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, 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 September 30, 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
October 30, 2000 were:
Common Stock Class A 9,563,446
Common Stock Class B 41,165,000
Electric Lightwave, Inc.
Index
Page No.
Part I. Financial Information --------
Item 1. Financial Statements
Balance Sheets at September 30, 2000 and December 31, 1999
(unaudited) 2
Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999 (unaudited) 3
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (unaudited) 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information 17
Signatures 18
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
(In thousands )
(Unaudited)
September 30, December 31,
Assets 2000 1999
--------------- ----------------
Current assets:
Cash $ 13,639 $ 21,378
Trade receivables, net 32,674 39,952
Other receivables 5,867 6,239
Other current assets 1,941 2,846
--------------- ----------------
Total current assets 54,121 70,415
--------------- ----------------
Property, plant and equipment 962,454 771,947
Less accumulated depreciation and amortization (117,561) (76,288)
--------------- ----------------
Property, plant and equipment, net 844,893 695,659
--------------- ----------------
Other assets 7,266 9,160
--------------- ----------------
Total assets $ 906,280 $ 775,234
=============== ================
Liabilities and Shareholders' (Deficit) Equity
Current liabilities:
Accounts payable and accrued liabilities $ 59,717 $ 61,066
Current portion of long-term obligations 29,414 25,105
Due to Citizens Communications Company 5,083 14,650
Other accrued taxes 18,906 11,153
Interest payable 14,723 4,950
Other current liabilities 4,144 3,314
--------------- ----------------
Total current liabilities 131,987 120,238
Deferred revenue 14,214 6,888
Other long-term liabilities 722 952
Deferred income taxes payable 3,598 2,658
Capital lease obligations 107,586 39,997
Long-term debt 725,000 585,000
--------------- ----------------
Total liabilities 983,107 755,733
--------------- ----------------
Shareholders' (deficit) equity:
Common stock issued, $.01 par value
Class A, authorized 110,000,000 shares, 9,486,924 shares
and 8,966,276 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 95 90
Class B, authorized 60,000,000 shares, 41,165,000 shares
issued and outstanding at September 30, 2000 and
December 31, 1999 412 412
Additional paid-in-capital 332,833 326,477
Accumulated deficit (410,167) (307,478)
--------------- ----------------
Total shareholders' (deficit) equity (76,827) 19,501
--------------- ----------------
Total liabilities and shareholders' (deficit) equity $ 906,280 $ 775,234
=============== ================
2
Statements of Operations
(In thousands, except per-share amounts)
For the three months ended Sept. 30, For the nine months ended Sept. 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Revenue $ 63,610 $ 48,602 $ 181,008 $ 132,913
---------------- ---------------- ---------------- ----------------
Operating expenses:
Network access 17,821 14,719 56,811 63,645
Operations 13,473 10,732 38,494 29,399
Selling, general and administrative 27,540 32,017 89,027 88,231
Depreciation and amortization 16,306 9,807 43,782 24,951
---------------- ---------------- ---------------- ----------------
Total operating expenses 75,140 67,275 228,114 206,226
---------------- ---------------- ---------------- ----------------
Loss from operations (11,530) (18,673) (47,106) (73,313)
Interest expense 20,745 11,425 54,603 24,592
Loss on disposal of assets and investments 117 289 893 483
Interest income and other (259) (290) (853) (804)
---------------- ---------------- ---------------- ----------------
Net loss before income taxes (32,133) (30,097) (101,749) (97,584)
Income tax expense 459 277 940 947
---------------- ---------------- ---------------- ----------------
Net loss $ (32,592) $ (30,374) $ (102,689) $ (98,531)
================ ================ ================ ================
Net loss per common share:
Basic $ (0.64) $ (0.61) $ (2.04) $ (1.98)
Diluted $ (0.64) $ (0.61) $ (2.04) $ (1.98)
Weighted average shares outstanding 50,606 49,915 50,404 49,846
3
Condensed Statements of Cash Flows
(In thousands)
For the nine months ended Sept. 30,
2000 1999
--------------- ----------------
Net cash used for operating activities $ (38,983) $ (76,421)
--------------- ----------------
Cash flows used for investing activities:
Capital expenditures (90,864) (138,557)
--------------- ----------------
Cash flows from financing activities:
Revolving bank credit facility proceeds 150,000 226,000
Revolving bank credit facility repayments (10,000) (310,000)
Note issuance - 325,000
Reduction of capital lease obligation (23,676) (12,816)
Other 5,784 (1,714)
--------------- ----------------
Net cash provided by financing activities 122,108 226,470
--------------- ----------------
Net increase (decrease) in cash (7,739) 11,492
Cash at January 1, 21,378 13,120
--------------- ----------------
Cash at September 30, $ 13,639 $ 24,612
=============== ================
Supplemental cash flow information:
Cash paid for interest, net of capitalized portion $ 23,792 $ 16,572
Non-cash increase in capital lease asset $ 98,555 $ 45,195
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,
revenue 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 $1,628,000 and $2,697,000 of interest costs were capitalized
in the three months ended September 30, 2000 and 1999, respectively, and
approximately $4,898,000 and $8,864,000 were capitalized in the nine months
ended September 30, 2000 and 1999, respectively.
c. Revenue Recognition
We recognize revenue 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.
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 Statements 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 September 30, 2000 and 1999 as
their effect would have reduced our net loss per share.
5
Electric Lightwave, Inc.
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 nine 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 three quarters
of 2000, we incurred additional exit costs of $0.4 million related to these
decisions that were recorded in selling, general and administrative expense
in our Statements 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 $0.9 million and $1.0 million, respectively. A
summary of the activity in the exit costs accrual since December 31, 1999
is as follows:
Balance Balance
December 31, New September 30,
($ In thousands) 1999 Charges Payments 2000
---------------- --------------- ---------------- ----------------
Severance related costs $ - $ 133 $ 133 $ -
Network and facilities costs 134 226 360 -
---------------- --------------- ---------------- ----------------
Total $ 134 $ 359 $ 493 $ -
================ =============== ================ ================
3. Commitments and Contingencies
We have entered into an 18-month take-or-pay contract, that expires on
February 28, 2001, to provide data products to a significant customer. The
take-or-pay contract will provide $20 million in revenue for 2000. It is
not likely that this take-or-pay contract will be renewed in 2001.
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.
In addition to the long-haul agreements above, we have also entered into
certain operating and capital leases to develop our local networks. The
terms of the various agreements range from 15 to 30 years, with varying
optional renewal periods. One of these contracts provides us with an
exclusive right to use the facilities as long as certain minimum usage is
satisfied. We continue to meet those requirements as of September 30, 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 Communications Company (Citizens) owns approximately 86% 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.
In April 2000, Citizens announced a plan to buy up to $25 million of
Electric Lightwave, Inc.'s Class A common stock which was completed July
2000. In August 2000, Citizens announced a plan to purchase up to one
million shares of Electric Lightwave, Inc.'s Class A common stock on the
open market which was completed in September 2000. In the aggregate
Citizens purchased 2.3 million shares between April and September, 2000.
This table summarizes the activity in the liability account Due to Citizens
for the nine months ended September 30,
($ In thousands) 2000 1999
--------------- ----------------
Balance beginning of period $ 14,650 $ 5,254
Guarantee fees 20,382 13,687
Administrative services:
Services provided by Citizens 4,438 6,028
ELI expenses paid by Citizens 5,578 11,282
Payments to Citizens (39,965) (21,000)
--------------- ----------------
Balance end of period $ 5,083 $ 15,251
=============== ================
5. Significant Customer
Qwest (formerly U S WEST Communications, Inc.) accounted for 16% and 18% of
our total revenue for the three and nine-month periods ended September 30,
2000 and 18% for the three and nine-months ended September 30, 1999. No
other customer accounted for 10% or more of our total revenue for either
the three months or nine months ended September 30, 2000.
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 $459,000 and
$277,000 for the three months ended September 30, 2000 and 1999,
respectively, and $940,000 and $947,000 for the nine months ended September
30, 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 our 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. Our management believes that any allocation
of the expenses incurred on a single network to multiple revenue streams
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 revenue generated
by these products and services for the three and nine months ended
September 30 were:
For the three months ended Sept. 30, For the nine months ended Sept. 30,
($ In thousands) 2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
Network services $ 21,627 $ 14,024 $ 54,804 $ 37,431
Local telephone services 25,187 22,313 75,412 55,221
Long distance services 3,728 4,812 12,590 22,587
Data services 13,068 7,453 38,202 17,674
---------------- --------------- ---------------- ----------------
Total $ 63,610 $ 48,602 $ 181,008 $ 132,913
================ =============== ================ ================
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:
o if the local and overall economic conditions of our markets are less
favorable than we expected;
o if there are changes in the nature and pace of technological advances
in our industry;
o 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;
o if our business strategy or its execution, including financial
performance goals, is not as successful as we anticipate;
o 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 and collect
reciprocal compensation for calls terminated to Internet Service
Providers (ISPs);
o if we do not receive the services and support which we require from
the regional ILECs or cannot maintain our current relationships with
ILECs;
o if we are not able to effectively manage rapid growth, including
integrating any businesses acquired;
o if we are not able to correctly identify future markets, successfully
expand existing ones, or successfully expand through acquisitions;
o 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;
o if we are not able to obtain additional financing; or
o 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 includes expansive local networks in seven major cities and
their surrounding areas, connected by our long-haul routes. In addition, we
provide data services in certain strategic markets across the nation. Our
product offerings include:
o 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.
o Local telephone services - consists of the delivery of local dial tone
and related services, and related carrier and local access revenue as
well as Integrated Services Digital Network Primary Rate Interface
(ISDN PRI). ISPN PRI provides customers with a high speed access
connection to the public switched telephone network for voice, video
and data applications.
o Long distance services - includes retail and wholesale long distance
phone services.
o 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.
Refer to Note 4 in Part I, Item 1, for a discussion concerning our
relationship with Citizens, which owns approximately 86% of our common
stock.
a. Liquidity and Capital Resources
We drew $140 million (net) from our revolving bank credit facility (Credit
Facility) to fund operating and capital expenditures during the first three
quarters of 2000. At September 30, 2000, there were no remaining funds
available for draw under our $400 million Credit Facility. No principal
payment is due until the expiration date of the Credit Facility in November
2002. Additionally, we have $325 million of five-year 6.05% senior
unsecured notes outstanding with maturity on May 14, 2004. Citizens has
guaranteed both the Credit Facility and our senior unsecured notes for fees
of 3.25% and 4.0%, respectively, based on the respective outstanding
balances. The current portion of our long-term obligations of $29.4 million
consists solely of capital lease obligations.
We anticipate that our existing cash balances and cash to be generated from
operations will be inadequate to fund operating leases, working capital
deficiencies, capital expenditures and debt through 2001. Citizens is
committed to continue to finance our cash requirements, at market terms and
conditions, until the earlier of the completion of a public or private
financing which would provide the funds necessary to support our cash
requirements, or through 2001.
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 revenue is realized. Our capital
additions were approximately $194.2 million in the first three quarters of
2000, including $98.6 million in 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
assurance that we will achieve or sustain profitability or generate
sufficient positive cash flow to fund our operating, capital expenditure
and debt service requirements.
10
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.
Other Matters
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards for
derivative instruments and hedging activities and, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
statement requires balance sheet recognition of derivatives as assets or
liabilities measured at fair value. Accounting for gains and losses
resulting from changes in the values of derivatives is dependent on the use
of the derivative and whether it qualifies for hedge accounting. Management
is currently assessing the impact of SFAS No. 133 and does not anticipate
that it will have a material impact on our financial statements.
On December 3, 1999, the Securities and Exchange Commission (SEC) staff
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements". On October 13, 2000, the SEC published "Frequently
Asked Questions and Answers" (Q&A) related to SAB 101 and deferred the
effective date to no later than the fourth quarter of fiscal years
beginning after December 15, 1999. We are currently evaluating the impact
of SAB 101 on our financial statements.
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 was
issued, Oregon, Washington, California, Utah and Arizona have ruled that
calls terminated to ISPs should be included in the calculation to determine
reciprocal compensation.
On March 24, 2000, the DC Circuit Court changed certain provisions of the
FCC's 1999 Declaratory Ruling. The DC Circuit Court is requiring the FCC to
again review the definitions of traffic that require inter-carrier
compensation. The FCC has been asked to specifically review the
compensation mechanisms for ISP-bound traffic. A decision regarding
inter-carrier compensation is expected in the fourth quarter 2000. We are
not currently able to determine the potential impact of that decision on
us.
We have various interconnection agreements with Qwest (formerly U S West),
Verizon (formerly GTE) and PacBell, the ILECs in the states in which we
operate. We recognized reciprocal compensation revenues of $9.2 million and
$10.1 million for the three months ended September 30, 2000 and 1999,
respectively and $29.2 and $24.8 million for the nine months ended
September 30, 2000 and 1999, respectively. Net trade accounts receivable
relating to reciprocal compensation totaled $6.0 million and $14.9 million
at September 30, 2000 and December 31, 1999, respectively. These agreements
are scheduled to expire between September 30 and December 31, 2001. We
cannot provide assurance that renewal of the interconnection agreements
will be in the same form, or at rates comparable to the current
interconnection agreements.
11
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 nine 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
three quarters of 2000, we have incurred additional costs of $0.4 million
related to these decisions due to sublease and lease termination costs and
additional costs for terminated employees.
b. Results of Operations
Revenue
Revenue increased $15.0 million, or 31%, and $48.1 million, or 36%, for the
three and nine months ended September 30, 2000, respectively, over the same
periods in 1999.
For the three months ended Sept. 30, For the nine months ended Sept. 30,
------------------------------------------ -----------------------------------------
($ In thousands) 2000 1999 % Change 2000 1999 % Change
------------- ------------ ---------- ------------ ------------- ----------
Network services $ 21,627 $ 14,024 54% $ 54,804 $ 37,431 46%
Local telephone services 25,187 22,313 13% 75,412 55,221 37%
Long distance services 3,728 4,812 (23%) 12,590 22,587 (44%)
Data services 13,068 7,453 75% 38,202 17,674 116%
------------- ------------ ------------ -------------
Total $ 63,610 $ 48,602 31% $ 181,008 $ 132,913 36%
============= ============ ============ =============
Network Services
Network Services revenue increased $7.6 million, or 54%, and $17.4 million,
or 46%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. The increase is due to
continued growth in our network and sales of additional high bandwidth,
DS-3 and OC level circuits to new and existing customers.
Local Telephone Services
Local telephone services revenue increased $2.9 million, or 13%, and $20.2
million, or 37%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Local telephone services
include dial tone, ISDN PRI, carrier access billings and reciprocal
compensation.
ISDN PRI revenue increased $3.1 million, or 51%, and $10.2 million, or 66%,
for the three and nine months ended September 30, 2000, respectively, over
the same periods in 1999. Dial tone revenue increased $0.6 million, or 12%,
and $1.9 million, or 15%, for the three and nine months ended September 30,
2000, respectively, over the same periods in 1999. Increases in revenue for
both ISDN PRI and dial tone is the result of an increase in the average
access line equivalents of 61,478, or 43%, and 72,716, or 60%, for the
three and nine months ended September 30, 2000, respectively.
Carrier access billings revenue increased $0.1 million, or 7%, and $3.7
million, or 142%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. The increase is due to an
increase in average monthly minutes processed of 38.6 million from 21.9
million, or 76%, and 33.2 million from 19.2 million, or 73%, for the three
and nine months ended September 30, 2000, respectively, partially offset by
lower average rates per minute due to competitive pressures in the markets
in which we operate and a reserve for estimated uncollectible revenue made
in September 2000.
12
Reciprocal compensation revenue decreased $0.9 million, or 9%, and
increased $4.4 million, or 18%, for the three and nine months ended
September 30, 2000, respectively, over the same periods in 1999. The
decrease for the three months ended September 30, 2000 is primarily due to
decreased revenue from Qwest due to lower rates applicable to new
interconnection agreements effective January 1, 2000. The increase for the
nine months ended September 30, 2000 is due to interconnection agreements
being in place with Verizon and PacBell during the three and nine months
ended September 30, 2000 to record reciprocal compensation revenue that
were not in place for the same periods in 1999. The increase for nine
months was partially offset by decreased revenue from Qwest 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 revenue decreased $1.1 million, or 23%, and $10.0
million, or 44%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. Long distance services include
retail long distance, wholesale long distance and prepaid services.
Retail long distance revenue increased $0.7 million, or 42%, and $2.3
million, or 51%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999. The increase is due to an
increase in average monthly minutes processed of 9.8 million from 6.8
million, or 44%, and 9.9 million from 5.9 million, or 68%, for the three
and nine months ended September 30, 2000, respectively, partially offset by
lower average rates per minute.
Wholesale long distance revenue decreased $0.4 million, or 26%, and
increased $0.2 million, or 4%, for the three and nine months ended
September 30, 2000, respectively, over the same periods in 1999.
We exited the prepaid services market in the third quarter of 1999. As a
result prepaid services revenue decreased $1.4 million, or 86%, and $12.5
million, or 93%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999.
Data Services
Data services revenue increased $5.6 million, or 75%, and $20.5 million, or
116%, for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999. Data services include Internet, RSVP and
other services.
Data services revenue increased $3.3 million, or 200%, and $13.2 million,
or 800%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999, as the result of an 18-month
take-or-pay contract with a significant customer that expires on February
28, 2001. The take-or-pay contract will provide $20 million in revenue for
2000. It is not likely that this take-or-pay contract will be renewed in
2001.
Revenue from our Internet services product increased $1.6 million, or 49%,
and $5.0 million, or 64%, for the three and nine months ended September 30,
2000, respectively, over the same periods in 1999. Revenue from our RSVP
products increased $0.6 million, or 235%, and $1.7 million, or 288%, for
the three and nine months ended September 30, 2000, respectively, over the
same periods in 1999.
13
Operating Expenses
Operating expenses increased $7.9 million, or 12%, and $21.9 million, or
11%, for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999.
For the three months ended Sept. 30, For the nine months ended Sept. 30,
----------------------------------------- -----------------------------------------
($ In thousands) 2000 1999 % Change 2000 1999 % Change
------------- ------------ ---------- ------------ ------------- ----------
Network access $ 17,821 $ 14,719 21% $ 56,811 $ 63,645 (11%)
Operations 13,473 10,732 26% 38,494 29,399 31%
Selling, general and
administrative 27,540 32,017 (14%) 89,027 88,231 1%
Depreciation and
amortization 16,306 9,807 66% 43,782 24,951 75%
------------- ------------ ------------ -------------
Total $ 75,140 $ 67,275 12% $ 228,114 $ 206,226 11%
============= ============ ============ =============
Network Access
Network access expenses include circuit and usage-based charges for
carrying and terminating traffic on another carrier's network.
Network access expenses for the three months ended September 30, 2000
increased $3.1 million, or 21%, compared to the same period in 1999 due to
increased costs directly related to increased revenue growth and network
expansion and were also impacted by the termination of the prepaid phone
card business and favorable resolution of vendor disputes during the third
quarter of 1999.
Network access expenses for the nine months ended September 30, 2000
decreased $6.8 million, or 11%, compared to the same period in 1999 as a
result of the termination of the prepaid phone card business which
decreased expense by $15.7 million, partially offset by increases in costs
directly related to increased revenue growth.
Our revenue growth was 31% and 36% for the three and nine months ended
September 30, 2000, respectively, over the same periods in 1999. Network
access expense did not increase in proportion to revenue as a result of our
ability to transmit a greater portion of activity over our internal network
facilities. Additionally, we have renegotiated agreements with vendors to
reduce our off-net costs.
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 three and nine months ended September 30, 2000
increased $2.7 million, or 26%, and $9.1 million, or 31%, respectively,
over the same periods in 1999, primarily due to increases in payroll,
maintenance, operating rents and related expenses to support the expanded
delivery of services.
14
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 three months ended
September 30, 2000 decreased $4.5 million, or 14%, and increased $0.8
million, or 1%, for the nine months ended September 30, 2000, compared to
the same periods in 1999. The decrease for the three months ended September
30, 2000 is primarily due to decreased expenses related to the decision to
exit our prepaid calling card and videoconferencing products and the
consolidation of our national retail sales efforts which resulted in
closing nine retail sales offices in the eastern United States in the third
quarter of 1999, partially offset by increases in franchise fees and
property taxes. See Part I, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources - Other Matters - Exit Costs" for further discussion of exit
cost.
The increase for the nine months ended September 30, 2000 is primarily due
to increases in property taxes, maintenance and related expenses to support
the delivery of services in existing and new markets, partially offset by
decreases in costs related to the decision to exit our prepaid calling card
and videoconferencing products and the consolidation of our national retail
sales efforts which resulted in closing nine retail sales offices in the
eastern United States in the third quarter of 1999.
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 three and nine months ended
September 30, 2000 increased $6.5 million, or 66%, and $18.8 million, or
75%, respectively, over the same periods in 1999. This was primarily due to
higher plant in service balances for newly completed communications network
facilities and electronics.
Interest Expense
For the three months ended Sept. 30, For the nine months ended Sept. 30,
----------------------------------------- -----------------------------------------
($ In thousands) 2000 1999 % Change 2000 1999 % Change
------------- ------------ ---------- ------------ ------------- ----------
Gross interest expense $ 22,373 $ 14,122 58% $ 59,501 $ 33,456 78%
Capitalized interest (1,628) (2,697) (40%) (4,898) (8,864) (45%)
------------- ------------ ------------ -------------
Interest expense, net $ 20,745 $ 11,425 82% $ 54,603 $ 24,592 122%
============= ============ ============ =============
Gross interest expense increased $8.3 million, or 58%, and $26.0 million,
or 78%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999, primarily due to higher levels
of outstanding long-term debt and higher interest rates. As of September
30, 2000, we had long-term debt outstanding of $725 million compared to
$525 million at September 30, 1999. The higher balance led to increased
interest and guarantee fees.
Capitalized interest decreased $1.1 million, or 40%, and $4.0 million, or
45%, for the three and nine months ended September 30, 2000, respectively,
over the same periods in 1999. The decreases are due to reductions in
average Construction Work In Process of $45.6 million, or 42%, and $63.8
million, or 49%, for the three and nine months ended September 30, 2000,
respectively, over the same periods in 1999, partially offset by higher
interest rates.
15
Income Tax Expense
For the three months ended Sept. 30, For the nine months ended Sept. 30,
----------------------------------------- -----------------------------------------
($ In thousands) 2000 1999 % Change 2000 1999 % Change
------------- ------------ ---------- ------------ ------------- ----------
Income tax expense $ 459 $ 277 66% $ 940 $ 947 (1%)
Income tax expense increased $0.2 million, or 66%, for the three months
ended September 30, 2000, and remained virtually unchanged for the nine
months ended September 30, 2000, compared to the same periods in 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. 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 future debt
financings 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 September 30, 2000. Our
credit facility and construction agency agreement are guaranteed by
Citizens. The construction agency agreement and advances against the credit
facility periodically renew, at which point the lease payments 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 is 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.
16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
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
3.2 Amended By-laws
27.1 Financial Data Schedule for the nine months ended
September 30, 2000.
b) Reports on Form 8-K
On August 10, 2000, we filed a current report on Form 8-K, under Item 5,
"Other Events", to make available a press release dated August 8, 2000,
regarding our second quarter 2000 financial results.
17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC LIGHTWAVE, INC.
(Registrant)
By: /s/ Kerry D. Rea
Kerry D. Rea
Vice President and Controller
By: /s/ Robert J. Larson
Robert J. Larson
Chief Accounting Officer
November 13, 2000