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 30,1999
<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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-23393
ELECTRIC LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1035711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 NE 77TH AVENUE
VANCOUVER, WASHINGTON 98662
(Address, zip code of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (360) 816-3000
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 26, 1999 were:
COMMON STOCK CLASS A 8,769,934
COMMON STOCK CLASS B 41,165,000
================================================================================
<PAGE>
Electric Lightwave, Inc.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Balance Sheets at September 30, 1999 and December 31, 1998 (unaudited) 2
Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 (unaudited)......................... 3
Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 (unaudited)......................... 4
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (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 18
PART II. OTHER INFORMATION 19
SIGNATURE.......................................................... 21
</TABLE>
-1-
<PAGE>
Electric Lightwave, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
----------- -----------
Current assets:
<S> <C> <C>
Cash ........................................... $ 24,612 $ 13,120
Trade receivables, net.......................... 32,431 20,320
Other receivables............................... 1,595 2,671
Other current assets............................ 1,540 1,953
----------- -----------
Total current assets........................... 60,178 38,064
----------- -----------
Property, plant and equipment..................... 723,141 528,582
Less accumulated depreciation and amortization.... (65,212) (40,912)
----------- -----------
Property, plant and equipment, net.............. 657,929 487,670
----------- -----------
Other assets...................................... 8,875 6,575
----------- -----------
Total assets................................... $ 726,982 $ 532,309
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities........ $ 56,151 $ 61,760
Current portion of long-term debt............... 15,412 351
Due to Citizens Utilities Company............... 15,251 5,254
Interest payable................................ 9,853 1,833
Other accrued taxes............................. 9,582 5,577
Other current liabilities....................... 3,778 3,191
----------- -----------
Total current liabilities...................... 110,027 77,966
Deferred credits and other........................ 1,600 1,834
Deferred income taxes payable..................... 2,769 1,760
Long-term debt.................................... 560,574 302,256
----------- -----------
Total liabilities.............................. 674,970 383,816
----------- -----------
Shareholders' equity:
Common stock issued, $.01 par value
Class A........................................ 88 86
Class B........................................ 412 412
Additional paid-in-capital...................... 323,974 321,926
Deficit......................................... (272,462) (173,931)
----------- -----------
Total shareholders' equity..................... 52,012 148,493
----------- -----------
Total liabilities and shareholders' equity..... $ 726,982 $ 532,309
=========== ===========
</TABLE>
See accompanying notes.
-2-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
(Unaudited) For the three months ended September 30,
1999 1998
----------- -----------
<S> <C> <C>
Revenues........................................... $ 48,602 $ 25,664
----------- -----------
Operating expenses:
Network access .................................. 14,719 12,317
Operations....................................... 10,732 7,308
Selling, general and administrative.............. 32,017 21,243
Depreciation and amortization.................... 9,807 4,090
----------- -----------
Total operating expenses........................ 67,275 44,958
----------- -----------
Loss from operations............................. (18,673) (19,294)
Interest expense and other......................... 11,424 2,742
----------- -----------
Net loss before income taxes..................... (30,097) (22,036)
Income tax expense (benefit)....................... 277 (3,631)
----------- -----------
Net Loss......................................... $ (30,374) $ (18,405)
=========== ===========
Net loss per common share:
Basic........................................... $ (.61) $ (.37)
Diluted......................................... $ (.61) $ (.37)
Weighted average shares outstanding................ 49,915 49,711
</TABLE>
See accompanying notes.
-3-
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
(Unaudited) For the nine months ended September 30,
1999 1998
----------- -----------
<S> <C> <C>
Revenues.......................................... $ 132,913 $ 67,164
----------- -----------
Operating expenses:
Network access ................................. 63,645 31,389
Operations...................................... 29,399 19,082
Selling, general and administrative............. 88,231 54,206
Depreciation and amortization................... 24,951 11,754
----------- -----------
Total operating expenses....................... 206,226 116,431
----------- -----------
Loss from operations............................ (73,313) (49,267)
Interest expense and other........................ 24,271 4,953
----------- -----------
Net loss before income taxes and cumulative effect
of change in accounting principle.............. (97,584) (54,220)
Income tax expense (benefit)...................... 947 (9,102)
----------- -----------
Net loss before cumulative effect of change in
accounting principle........................... (98,531) (45,118)
Cumulative effect of change in accounting principle
(net of $577 income tax benefit)................ -- 2,817
----------- -----------
Net loss........................................ $ (98,531) $ (47,935)
=========== ===========
Net loss per share before cumulative effect of change
in accounting principle:
Basic.......................................... $ (1.98) $ (.91)
Diluted........................................ $ (1.98) $ (.91)
Net loss per common share:
Basic.......................................... $ (1.98) $ (.96)
Diluted........................................ $ (1.98) $ (.96)
Weighted average shares outstanding............... 49,846 49,697
</TABLE>
See accompanying notes.
-4-
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) For the nine months ended September 30,
1999 1998
----------- -----------
<S> <C> <C>
Net cash used for operating activities............. $ (76,421) $ (29,507)
----------- -----------
Cash flows used for investing activities:
Capital expenditures............................. (138,676) (119,154)
Other............................................ 119 --
----------- -----------
Net cash used for investing activities (138,557) (119,154)
----------- -----------
Cash flows from financing activities:
Net revolving bank credit facility
proceeds (repayments).......................... (84,000) 134,000
Note issuance.................................... 325,000 --
Capital lease payments........................... (12,816) (256)
Other............................................ (1,714) 284
----------- -----------
Net cash provided by financing activities....... 226,470 134,028
----------- -----------
Net increase (decrease) in cash.................... 11,492 (14,633)
Cash at January 1,................................. 13,120 26,531
----------- -----------
Cash at September 30,.............................. $ 24,612 $ 11,898
=========== ===========
Supplemental cash flow information:
Cash paid for interest, net of capitalized
portion........................................ $ 16,572 $ 4,784
Non-cash increase in capital lease asset
and obligation................................. 45,195 25,830
</TABLE>
See accompanying notes.
-5-
<PAGE>
Electric Lightwave, Inc.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND USE OF ESTIMATES
Electric Lightwave, Inc. is referred to as "we", "us" or "our" in this
report. We have prepared these unaudited financial statements 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, we have condensed or omitted
certain information and footnote disclosures. In our opinion, these
financial statements include all adjustments and recurring accruals
necessary to present fairly the results for the interim periods shown.
Preparing financial statements in conformity with GAAP requires us to
make estimates and assumptions which affect the amounts of assets,
liabilities, revenues and expenses we have reported and our disclosure
of contingent assets and liabilities at the date of the financial
statements. The results of the interim periods are not necessarily
indicative of the results for the full year. We have made certain
reclassifications of balances previously reported to conform to the
current financial statement presentation. You should read these
financial statements in conjunction with the audited financial
statements and the related notes included in our Annual Report on Form
10-K for the year ended December 31, 1998.
B. CAPITALIZED INTEREST
Property, plant and equipment includes interest costs capitalized during
the installation and expansion of our communications networks.
Approximately $2,697,000 and $2,079,000 of interest costs were
capitalized in the three months ended September 30, 1999 and 1998,
respectively, with approximately $8,864,000 and $5,917,000 capitalized
in the nine months ended September 30, 1999 and 1998, respectively.
C. RECIPROCAL COMPENSATION
We have various interconnection agreements with U S West Communications,
Inc. (US West) and GTE Corporation (GTE), the Incumbent Local Exchange
Carriers (ILECs) in the states in which we operate. These agreements
govern reciprocal compensation relating to the transport and termination
of traffic between the ILEC's networks and our network. We recognize
reciprocal compensation revenues as earned, based on the terms of the
interconnection agreements.
We have a process in place to monitor regulatory matters related to
reciprocal compensation specifically for us as well as others in the
industry. Using the information available, we review revenue recognition
on reciprocal compensation and adjust revenues as we deem appropriate.
D. NET LOSS PER SHARE
We follow the provisions of Statement of Financial Accounting Standards
(SFAS) 128, "Earnings Per Share" which requires presentation of both
basic and diluted earnings per share (EPS) on the face of the statement
of operations. Basic EPS is computed using the weighted average number
of common shares outstanding during the period. The diluted EPS
calculation assumes that all stock options or contracts to issue common
stock were exercised or converted into common stock at the beginning of
the period. We have excluded certain common stock equivalents from our
diluted EPS calculation during the quarters ended September 30, 1999 and
1998 because the effect would have reduced our net loss per share.
-6-
<PAGE>
2. EXIT COSTS
In the third quarter 1999, we announced two strategic decisions that led
to $1.5 million in employee severance and shutdown costs that we
recorded in selling, general and administrative expense in our
Statements of Operations in the third quarter 1999. On August 24, 1999,
we announced that we were eliminating our prepaid calling card and
videoconferencing products, effective November 1, 1999. This initiative
was taken as a result of our decision to focus on our core business
strategy. Prepaid calling cards are a high-volume, low-margin product
that we determined did not support our strategy of accelerating EBITDA
profitability. On September 1, 1999, we announced that we were
consolidating our national retail sales efforts in Dallas, closing six
retail sales offices in the eastern U.S. by October 8, 1999. The offices
closed included Cleveland, Chicago, Atlanta, Washington D.C., New York
and Philadelphia. We have maintained all of our data points-of-presence
and wholesale sales offices.
As a result of both of these decisions, we eliminated approximately 68
positions, and incurred charges relating to employee severance and
facility shutdown costs. The following table summarizes the activity in
the related accrual account during the quarter ended September 30, 1999.
The balance of the exit cost accrual at September 30, 1999 is included
in Accounts Payable and Accrued Liabilities on our balance sheet and is
anticipated to be paid within 12 months.
<TABLE>
<CAPTION>
Balance
September 30,
($ IN THOUSANDS) Exit Costs Payments 1999
----------- ---------- -------------
<S> <C> <C> <C>
Severance related costs............... $ 681 $ 342 $ 339
Network and facilities costs...... 799 300 499
------- ------- -------
$ 1,480 $ 642 $ 838
======= ======= =======
</TABLE>
3. CHANGE IN ACCOUNTING PRINCIPLE
On April 3, 1998, the Accounting Standards Executive Committee of the
AICPA released Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-Up Activities". The SOP requires that at the beginning of the
fiscal year of adoption, any remaining deferred start-up costs be
expensed and reported as a change in accounting principle. Future costs
of start-up activities should then be expensed as incurred.
We adopted SOP 98-5 effective January 1, 1998. Previous to January 1,
1998, we had capitalized certain third party direct costs incurred in
connection with negotiating and securing initial rights-of-way and
developing network design for new markets or locations. These amounts
were being amortized over five years. We have reported the remaining net
book value of these deferred amounts of $3,394,000 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>
4. COMMITMENTS AND CONTINGENCIES
Our license agreements for the exclusive use of long-haul facilities
connecting our 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. If our
traffic on any of these networks falls below the minimums, the licensor
will obtain the right to terminate our exclusive use of these fibers. We
have entered arbitration to resolve a dispute regarding the minimum
usage required for exclusive use of our long-haul facilities connecting
Portland to Seattle and Portland to Spokane.
In March 1999, we entered into a 20-year fiber-swap agreement, in which
we will exchange unused fiber on our network for unused fiber on another
carrier's network. This exchange will provide us with fiber from Salt
Lake City to Denver, continuing on to Dallas. We will provide the other
carrier with unused fiber on our long-haul network that connects Spokane
and Seattle, Washington, Portland, Oregon and the Bay Area in
California. We anticipate incorporating the other carrier's fiber into
our network during 2000. We will pay the other carrier approximately
$101 million over 20 years beginning in 2000. The other carrier will pay
us approximately $77 million over the same time period.
We were previously leasing network capacity through a private-line
services agreement with a third party which allows us to utilize the
third party's national fiber optic network through 2007, and had a
take-or-pay commitment of $122 million. We amended the private-line
services agreement in June 1999 to reflect that we are now leasing
certain capacity under a new 20 year capital lease that had previously
been leased under the private-line services agreement. As a result of
this amendment, our total minimum commitment under the private-line
services agreement was reduced to $90 million for the remaining period
of July 1, 1999 through December 31, 2007.
5. RELATED PARTY TRANSACTIONS
Citizens Utilities Company (Citizens) owns approximately 82% of our
common stock. Through May 1999, Citizens had been pursuing its
separation plan. Between May 27, and September 21, 1999, Citizens
announced that it had entered into agreements to purchase 776,000
telephone access lines for $2.5 billion. Permanent funding for the
acquisitions will come from the sale of Citizens' public services
properties. On October 18, 1999, Citizens announced it had agreed to
sell its water and wastewater operations for $835 million. Citizens is
continuing to investigate and review opportunities for the acquisition
of new telecommunications properties.
This table summarizes the activity in the liability account Due to
Citizens for the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
<S> <C>
Balance, December 31, 1998................. $ 5,254
Guarantee fees............................. 13,687
Administrative services:
Services provided by Citizens........... 6,028
ELI expenses paid by Citizens........... 11,282
Payments to Citizens....................... (21,000)
---------
Balance, September 30, 1999................ $ 15,251
=========
</TABLE>
-8-
<PAGE>
6. SIGNIFICANT CUSTOMER
During the three and nine months ended September 30, 1999, US West
accounted for 19% of our total revenues. During the three and nine
months ended September 30, 1998, US West accounted for 18% and 17%,
respectively, of our total revenues.
7. INCOME TAXES
Citizens includes us in their consolidated federal income tax return
which uses a calendar year reporting period. We record income taxes as
if we were a stand-alone company. We recorded income tax expense of
$277,000 and $947,000 in the three and nine months ended September 30,
1999, respectively. This expense represents the deferred tax effect of
the increase in temporary differences between our GAAP financial
statements and our tax return that may not be fully offset with the use
of tax loss carryforwards when the timing differences reverse in future
periods.
The income taxes payable by Citizens' consolidated group have been
reduced as a consequence of our losses for tax purposes in past years.
We would be able to carry-forward our tax losses to future periods to
offset net income for tax purposes in these future periods had we been
stand-alone for tax purposes. In accordance with the tax sharing
agreement, Citizens has agreed to reimburse us for the taxes we would
have to pay in the future, if we have taxable income, to the extent that
these carryforwards would otherwise remain available on a stand-alone
basis. This is a result of Citizens utilizing our tax loss
carryforwards.
8. LONG-TERM DEBT
The components of our long-term debt are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
($ IN THOUSANDS) 1999 1998
-------------- --------------
<S> <C> <C>
Senior unsecured notes............ $ 325,000 $ --
Revolving bank credit facility.... 200,000 284,000
Capital leases.................... 35,574 18,256
--------- ---------
$ 560,574 $ 302,256
========= =========
</TABLE>
We issued $325 million of five-year senior unsecured notes in April
1999. The notes have an interest rate of 6.05% and will mature on May
15, 2004. Citizens has initially guaranteed the notes for an annual fee
of 4.0% of the outstanding balance.
We incurred $2.6 million of costs related to issuing the senior
unsecured notes. We have recorded these amounts in other assets on our
September 30, 1999 balance sheet, and are amortizing them to interest
expense using the effective interest method over the term of the notes.
We also recorded $30,180,000 of long-term capital lease obligations
during the nine months ended September 30, 1999. The obligations
primarily relate to constructed portions of our long-haul networks.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
We caution you that this quarterly report on Form 10-Q contains
forward-looking statements within the meaning of the Securities and
Exchange Act of 1934. Forward-looking statements (including oral
representations) are only predictions or statements of our current
plans, which we review on a continual basis, and are based on our
beliefs, expectations and assumptions and on information currently
available to us. The words "may", "should", "expect", "anticipate",
"intend", "plan", "continue", "believe", "estimate" or similar
expressions used in this report are intended to identify forward-looking
statements.
The forward-looking statements in this quarterly report on Form 10-Q
involve certain risks, uncertainties and assumptions. They are not
guarantees of future performance. Factors that may cause actual results
to differ materially from those expressed or implied in any
forward-looking statements include, but are not limited to, any of the
following possibilities:
* if the local and overall economic conditions of our markets are less
favorable than we expected;
* if there are changes in the nature and pace of technological advances in
our industry;
* if competitive pressure in the telecommunications industry increases in
any of our markets because of the entrance of new competitors, the
combination of existing competitors and/or the more effective provision
of products and services from our competitors, including ILECs, or other
public utilities;
* if our business strategy or its execution, including financial
performance goals, is not as successful as we anticipate;
* if we are not able to maintain exclusive use of fiber on our performance
based leases;
* if state or federal regulatory changes are implemented that assist our
competitors, impair our competitive position, threaten our costs or
impact our rate structures, including the ability to bill reciprocal
compensation for calls terminated to ISPs;
* if we do not receive the services and support which we require from the
regional ILECs or cannot maintain our current relationships with ILECs;
* if we are not able to effectively manage rapid growth, including
integrating any businesses acquired;
* if we are not able to correctly identify future markets, successfully
expand existing ones, or successfully expand through acquisitions;
* if the mix of products and services we are able to offer in our target
markets is not appropriate to the demands of our customers;
* if we are not able to obtain additional financing; or
* if our stock price is volatile.
You should consider these important factors in evaluating any statement
contained in this report and/or made by us or on our behalf. We have no
obligation to update or revise forward-looking statements.
- --------------------------------------------------------------------------------
-10-
<PAGE>
The following information has not been audited. You should read this
information in conjunction with the condensed financial statements and
related notes to financial statements included in this report. In
addition, please see our Management Discussion and Analysis of Financial
Condition and Results of Operations, audited financial statements and
related notes included in our Annual Report on Form 10-K for the year
ended December 31, 1998.
OVERVIEW
We have built an extensive fiber-optic network in the western United
States, which we use to provide products and services to customers in
seven major cities and their surrounding areas. In addition, we provide
data services in certain other strategic markets. Our product offerings
include:
* Network services - includes dedicated service between two points for a
customer's exclusive use. We offer this in both local and long-haul
applications.
* Local telephone services - consists of the delivery of local dial tone
and related services, including reciprocal compensation.
* Long distance services - includes retail and wholesale long distance
phone services.
* Data services - includes a wide range of products to deliver large
quantities of data from one location to another through Asynchronous
Transfer Mode (ATM), Frame Relay and Internet Protocol packet
technologies. These technologies group data (voice, video, images and
character-based data) into small packets of information and transmit the
packets over a network.
We are investing in our network in the west and are developing long-haul
networks that will connect all of our seven major cities and several of
our data-only cities with high-capacity fiber-optic cable and
electronics. Certain segments of our long-haul networks are currently
operational, and we expect to complete the remainder of this network by
the first quarter 2000. During March 1999, we entered into a fiber-swap
agreement, which exchanges unused fiber on our network for unused fiber
on another carrier's network. This exchange will provide us with fiber
from Salt Lake City, Utah to Denver, Colorado and continuing on to
Dallas, Texas. We anticipate incorporating the other carrier's fiber
into our network during 2000.
Refer to Note 5, in Part I, Item 1, for a discussion concerning our
relationship with Citizens, which owns 82% of our common stock.
A. LIQUIDITY AND CAPITAL RESOURCES
We used net debt borrowings of $241 million to fund operating and
capital expenditures in the nine months ended September 30, 1999. The
source of these borrowings was our revolving bank credit facility and
$325 million of notes which we issued during April 1999 in a private
placement. The notes are five-year senior unsecured notes, have an
annual interest rate of 6.05% and will mature on May 15, 2004. We used
the majority of the net proceeds from the issuance to repay outstanding
borrowings under our revolving bank credit facility. As a result, we
have $200 million of our bank credit facility which remains available
through November 2002 to fund future operating and capital expenditures.
Citizens has guaranteed both the revolving bank credit facility and the
notes for per annum fees of 3.25% and 4.0%, respectively, assessed on
the respective outstanding balances.
-11-
<PAGE>
We expect that the $200 million remaining on our revolving bank credit
facility will be adequate to fund operating and capital expenditures
through the second quarter 2000. At that point, we will need to obtain
additional debt or equity financing. Citizens has historically provided
the necessary bridge financing and other guarantees in support of our
obtaining financing. We cannot provide assurance that we will be able to
obtain the required financing or bridge financing, or that we will be
able to obtain it on reasonable terms.
We continue to invest in the installation, development and expansion of
our new and existing communications networks. A significant portion of
these expenditures is incurred before any revenues are realized. Our
capital additions were approximately $195 million in the nine months
ended September 30, 1999, including $45 million in non-cash capital
lease additions. These expenditures, combined with our operating
expenses, have resulted in negative cash flows and operating losses. We
expect to continue incurring operating losses and negative cash flows
until we can establish an adequate customer base and revenue stream to
support our network. We cannot provide assurance that we will achieve or
sustain profitability or generate sufficient positive cash flow to fund
our operating and capital requirements or service debt.
We continue to evaluate opportunities to generate revenue growth through
making substantial investments in the continued development of our
existing networks, new long-haul routes and entry into new markets.
These opportunities may include acquisitions and/or joint ventures that
are consistent with our business plan of generating revenue growth
through expansion of our network and customer base. Any such
acquisitions, investments and/or strategic arrangements, if available,
could require additional financial resources and/or reallocation of our
financial resources.
We were previously leasing network capacity through a private-line
services agreement with a third party which allows us to utilize the
third party's national fiber optic network through 2007, and had a
take-or-pay commitment of $122 million. We amended the private-line
services agreement in June 1999 to reflect that we are now leasing
certain capacity under a new 20 year capital lease that had previously
been leased under the private-line services agreement. As a result of
this amendment, our total minimum commitment under the private-line
services agreement was reduced to $90 million for the remaining period
of July 1, 1999 through December 31, 2007. Effective June 30, 1999, we
reported a capital lease asset and related obligation of approximately
$7.5 million on our balance sheet.
Since December 31, 1998, we have added $45.2 million in capital lease
obligations, including the $7.5 million discussed above. We have made
payments totaling $12.8 million, leaving a balance of $51 million of
capital lease obligations at September 30, 1999, of which $15.4 million
is presented in the current portion of long-term debt and $35.6 million
in long-term debt.
OTHER MATTERS
YEAR 2000
The Year 2000 (Y2K) issue stems from the fact that many computer
programs worldwide use two digits, rather than four, to define the
applicable year. For instance, many computers on January 1, 2000 may
assume that 01/01/00 is the first day of the year 1900 rather than 2000.
Massive system failures may occur globally if this issue is not properly
addressed. We have developed a Y2K Initiative (the Initiative) to
mitigate the impact of the Y2K issue for our internal systems and the
systems that we rely on indirectly from third parties.
-12-
<PAGE>
Under the Initiative, we have formed a cross-functional Y2K project team
that reports to the Chief Information Officer (CIO). The CIO has
authority to establish methodologies, approve expenditures, and marshal
additional resources as necessary. A full-time consultant project
manager, who reports regularly to the CIO, manages the Initiative and
oversees the project team. The CIO is responsible for researching,
planning, executing, implementing and completing the Initiative.
The three functional categories evaluated in the Initiative include:
* Communications Network - software and electronics that process voice and
data information relating to our communications operations, including
transmission equipment,
* Information Technology (IT) - consists of all internal hardware and
software used to support our financial and administrative operations,
and
* Facilities - consists of all systems necessary to run an office
including security systems, fire suppression, generators, rectifiers,
batteries and components with embedded technology at our headquarters
and leased facilities.
The Initiative is composed of three primary phases that we are applying
to each of the three functional categories.
* Phase I - Inventory and assessment
Inventory and assessment is the process of identifying all relevant
systems and information sources company-wide, performing a risk-based
analysis of each, categorizing each risk according to its impact on
our mission, and making a preliminary determination of Y2K
compliance. Phase I is complete for all functional categories.
* Phase II - Remediation
Remediation is the process of making changes to the hardware,
software or services in order to become Y2K compliant. Phase II is
complete for all functional categories.
* Phase III - Testing, contingency planning and certification
Testing is the process of verifying that systems and processes will
continue to operate properly in the Year 2000 and beyond. Testing is
required for all mission-critical systems and information sources. We
have performed steps to test hardware and software and reviewed
testing documentation prepared by vendors or service providers.
Testing is complete for all functional categories.
Contingency planning is required for all mission-critical systems and
information sources. The contingency plan will include an evaluation
of the system or information source business risk, vulnerabilities,
contingency steps and containment measures. Contingency planning is
complete for all functional categories.
-13-
<PAGE>
Year 2000 certification is achieved when all Year 2000 milestones
have been successfully completed and approved by the project manager.
Certification is substantially complete for all functional
categories.
We anticipate the cost to address the Y2K issue to be approximately $2.3
million. This cost estimate is based on current information, and there
are no guarantees that costs will not be higher than we anticipate. As
of September 30, 1999, we had incurred $1.7 million of Y2K costs.
Within the Communications Network, we depend on the ILEC and other
carriers to provide systems that are Y2K compliant to allow us to
connect with some of our customers. Within IT, we depend on
appropriately skilled internal and external experts to develop software.
Within Facilities, we depend on utility suppliers to provide services to
allow our network to continue to operate. If we are not Y2K compliant,
the worst case scenario would be a disruption of service or the
inability to bill or collect revenues from our customers, which could
have a material adverse effect on our business. However, we believe this
is unlikely and that we will succeed in mitigating Y2K issues. As an
added precaution, we have formed a Y2K Rapid Response Team composed of
experts from key operational departments that will be able to quickly
respond in the event of Y2K failures.
ELECTION OF RUDY GRAF AS VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
On October 8, 1999, our Board of Directors appointed Rudy Graf as Vice
Chairman and Chief Executive Officer. Mr. Graf, who has also been
appointed President and Chief Operating Officer of Citizens, succeeds
Daryl A. Ferguson, who has retired. Mr. Graf was President and Chief
Operating Officer of Centennial Cellular Corp., a provider of wireless
telephone services throughout the United States and Puerto Rico from
1991 to 1999. Prior to 1991, Mr. Graf was Regional Vice President of
Metromedia Telecommunications. Before that, he spent 13 years with AT&T
in a variety of management positions. Mr. Graf earned a B.A. from St.
Thomas University in Miami, Florida.
RECIPROCAL COMPENSATION
We recognized reciprocal compensation revenues for the three and nine
months ended September 30, 1999 of $10.1 million and $24.8 million,
respectively. Net trade accounts receivable relating to reciprocal
compensation at September 30, 1999 totaled $13.5 million, compared to
$10.4 million at December 31, 1998.
We have a process in place to monitor regulatory matters related to
reciprocal compensation specifically for us as well as others in the
industry. Using the information available, we review revenue recognition
on reciprocal compensation and adjust revenues as we deem appropriate.
On February 25, 1999, the FCC issued a Declaratory Ruling and Notice of
Proposed Rulemaking that categorized calls terminated to ISPs as
"largely" interstate in nature, which could have the effect of
precluding these calls from reciprocal compensation charges. However,
the ruling stated that ILECs are bound by the existing interconnection
agreements and the state decisions that have defined them. The FCC gave
the states authority to interpret existing interconnection agreements.
Since the FCC order, Oregon, Washington, California and Arizona have
ruled that calls terminated to ISPs should be included in the
calculation to determine reciprocal compensation.
Our Washington and Oregon interconnection agreements with GTE are in
effect and have generated both revenue and payments from GTE. These two
agreements are scheduled to expire during the second quarter 2001.
-14-
<PAGE>
Our interconnection agreements with US West in Oregon, Utah and Idaho
expired on September 30, 1999. As a result, we chose to opt-in to
interconnection agreements that US West currently has with other
telecommunications companies in those states. However, US West is
disputing our right to bill reciprocal compensation for calls terminated
to ISPs under these agreements. US West is also claiming that our
interconnection agreements in Washington and Arizona expired on
September 30, 1999. We believe that these agreements contain provisions
that extend the term of the agreements until new agreements are reached.
We believe that the above factors may reduce our ability to recognize
reciprocal compensation revenues in the fourth quarter from current
levels.
EXIT COSTS
Refer to Note 2 in Part I, Item 1, of this report for a discussion of
the exit costs we incurred in the third quarter 1999.
B. RESULTS OF OPERATIONS
REVENUES
Revenues increased in the three and nine months ended September 30, 1999
over the respective periods in 1998 due to the expansion of our network
and customer base. Since September 30, 1998, we completed our fiber
network in Spokane, Washington, where we are providing our full suite of
services. We also added 627 customers and 97 building connections, 43%
and 14% increases, respectively, since September 30, 1998.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ -------------------------
% %
($ IN THOUSANDS) 1999 1998 Incr. 1999 1998 Incr.
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Network services.. $ 14,024 $ 9,009 56% $ 37,431 $ 26,487 41%
Local telephone
services.......... 22,313 9,987 123% 55,221 23,780 132%
Long distance
services.......... 4,812 2,512 92% 22,587 6,233 262%
Data services..... 7,453 4,156 79% 17,674 10,664 66%
------- ------- ------ ------- -------- ------
Total......... $ 48,602 $ 25,664 89% $ 132,913 $ 67,164 98%
======= ======= ======= ========
</TABLE>
NETWORK SERVICES
Network services revenues increased in both the three and nine months
ended September 30, 1999 over the respective periods in 1998 primarily
due to sale of additional circuits to new and existing customers.
LOCAL TELEPHONE SERVICES
Local telephone services revenues increased in both the three and nine
months ended September 30, 1999 over the respective periods in 1998.
Included in this category were reciprocal compensation revenues, which
increased $5.8 million, or 135%, and $14.6 million, or 142%, in the
three and nine months ended September 30, 1999, respectively, over the
same periods in 1998. Our ISDN PRI product revenues increased $3.3
million, or 117%, and $9.0 million, or 142%, in the three and nine
months ended September 30, 1999, respectively, over the same periods in
1998. Over the same periods, local dial tone services increased $3.2
million, or 112%, and $7.8 million, or 109%, respectively.
-15-
<PAGE>
The increases were the result of an increase in access line equivalents
installed of 79,776 or 127%, from September 30, 1998 to September 30,
1999. Also, we began recognizing reciprocal compensation revenues from
US West in Idaho and GTE in Washington in the second quarter of 1999,
and from GTE in Oregon in the third quarter of 1999. The ISDN PRI growth
has largely come from sales to Internet Service Providers.
LONG DISTANCE SERVICES
Long distance services revenues increased in both the three and nine
months ended September 30, 1999 over the respective periods in 1998 due
to increased revenues from our retail, wholesale, and prepaid services.
The increases were due to large increases in the minutes processed as a
result of adding new customers and expanding the services we provide for
existing customers. We reduced sales efforts on our prepaid programs by
eliminating or modifying a number of programs in the third quarter 1999.
These changes caused a 72%, or $4.0 million decrease in prepaid services
revenue from the second quarter 1999. Refer to additional discussion in
Note 2 of Part I, Item 1.
DATA SERVICES
Data services revenues increased in both the three and nine months ended
September 30, 1999 over the respective periods in 1998 primarily due to
strong customer demand for these products. Revenues from our Internet
services product increased $1.8 million, or 130%, and $4.5 million, or
131%, respectively. Additionally, our frame relay product revenues
increased by $.2 million, or 10%, and $1.5 million, or 38%,
respectively. Data services included $1.7 million revenue in the three
months ended September 30, 1999 from an 18-month take-or-pay contract
with a significant customer.
OPERATING EXPENSES
Operating expenses increased in both the three and nine months ended
September 30, 1999 over the respective periods in 1998. This increase
was due to our growth in network and customer base as reflected in
revenues as well as increased long distance network access costs,
expansion of our sales force and the costs incurred to support our
national data expansion.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ -------------------------
($ IN THOUSANDS) % %
1999 1998 Incr. 1999 1998 Incr.
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Network access..... $ 14,719 $ 12,317 20% $ 63,645 $ 31,389 103%
Operations......... 10,732 7,308 47% 29,399 19,082 54%
Selling, general
and administrative.... 32,017 21,243 51% 88,231 54,206 63%
Depreciation and
amortization........ 9,807 4,090 140% 24,951 11,754 112%
------- ------- ---- ------- ------- ------
Total $ 67,275 $ 44,958 50% $ 206,226 $ 116,431 77%
======= ======= ======= =======
</TABLE>
NETWORK ACCESS
Network access expenses include resold product expenses. The primary
components are usage-based charges for carrying and terminating traffic
on another carrier's network.
Network access expenses increased in both the three and nine months
ended September 30, 1999 over the respective periods in 1998 due to
overall revenue growth and an increase in long distance costs related to
our prepaid services programs. We have also incurred expenses relating
to our national data expansion before we have been able to realize
significant related revenues. These increases were offset by $3.8
million of vendor credits received during the third quarter.
-16-
<PAGE>
OPERATIONS
Operations 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.
Operations expenses increased in both the three and nine months ended
September 30, 1999 over the respective periods in 1998 due to increases
in payroll and related expenses to support the expanded delivery of
services, and an expanded customer service organization.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses include all direct and
indirect sales channel expenses and commissions, as well as all general
and administrative expenses.
Selling, general and administrative expenses increased in both the three
and nine months ended September 30, 1999 over the respective periods in
1998 due to increases in payroll and related expenses to support the
delivery of services in existing and new markets including the national
data expansion. We incurred exit costs of $1.5 million during the third
quarter related to our announced plans to close six retail sales offices
in the eastern United States and eliminate the prepaid phone card and
videoconferencing products (refer to Note 2 in Part I, Item 1, for
further discussion).
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses include depreciation of
communications network assets including fiber-optic cable, network
electronics, network switching and network data equipment.
Depreciation and amortization expense increased in both the three and
nine months ended September 30, 1999 over the respective periods in 1998
due to higher plant in service balances for newly completed
communications network facilities and electronics.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ------------------------
% %
($ IN THOUSANDS) 1999 1998 Incr. 1999 1998 Incr.
------- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest expense and
other.......... $ 11,424 $ 2,742 317% $ 24,271 $ 4,953 390%
</TABLE>
Interest expense increased in both the three and nine months ended
September 30, 1999 over the respective periods in 1998 primarily due to
higher levels of long-term debt outstanding. At September 30, 1999, $561
million of long-term debt was outstanding, compared to $216 million at
September 30, 1998.
-17-
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
% %
Incr./ Incr./
($ IN THOUSANDS) 1999 1998 (Decr.) 1999 1998 (Decr.)
------ ------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Income tax expense (benefit).. $ 277 $(3,631) N/A $ 947 $(9,012) N/A
</TABLE>
In 1998, we were able to recognize a tax benefit for our tax loss
carryforwards to a limited extent of our deferred tax liabilities. In
1999, the benefit of our tax loss carryforwards is not able to fully
offset the deferred tax expense associated with current year timing
differences.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
% %
Incr./ Incr./
($ IN THOUSANDS) 1999 1998 (Decr.) 1999 1998 (Decr.)
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Cumulative effect of change
in acconting principle...... $ -- $ -- N/A $ -- $ 2,817 N/A
</TABLE>
Cumulative effect of change in accounting principle represented a
write-off of the unamortized portion of deferred start-up costs due to
our adoption of AICPA Statement of Position 98-5, "Reporting on the
costs of Start-Up Activities" in 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We reduced our interest rate risk by issuing $325 million, five-year
senior unsecured notes in April 1999 that are guaranteed by Citizens.
The notes have a fixed annual interest rate of 6.05% and an annual
guarantee fee of 4.0%. We used the net proceeds from the issuance to
repay outstanding borrowings under our floating rate bank credit
facility.
-18-
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the third quarter, we resolved the legal proceedings and related
arbitration against US West as described in Item 3 of our 1998 Form
10-K. US West has entered into an 18-month service contract to purchase
telecommunications services from us.
In accordance with the terms of our contract with Bonneville Power
Administration, we requested arbitration to resolve a dispute regarding
the exclusive use of our long-haul facilities connecting Portland to
Seattle and Seattle to Spokane. We filed our Notice of Claim or Demand
for Arbitration on April 19, 1999. It is pending before an arbitrator
of the American Arbitration Association.
We are party to routine litigation arising in the normal course of
business. We do not expect these matters, individually or in the
aggregate, to have a material adverse effect on our financial position,
results of operations or cash flows. We are also party to various
proceedings before state PUCs. These proceedings typically relate to
authority to operate in a state and regulatory arbitration proceedings
concerning our interconnection agreements. See "Part I., Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Other Matters -
Reciprocal Compensation".
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.
-19-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits below are filed as part of this report:
EXHIBIT DESCRIPTION
NO.
27.1 Financial Data Schedule for the nine months ended September
30, 1999.
b) Reports on Form 8-K
On August 3, 1999, we filed a Current Report on Form 8-K, under Item 5,
"Other Events" containing second quarter 1999 financial information. On
August 24, 1999, we filed a Current Report on Form 8-K, under Item 5,
"Other Events" to make available a press release dated August 24, 1999,
announcing our plans to eliminate our prepaid calling card and video
conferencing products. On September 9, 1999, we filed a Current Report
on Form 8-K, under Item 5, "Other Events" to make available a press
release dated September 1, 1999, announcing a consolidation of our
national retail sales efforts.
-20-
<PAGE>
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
November 2, 1999
-21-
<PAGE>
<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, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001044827
<NAME> Electric Lightwave, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<CASH> 24,216
<SECURITIES> 0
<RECEIVABLES> 32,431
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,178
<PP&E> 723,141
<DEPRECIATION> 65,212
<TOTAL-ASSETS> 726,982
<CURRENT-LIABILITIES> 110,027
<BONDS> 560,574
0
0
<COMMON> 500
<OTHER-SE> 51,512
<TOTAL-LIABILITY-AND-EQUITY> 726,982
<SALES> 0
<TOTAL-REVENUES> 132,913
<CGS> 0
<TOTAL-COSTS> 63,645
<OTHER-EXPENSES> 29,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,271
<INCOME-PRETAX> (97,584)
<INCOME-TAX> 947
<INCOME-CONTINUING> (98,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (98,531)
<EPS-BASIC> (1.98)
<EPS-DILUTED> (1.98)
</TABLE>
