===============================================================================
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 MARCH 31, 2000
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 March 31, 2000
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.)
3 HIGH RIDGE PARK
P. O. BOX 3801
STAMFORD, CT 06905
(Address, zip code of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (203) 614-5600
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
April 25, 2000 were:
COMMON STOCK CLASS A 9,259,696
COMMON STOCK CLASS B 41,165,000
Electric Lightwave, Inc.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at March 31, 2000 and December 31, 1999 (unaudited) 2
Statements of Operations for the Three Months ended March 31, 2000 3
and 1999 (unaudited)
Condensed Statements of Cash Flows for the Three Months ended 4
March 31, 2000 and 1999 (unaudited)
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
AND RESULTS OF OPERATIONS
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION 15
SIGNATURE 16
-1-
Electric Lightwave, Inc.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
Assets 2000 1999
--------- ---------
Current assets:
Cash .................................................. $ 25,990 $ 21,378
Trade receivables, net ................................ 28,896 39,952
Other receivables ..................................... 6,248 6,239
Other current assets .................................. 2,807 2,846
--------- ---------
Total current assets ............................... 63,941 70,415
--------- ---------
Property, plant and equipment .............................. 824,671 771,947
Less accumulated depreciation and amortization ............. (88,614) (76,288)
--------- ---------
Property, plant and equipment, net .................... 736,057 695,659
--------- ---------
Other assets ............................................... 9,028 9,160
--------- ---------
Total assets ....................................... $ 809,026 $ 775,234
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued liabilities .............. $ 57,556 $ 61,066
Current portion of long-term obligations .............. 28,158 25,105
Due to Citizens Utilities Company ..................... 5,148 14,650
Other accrued taxes ................................... 14,240 11,153
Interest payable ...................................... 11,961 4,950
Other current liabilities ............................. 6,799 3,314
--------- ---------
Total current liabilities .......................... 123,862 120,238
Deferred revenue ........................................... 12,591 6,888
Other long-term liabilities ................................ 972 952
Deferred income taxes payable .............................. 2,893 2,658
Capital lease obligations .................................. 57,243 39,997
Long-term debt ............................................. 625,000 585,000
--------- ---------
Total liabilities .................................. 822,561 755,733
--------- ---------
Shareholders' equity (deficit):
Common stock issued, $.01 par value
Class A ............................................ 92 90
Class B ............................................ 412 412
Additional paid-in-capital ............................ 328,578 326,477
Deficit ............................................... (342,617) (307,478)
--------- ---------
Total shareholders' equity (deficit) ............... (13,535) 19,501
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 809,026 $ 775,234
========= =========
-2-
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)
For the three months ended March 31,
2000 1999
-------- --------
Revenues ......................................... $ 56,778 $ 38,216
-------- --------
Operating expenses:
Network access .............................. 20,696 25,224
Operations .................................. 11,575 9,034
Selling, general and administrative ......... 31,172 26,767
Depreciation and amortization ............... 12,755 6,994
-------- --------
Total operating expenses ................. 76,198 68,019
-------- --------
Loss from operations ........................ (19,420) (29,803)
Interest expense ................................. 15,196 5,101
Loss on disposal of assets ....................... 567 --
Interest income and other ........................ (279) (322)
-------- --------
Net loss before income taxes ................ (34,904) (34,582)
Income tax expense ............................... 235 370
-------- --------
Net loss .................................... $(35,139) $(34,952)
======== ========
Net loss per common share:
Basic ....................................... $ (0.70) $ (0.70)
Diluted ..................................... $ (0.70) $ (0.70)
Weighted average shares outstanding .............. 50,183 49,801
-3-
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the three months ended March 31,
2000 1999
-------- --------
Net cash used for operating activities ................. $(11,514) $(26,577)
-------- --------
Cash flows used for investing activities:
Capital expenditures .............................. (25,371) (48,537)
-------- --------
Cash flows from financing activities:
Net revolving bank credit facility proceeds ....... 40,000 70,000
Other ............................................. 1,497 (86)
-------- --------
Net cash provided by financing activities ...... 41,497 69,914
-------- --------
Net increase (decrease) in cash ........................ 4,612 (5,200)
Cash at January 1, ..................................... 21,378 13,120
-------- --------
Cash at March 31, ...................................... $ 25,990 $ 7,920
======== ========
Supplemental cash flow information:
Cash paid for interest, net of capitalized portion $ 8,184 $ 4,712
Non-cash increase in capital lease asset .......... $ 23,412 $ --
-4-
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, 1999.
B. CAPITALIZED INTEREST
Property, plant and equipment includes interest costs capitalized during the
installation and expansion of our communications networks. Approximately
$2,033,000 and $3,218,000 of interest costs were capitalized in the first
quarter 2000 and 1999, respectively.
C. REVENUE RECOGNITION
We recognize revenues from communications services when the services are
provided. Amounts received from long-term leases of fiber optic cable are
included in deferred revenue and are amortized on a straight-line basis over the
terms of the related leases, as the services are provided.
D. RECIPROCAL COMPENSATION
We have various interconnection agreements with U S WEST Communications, Inc. (U
S WEST), GTE Corporation (GTE) and PacBell, 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 recognized reciprocal compensation revenues of $9.6 million and $6.6 million
for the three months ended March 31, 2000 and 1999, respectively. Net trade
accounts receivable relating to reciprocal compensation totaled $5.6 million and
$14.9 million at March 31, 2000 and December 31, 1999, respectively.
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 continuously review our reciprocal compensation
revenue recognition.
-5-
E. 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
excludes dilution and 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 March 31, 2000 and 1999 as their effect would have reduced our net loss
per share.
2. EXIT COSTS
In the third quarter 1999, we announced two strategic decisions that led to $1.5
million in employee severance and facility shutdown costs that we recorded in
selling, general and administrative expense in our Statements of Operations for
the year ended December 31, 1999. On August 24, 1999, we announced that we were
eliminating our prepaid calling card and videoconferencing products, effective
November 1, 1999. On September 1, 1999, we announced that we were consolidating
our national retail sales efforts in Dallas and closing six retail sales offices
in the eastern United States by October 8, 1999. We have maintained all of our
data points-of-presence and wholesale sales offices. In the first quarter 2000,
we incurred additional exit costs of $0.3 million related to these decisions
that we recorded in selling, general and administrative expense in our Statement
of Operations.
As a result of both of these decisions, we eliminated 63 sales and sales support
positions, and incurred charges relating to employee severance and facility
shutdown costs of $0.8 million and $1.0 million, respectively. The balance of
the exit cost accrual at March 31, 2000 of $0.2 million is included in Accounts
Payable and Accrued Liabilities on our balance sheet. A summary of the activity
in the exit costs accrual since December 31, 1999 is as follows:
Balance Balance
December 31, New March 31,
($ In thousands) 1999 Charges Payments 2000
-------------- ------------ ------------- ------------
Severance related costs $ - $ 71 $ 71 $ -
Network and facilities costs 134 226 124 236
-------------- ------------ ------------- ------------
Total $ 134 $ 297 $ 195 $ 236
============== ============ ============= ============
3. COMMITMENTS AND CONTINGENCIES
We have entered into various capital and operating leases for fiber optic cable
to interconnect our local networks with long-haul fiber optic routes. The terms
of the various agreements range from 20 to 25 years, with varying optional
renewal periods. For a certain contract, we have an exclusive right to use the
facilities as long as certain minimum usage is satisfied. We have entered
arbitration to resolve a dispute regarding the minimum usage required for
exclusive use of our long-haul facilities connecting Portland, Seattle and
Spokane, as well as a portion of our long-haul route from Portland to
Sacramento.
In addition to the long-haul agreements above, we have also entered into certain
operating and capital leases in order to develop our local networks. The terms
of the various agreements range from 15 to 30 years, with varying optional
renewal periods. For certain contracts, we have an exclusive right to use the
facilities as long as certain minimum usage is satisfied. We have met those
requirements as of March 31, 2000.
We are involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on our results of
operations, financial position or liquidity.
-6-
4. RELATED PARTY TRANSACTIONS
Citizens Utilities Company (Citizens) owns approximately 82% of our common
stock. On December 1, 1997, we entered into an Administrative Services Agreement
(Agreement) under which Citizens provides us with certain administrative
services including, but not limited to, financial management services,
information services, legal and contract services and planning and human
resources services. Under the terms of the Agreement, Citizens bills us for
direct costs and an allocation of indirect costs, plus an administrative charge.
The current practice of allocating indirect costs is based on four factors:
plant assets, operating expenses, number of customers and payroll expenses. We
believe that this allocation method and the resultant amounts are reasonable as
contemplated by the Agreement. In addition, we reimburse third party costs
incurred by Citizens on our behalf. We believe that the amounts charged by
Citizens do not exceed comparable amounts that would be charged by an
unaffiliated third party. Also, we believe that the accompanying financial
statements include all of our costs of doing business.
This table summarizes the activity in the liability account Due to Citizens for
the three months ended March 31,
($ In thousands) 2000 1999
-------------- --------------
Balance beginning of period $ 14,650 $ 5,254
Guarantee fees 6,356 3,452
Administrative services:
Services provided by Citizens 1,154 1,880
ELI expenses paid by Citizens 2,313 1,589
Payments to Citizens (19,325) (6,500)
-------------- --------------
Balance end of period $ 5,148 $ 5,675
============== ==============
5. SIGNIFICANT CUSTOMER
U S WEST accounted for 19% of our total revenues for each of the quarters ended
March 31, 2000 and 1999. Most of the U S WEST revenues were generated from
reciprocal compensation as discussed above in Note 1(d). No other customer
accounted for 10% or more of our total revenues for either of the quarters ended
March 31, 2000 and 1999.
6. 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 $235,000 and $370,000 for
the three months ended March 31, 2000 and 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 temporary 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 have been
able to carry-forward our tax losses to future periods to offset taxable income
in these future periods had we been a stand-alone company. In accordance with
the tax sharing agreement, Citizens has agreed to reimburse us for the taxes we
would be required to pay in the future, if we have taxable income, to the extent
that these loss carryforwards would otherwise remain available on a stand-alone
basis.
-7-
7. SEGMENT DISCLOSURES
We operate in a single industry segment, communications services. Our operations
involve developing an integrated advanced fiber network to provide the full
range of our products and services in the western United States as well as
enhanced broadband data services in selected cities nationwide. While our chief
operating decision-maker monitors the revenue streams of the various products
and geographic locations, we manage operations and evaluate financial
performance based on the delivery of multiple services to customers over a
single fiber-optic network. This practice allows us to leverage our network
costs to maximize profitability. As a result, there are many shared and
indistinguishable expenses generated by the various revenue streams and
geographical locations. Our management believes that any allocation of the
expenses incurred on a single network to multiple revenue streams or geographic
locations would be impractical, arbitrary and inconsistent with the way the
business is currently evaluated by management. As a result, management does not
currently make such allocations internally.
PRODUCTS AND SERVICES
We group our products and services into Network Services, Local Telephone
Services, Long Distance Services and Data Services. The revenues generated by
these products and services for the three months ended March 31 were:
($ In thousands) 2000 1999
-------------- --------------
Network services $ 16,004 $ 10,424
Local telephone services 24,274 14,308
Long distance services 4,596 8,530
Data services 11,904 4,954
-------------- --------------
Total $ 56,778 $ 38,216
============== ==============
We do not currently provide products or services outside the United States.
-8-
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 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 Internet Service Providers (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.
- --------------------------------------------------------------------------------
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's 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, 1999. Electric
Lightwave, Inc., is referred to as "we", "us", or "our" in this report.
-9-
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
strategic markets across the nation. 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 and collocation facilities to meet us directly in our hub.
* Local telephone services - consists of the delivery of local dial tone
and related services, and related carrier and local access revenue.
* 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 in the second quarter 2000. In addition
to our long-haul agreements, we have agreements providing a fiber-optic network
in Phoenix, Arizona and San Francisco, California. During March 1999, we entered
into a fiber-swap, which exchanges unused fiber on our network for unused fiber
on another carrier's network. This exchange will provide us with direct access
from Salt Lake City, Utah to Denver, Colorado and continue on to Dallas, Texas.
We anticipate incorporating the other carrier's fiber into our network during
2000.
Refer to Note 4 in Part I, Item 1, for a discussion concerning our relationship
with Citizens, which owns approximately 82% of our common stock.
A. LIQUIDITY AND CAPITAL RESOURCES
We drew $40 million from our revolving bank credit facility (Credit Facility) to
fund operating and capital expenditures during the first quarter 2000. At March
31, 2000, we have approximately $100 million available under our $400 million
Credit Facility to fund future operating and capital expenditures. No principal
payment is due until the expiration date of the Credit Facility in November
2002. Additionally, we have $325 million of five-year senior unsecured notes
outstanding with maturity on May 14, 2004. The current portion of our long-term
obligations is $28.2 million and consists solely of capital lease obligations.
Citizens has guaranteed both the Credit Facility and our 6.05% five-year senior
unsecured notes for fees of 3.25% and 4.0%, respectively, based on the
respective outstanding balances.
We anticipate that the remaining funds available for draw on our Credit Facility
will be inadequate to fund operating leases, working capital deficiencies,
capital expenditures and debt service for 2000. Citizens has committed to
provide the necessary bridge financing, at then market terms and conditions,
until third party financing is complete.
In order to continue the growth of our customer base and revenue stream, we must
continue to invest in the installation, development and expansion of our
existing communications networks. A significant portion of these expenditures is
incurred before any revenues are realized. Our capital additions were
approximately $53.7 million in the first quarter 2000, including $23.4 million
in non-cash capital lease additions. These expenditures, combined with our
operating expenses, have resulted in operating losses and negative cash flows.
We expect to continue incurring operating losses and negative cash flows until
we can establish an adequate customer base necessary to generate a revenue
stream sufficient to support our operations, capital requirements and debt
service. We cannot provide assurances that we will achieve or sustain
profitability or generate sufficient positive cash flow to fund our operating,
capital expenditures and debt service requirements.
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.
-10-
OTHER MATTERS
RECIPROCAL COMPENSATION
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 had 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,
Utah and Arizona have ruled that calls terminated to ISPs should be included in
the calculation to determine reciprocal compensation.
We have various interconnection agreements with U S WEST, GTE and PacBell, the
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.
Our interconnection agreements with U S WEST in Washington, Utah, Oregon,
Arizona and Idaho are in effect and have generated both revenue and payments
from U S WEST. These agreements are scheduled to expire on December 31, 2001.
Our Washington and Oregon interconnection agreements with GTE are in effect and
have generated both revenue and payments from GTE. These agreements are
scheduled to expire on June 30, 2001.
Our interconnection agreement with PacBell in California is in effect and has
generated both revenue and payments from PacBell. The agreement is scheduled to
expire on December 31, 2001.
We recognized reciprocal compensation revenues of $9.6 million and $6.6 million
for the three months ended March 31, 2000 and 1999, respectively. Net trade
accounts receivable relating to reciprocal compensation totaled $5.6 million and
$14.9 million at March 31, 2000 and December 31, 1999, respectively.
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 continuously review our reciprocal compensation
revenue recognition.
EXIT COSTS
In the third quarter 1999, we announced that we were eliminating our prepaid
calling card and videoconferencing products, effective November 1, 1999, and
that we were consolidating our national retail sales efforts in Dallas and
closing six retail sales offices in the eastern United States by October 8,
1999. As a result of both of these decisions, we eliminated 63 sales and sales
support positions, and incurred charges relating to employee severance and
facility shutdown costs of $0.7 million and $0.8 million, respectively for the
year ended December 31, 1999. In the first quarter 2000, we have incurred
additional costs of $0.3 million related to these decisions due to sublease and
lease termination costs and additional medical benefit costs to terminated
employees. The balance of the exit cost accrual at March 31, 2000 of $0.2
million is included in Accounts Payable and Accrued Liabilities on our balance
sheet.
-11-
B. RESULTS OF OPERATIONS
REVENUES
Revenues increased $18.6 million, or 49%, in the first quarter 2000 over the
first quarter 1999.
For the three months ended March 31,
-----------------------------------------------------
($ In thousands) 2000 1999 % Change
---------------- ---------------- --------------
Network services $ 16,004 $ 10,424 54%
Local telephone services 24,274 14,308 70%
Long distance services 4,596 8,530 (46%)
Data services 11,904 4,954 140%
---------------- ----------------
Total $ 56,778 $ 38,216 49%
================ ================
NETWORK SERVICES
Network Services revenues increased $5.6 million, or 54%, in the first quarter
2000 over the first quarter 1999. The increase is due to continued growth in our
network and sales of additional circuits to new and existing customers.
LOCAL TELEPHONE SERVICES
Local telephone services revenues increased $10.0 million, or 70%, in the first
quarter 2000 over the first quarter 1999. Dial tone and ISDN PRI revenues
increased $1.2 million or 36%, and $4.1 million, or 109%, respectively, as a
result of an increase in access line equivalents installed of 81,929, or 83%.
Carrier Access Billings revenues increased $1.7 million, or 283%, due to an
increase in usage.
Reciprocal compensation revenue, which increased $3.0 million, or 45%, over the
first quarter 1999, is included in this category. The increase is due to
recording reciprocal compensation revenues subsequent to March 31, 1999 from GTE
in Washington and Oregon, PacBell in California and U S West in Idaho. The
increase was offset by decreased revenues from U S West due to lower rates
applicable to new interconnection agreements effective January 1, 2000. See
"Part I., Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Other Matters -
Reciprocal Compensation" for further discussion of reciprocal compensation.
LONG DISTANCE SERVICES
Long distance services revenues decreased $3.9 million, or 46%, in the first
quarter 2000 from the first quarter 1999. Prepaid services revenue decreased
$6.0 million, or 97%, due to our decision to exit the prepaid services market in
the third quarter of 1999. Retail and wholesale long distance revenue increased
$1.0 million, or 85%, and $1.1 million, or 92%, respectively. The increases were
due to increases in the minutes processed as a result of adding new customers
and expanding the services we provide to existing customers. Retail minutes
processed increased from 5.3 million to 9.1 million, or 73% and wholesale
minutes processed increased from 9.9 million to 19.6 million, or 98%, over the
first quarter 1999.
DATA SERVICES
Data services revenues increased $7.0 million, or 140%, in the first quarter
2000 from the first quarter 1999. Revenues from our Internet services product
increased $1.6 million, or 79%, as a result of an increase in Internet routers
installed from 36 to 62, or 72%. Data services revenues include $5.0 million in
revenue from an 18 month take-or-pay contract with a significant customer that
expires on February 28, 2001. The take-or-pay contract provides $20 million in
revenue for 2000. There is no assurance this take-or-pay contract will be
renewed in 2001.
-12-
OPERATING EXPENSES
Operating expenses increased $8.1 million, or 12%, in the first quarter 2000
over the first quarter 1999. This was due to our growth in network and customer
base, as well as the expansion of our sales force and increased
plant-in-service. However, the increase was partially offset by lower access
costs.
For the three months ended March 31,
-------------------------------------------------------
($ In thousands) 2000 1999 % Change
-------------- -------------- --------------
Network access $ 20,696 $ 25,224 (18%)
Operations 11,575 9,034 28%
Selling, general and administrative 31,172 26,767 16%
Depreciation and amortization 12,755 6,994 82%
-------------- --------------
Total $ 76,198 $ 68,019 12%
============== ==============
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 for the first quarter 2000 decreased $4.5 million, or
18%, compared to the first quarter 1999. The reduction is the result of an $8.4
million reduction in costs from the elimination of the prepaid services
business. This was partially offset by an increase in costs associated with
services relating to our increase in revenues.
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 for the first quarter 2000 increased $2.5 million, or 28%,
over the first quarter 1999. This was primarily due to increases in payroll,
operating rents and related expenses to support the expanded delivery of
services.
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 for the first quarter 2000
increased $4.4 million, or 16%, over the first quarter 1999. This was primarily
due to increases in payroll, property taxes and related expenses to support the
delivery of services in existing and new markets.
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 for the first quarter 2000 increased $5.8
million, or 82%, over the first quarter 1999. This was primarily due to higher
plant in service balances for newly completed communications network facilities
and electronics.
-13-
INTEREST EXPENSE AND INTEREST INCOME AND OTHER
For the three months ended March 31,
--------------------------------------------------
($ In thousands) 2000 1999 % Change
---------------- ---------------- -----------
Interest expense $ 15,196 $ 5,101 198%
Loss on disposal of assets 567 - N/A
Interest income and other (279) (322) (13%)
Interest expense increased $10.1 million, or 198%, in the first quarter 2000
over the first quarter 1999, primarily due to higher levels of outstanding
long-term debt. As of March 31, 2000, we had long-term debt outstanding of $625
million compared to $354 million at March 31, 1999. The higher balance led to
increased interest and guarantee fees. Loss on disposal of assets was due to
equipment turnover and technical upgrades. Interest income and other is
primarily comprised of interest earned on cash balances.
INCOME TAX EXPENSE
For the three months ended March 31,
-------------------------------------------------------
($ In thousands) 2000 1999 % Change
---------------- ---------------- ----------------
Income tax expense $ 235 $ 370 (36%)
Income tax expense decreased $0.1 million, or 36%, in the first quarter 2000
over the first quarter 1999. In both 2000 and 1999, the benefit of our tax loss
carryforwards is not able to fully offset the deferred tax expense associated
with current year temporary differences.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. Sensitivity of results of operations to
these risks is managed by maintaining a conservative investment portfolio, which
is comprised solely of money market funds, and entering into long-term debt
obligations with appropriate price and term characteristics. We do not hold or
issue derivative instruments, derivative commodity instruments or other
financial instruments for trading purposes. Financial instruments held for other
than trading purposes do not impose a material market risk.
We are exposed to interest rate risk, as additional financing is periodically
needed due to the large operating losses and capital expenditures associated
with establishing and expanding our communications networks. The interest rate
that we will be able to obtain on debt financing will depend on market
conditions at that time, and may differ from the rates we have secured on our
current debt. Additionally, we are exposed to interest rate risk on amounts
borrowed against our credit facility and construction agency agreement as of
March 31, 2000. The construction agency agreement and advances against the
credit facility periodically renew, at which point the borrowings are subject to
the then current market interest rates, which may differ from the rates we are
currently paying on our borrowings.
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 interest rate of 6.05%, and we pay Citizens 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.
-14-
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, Seattle and
Spokane, as well as a portion of our long-haul route from Portland to
Sacramento. 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 Public Utilities
Commissions. These proceedings typically relate to authority to operate in 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits below are filed as part of this report:
EXHIBIT NO. DESCRIPTION
10.13.1 Second Amendment to the Equity Incentive Plan of Electric
Lightwave, Inc.
27.1 Financial Data Schedule for the three months ended March 31, 2000.
b) Reports on Form 8-K
* On March 3, 2000, we filed a current report on Form 8-K, under Item 5, "Other
Events", to make available a press release dated March 1, 2000, regarding our
calendar year 1999 financial results.
-15-
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
May 12, 2000