statements 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
1
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ELECTRIC LIGHTWAVE, INC.
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1998 December 31, 1997
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ASSETS
Current assets:
Cash $ 21,849 $ 26,531
Trade receivables, net 12,393 12,569
Other receivables 7,573 7,688
Other current assets 1,619 844
-------------- -------------
Total current assets 43,434 47,632
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Property, plant and equipment 352,062 328,664
Less accumulated depreciation and amortization ( 28,247) (25,791)
-------------- -------------
Property, plant and equipment, net 323,815 302,873
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Other assets 6,125 9,457
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Total assets $ 373,374 $ 359,962
============== =============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 30,610 $ 50,237
Taxes other than income taxes 3,783 3,136
Due to Citizens Utilities Company 7,281 944
Other current liabilities 3,743 3,102
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Total current liabilities 45,417 57,419
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Deferred credits and other 1,720 1,800
Deferred income taxes payable 13,892 16,918
Capital lease obligation 12,732 10,511
Long-term debt 100,000 60,000
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Total liabilities 173,761 146,648
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Shareholders' Equity:
Common stock issued, $.01 par value
Class A 85 85
Class B 412 412
Additional paid-in-capital 317,802 316,731
Deficit (118,686) (103,914)
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Total shareholders equity 199,613 213,314
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Total liabilities and shareholders' equity $ 373,374 $ 359,962
============== =============
The accompanying Notes are an integral part of these Financial Statements
2
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ELECTRIC LIGHTWAVE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands, except per-share amounts)
1998 1997
------------ -----------
Revenues $ 20,057 $ 10,519
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Operating expenses:
Network access 9,212 4,930
Sales and marketing 4,940 2,906
Depreciation and amortization 3,884 2,817
Other operating expenses 15,681 9,937
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Total operating expenses 33,717 20,590
------------ -----------
Loss from operations (13,660) (10,071)
Interest expense (net of capitalized interest of $1,788 for 1998 and $345 for 1997) 911 91
Interest income 167 -
------------ -----------
Net loss before income taxes and cumulative effect of change in accounting
principle (14,404) (10,162)
Income tax benefit (2,449) -
------------ -----------
Net loss before cumulative effect of change in accounting principle (11,955) (10,162)
Cumulative effect of change in accounting principle (net of $577 income tax benefit) 2,817 -
------------ -----------
Net loss $ (14,772) $ (10,162)
============ ===========
Net loss before cumulative effect of change in accounting principle per common share:
Basic $ (.24) $ (.24)
Diluted $ (.24) $ (.24)
Net loss per common share:
Basic $ (.30) $ (.24)
Diluted $ (.30) $ (.24)
Weighted average shares outstanding 49,685 41,685
The accompanying Notes are an integral part of these Financial Statements.
3
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ELECTRIC LIGHTWAVE, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
1998 1997
--------------- ---------------
Net cash used for operating activities $ (6,541) $ (5,562)
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Cash flows used for investing activities:
Capital expenditures (38,028) (20,354)
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Cash flows from financing activities:
Debt borrowings 40,000 -
Citizens fundings - 26,518
Principle payments on capital lease obligation (113) -
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Net cash provided by financing activities 39,887 26,518
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Net increase (decrease) in cash (4,682) 602
Cash at January 1, 26,531 611
=============== ===============
Cash at March 31, $ 21,849 $ 1,213
=============== ===============
Supplemental cash flow information:
Cash paid for interest $ 1,153 $ -
Other non-cash transactions with Citizens:
Deferred income taxes $ - $ 1,559
Capitalized interest $ 630 $ 345
Other non-cash transaction from modification of capital lease:
Increase in capital lease asset $ 2,174 $ -
Increase in capital lease obligation $ 2,174 $ -
The accompanying Notes are an integral part of these Financial Statements.
4
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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). The 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. Certain information and footnote
disclosures have been condensed pursuant to Securities and
Exchange Commission rules and regulations. 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 current presentation.
(b) COMPREHENSIVE INCOME In June 1997 the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards 130 (SFAS 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
adopted SFAS 130 on January 1, 1998. The Company currently has no
items of "other comprehensive income" as defined in the
Statement.
(c) 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 first quarter 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 No. 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 No. 98
had the effect of increasing outstanding shares by 520,000 for
the first quarter 1997.
5
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ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(2) Change in Accounting Principle
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
released Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities". The SOP, which is effective for periods beginning after
December 15, 1998, 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 elected to early adopt 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 statements of operations for the first quarter 1998,
net of income tax benefit of $577,000.
(3) Commitments and Contingencies
Effective March 20, 1998, the Company amended two previous lease agreements for
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 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 the amended lease, a third
route from Seattle to Spokane, Washington was added and both previous leases
were combined into a 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. The effect of
the amended lease was to increase the book value of the capital lease asset and
obligation by $2,174,000.
(4) Related Party Transactions
A summary of the activity in the amount due to Citizens for the quarter ended
March 31, 1998 is as follows:
($ in thousands)
Balance beginning of period $ 944
Guarantee fees 1,747
Administrative services and other items 4,590
=========
Balance end of period $ 7,281
=========
6
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ELECTRIC LIGHTWAVE, INC.
NOTES TO FINANCIAL STATEMENTS
(5) Income Taxes
Income taxes for the first quarter 1998 decreased $3,026,000 as compared
with the prior year period primarily due to the recognition of a portion of
the operating loss benefit which is not offset with a valuation allowance.
The effective income tax rate for the first quarter is 17% compared to 0%
for the prior year period. The change in the effective income tax rate is
due to the full valuation allowance reducing the tax benefit of the
operating loss for the prior year period compared to a partial valuation
allowance for the current year period based on the estimated effective
annual income tax benefit rate. A full valuation allowance was necessary in
the prior period due to the uncertainty of realizing the benefit of those
operating losses in the future as well as 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. For
the post IPO period, which includes the first quarter 1998, the tax benefit
of the Company's operating losses can be recognized to the extent of net
deferred income tax liabilities. 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This quarterly report on Form 10-Q may contain 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. All forward-looking statements (including oral representations)
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
RBOCs 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 following information is unaudited and should be read in
conjunction with the financial statements and related notes to financial
statements included in this report. The Company has no obligation to update
or revise forward-looking statements to reflect the occurrence of future
events or circumstances.
The Company is a facilities-based integrated communications provider
(ICP) providing a broad range of communications services in five major
market clusters in the western United States including: Portland, Oregon;
Seattle, Washington; Salt Lake City, Utah; Sacramento, California; and
Phoenix, Arizona (hub cities) and their respective surrounding areas. 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).
(a) Liquidity and Capital Resources
For the three months ended March 31, 1998 the Company used the remaining
proceeds from its initial public offering and proceeds from a credit
facility to fund operating and capital expenditures.
The Company has a five-year $400,000,000 revolving bank credit facility.
Citizens has guaranteed all of the Company's obligations under this
credit facility. The Company drew $40,000,000 on its line of credit
during the first quarter 1998, and as of March 31, 1998, $100,000,000 was
outstanding under this facility.
7
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ELECTRIC LIGHTWAVE, INC.
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 $352 million at March 31, 1998
from $329 million at December 31, 1997. 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. 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.
The Company continues to evaluate potential acquisitions that are
consistent with its long-range business plans of generating revenue growth
through the expansion of its network and customer base. If any acquisitions
are consummated, the Company expects that additional debt or equity
financing would be required. The Company believes that it can attract such
financing at reasonable terms.
8
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ELECTRIC LIGHTWAVE, INC.
(b) Results of Operations
REVENUES
Revenues increased $9.5 million, or 91%, over the first quarter 1997 due to
the build out of the five market clusters in which the Company has a
presence. The Company added 365 customers and 26,600 access line
equivalents (42% and 181% increases over first quarter 1997, respectively).
For the three months
ended March 31
--------------------------------------------
($ in thousands)
%
1998 1997 Increase
--------- ------------- --------
Dedicated services $ 9,107 $ 6,081 50%
Local dial tone services 6,024 1,245 384%
Long distance services 1,822 1,501 21%
Enhanced services 3,104 1,692 83%
========== ==============
Total $ 20,057 $ 10,519 91%
========== ==============
Dedicated services revenues increased $3.0 million, or 50%, over the first
quarter of 1997 primarily due to a 42% increase in customers and an
increase in route miles of 69% over the first quarter 1997.
Local dial tone services revenues increased $4.8 million, or 384%, over the
first quarter of 1997 primarily due to a 181% increase in access line
equivalents. The successful sales and marketing of the ISDN product
generated $1.3 million of increased revenue in the first quarter 1998 over
the first quarter 1997. Carrier and local access revenue increased $3.2
million over the first quarter of 1997, which included $1.1 million of
revenue related to the reversal of an allowance previously provided for
access fees that had been disputed by a carrier.
Long distance services revenues increased $.3 million, or 21%, over the
first quarter of 1997 primarily due to a $.6 million increase in Advantage
Long Distance, the Company's retail long distance service. The increase is
attributable to an overall expansion of the Company's sales force and the
Company's success in its product bundling strategy. The increase in retail
long distance was partially offset by decreases in prepaid services and
wholesale long distance.
Enhanced services revenues increased $1.4 million, or 83%, over the first
quarter of 1997 primarily due to increased sales of the frame relay and
Internet products.
9
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ELECTRIC LIGHTWAVE, INC.
OPERATING EXPENSES
Operating expenses increased $13.1 million, or 64% over the first quarter
1997 due to the Company's rapid network and customer growth as reflected in
revenues, offset in part by economies of scale from infrastructure and
network development.
For the three months
ended March 31
--------------------------------------------
($ in thousands)
%
1998 1997 Increase
---------- -------------- -----------
Network access $ 9,212 $ 4,930 87%
Sales and marketing 4,940 2,906 70%
Depreciation & amortization 3,884 2,817 38%
Other operating expenses 15,681 9,937 58%
========== ==============
$ 33,717 $ 20,590 64%
========== ==============
Network access expenses increased $4.3 million, or 87%, over the first
quarter of 1997 primarily due to the Company's expansion of its frame relay
and internet products, and its customer base.
Sales and marketing expenses increased $2.0 million, or 70%, over the first
quarter of 1997 primarily due to the Company's continued focus on expanding
direct retail sales in the markets it had entered as of the first quarter
1997, as well as additional sales and marketing activities to support its
entry into new markets such as Boise, Idaho; Los Angeles and San Francisco,
California; and Spokane, Washington.
Depreciation and amortization expense increased $1.1 million, or 38%, over
the first quarter of 1997 primarily due to higher plant in service balances
for newly completed communications network facilities and electronics.
Other operating expenses increased $5.7 million, or 58%, over the first
quarter of 1997 primarily due to increases in salaries and related expenses
to support the expanded delivery of services, new product development, and
an expanded customer service organization.
10
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ELECTRIC LIGHTWAVE, INC.
INTEREST EXPENSE / INTEREST INCOME
For the three months
ended March 31
--------------------------------------------
($ in thousands)
%
1998 1997 Increase
----------- ------------- -----------
Interest expense $ 911 $ 91 901%
Interest income 167 - N/A
Interest expense (net of capitalized interest of $1.8 million and $.3
million for 1998 and 1997, respectively) increased $.8 million, or 901%,
over the first quarter of 1997 primarily due to interest and guarantee fees
associated with the Company's borrowings against its credit facility and
construction agency agreement.
Interest income increased $.2 million over the first quarter of 1997
primarily due to interest earned on cash and investments maintained in a
money market fund.
INCOME TAX BENEFIT
For the three months
ended March 31
--------------------------------------------
($ in thousands)
%
1998 1997 Increase
---------- -------------- -----------
Income tax benefit $ 2,449 $ - N/A
Income tax benefit increased $3.0 million, including $.6 million netted
against cumulative effect of change in accounting principle, over the first
quarter of 1997 primarily due to net operating loss carryforwards.
11
