Electric Lightwave, Inc. Form 10-K
Annual Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934
For The Year Ended December 31, 2000
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Class A, par value $.01 per share
(Title of each class)
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 1, 2001, was $35,197,000. The number of shares
outstanding of each of the registrant's classes of common stock as of March 1,
2001 were:
Common Stock Class A: 9,706,533
Common Stock Class B: 41,165,000
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 2000 Annual Meeting of Stockholders to
be held on May 17, 2001 is incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1. Business 2
General Development of Business 2
Industry Segments 2
Description of Business 3
Products and Services 4
Regulatory Environment 6
Competition 8
Operations/Information Technology 9
Employees 9
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Executive Officers of the Registrant 11
PART II
- -------
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 13
Item 6. Selected Financial and Operating Data 14
Item 7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting 23
and Financial Disclosure
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 27
Index to Financial Statements F
1
PART I
------
Item 1. BUSINESS
This annual report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
expressed or implied in the financial statements. Further discussion regarding
forward-looking statements, including the factors which may cause actual results
to differ from such statements, is located in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", in this report.
a. General development of business
----------------------------------
Electric Lightwave, Inc. is referred to as "we", "us", or "our" in this report.
We are a facilities-based competitive local exchange carrier (CLEC) providing a
broad range of communications services to businesses. We provide the full range
of wireline telecommunications products and services, including switched local
and long distance voice service, enhanced data communications services and
dedicated point-to-point services, in the western United States. We market in
the western United States to retail business customers, who are primarily
communications-intensive organizations. We market nationally to wholesale
customers, who are communications carriers themselves.
Our facilities-based network in the western United States consists of optical
fiber plus voice and data switches. We have a national internet and data network
with switches and routers in key cities, linked by leased transport facilities.
At December 31, 2000 we had 5,924 local and long-haul route miles of fiber-optic
cable in service. During 2000, we completed construction of our long-haul fiber
optic network, a self-healing Synchronous Optical Network (SONET) architecture.
This network spans more than 3,200 miles, crosses seven states and is one of the
largest OC-192 SONET systems in the western United States.
Citizens Communications Company (Citizens) owns approximately 85% of our common
stock. Our relationship with Citizens is governed by an Administrative Services
Agreement, a Tax Sharing Agreement, an Indemnification Agreement, a Customers
and Service Agreement and a Registration Rights Agreement entered into in
connection with our initial public offering in 1997 (IPO). We have entered into
a revolving credit facility with Citizens for $450 million with an interest rate
of 15% and a final maturity of October 30, 2005 (Citizens Credit Facility).
Citizens is also currently guaranteeing our $400 million revolving bank credit
facility, $325 million five-year senior unsecured notes and $110 million
construction agency and operating lease agreements. Citizens provides certain
management and administrative services to us and certain officers of Citizens
also serve as our officers.
b. Industry segments
---------------------
We operate in a single industry segment, communications services. We provide
services utilizing our centrally planned, monitored and operated
telecommunications network. Operations are managed and financial performance is
evaluated based on the delivery of multiple services to customers over our
single fiber-optic network. As a result, there are many shared expenses
generated by the various revenue streams and geographic locations. 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, we do
not presently have systems or procedures in place to derive all the operating
costs and expenses relating to a particular product group or service area.
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c. Description of business
---------------------------
In the last six years, we have built a fiber-optic network in the western United
States. We have created an infrastructure and the systems needed to support an
expanded product portfolio and a larger customer base.
We currently provide the full range of our services in seven major cities and
their surrounding areas, including:
Boise, Idaho Phoenix, Arizona
Portland, Oregon Sacramento, California
Salt Lake City, Utah Seattle, Washington
Spokane, Washington
The major cities include a network of approximately 2,065 route miles of fiber
optic cable installed to create a series of SONET-rings, which provide a higher
degree of stability and dependability. Switched service, including local dial
tone, is provided from 8 Nortel DMS 500 switches in the primary major cities. We
also have transmission equipment collocated with switches of the Incumbent Local
Exchange Carrier (ILEC) at 55 locations.
We have broadband data points of presence in our major cities as well as other
strategic cities across the United States, including:
Atlanta, Georgia Austin, Texas
Chicago, Illinois Cleveland, Ohio
Dallas, Texas Denver, Colorado
Houston, Texas Las Vegas, Nevada
Los Angeles, California New York, New York
Philadelphia, Pennsylvania San Diego, California
San Francisco, California Washington, D.C.
We have developed an Internet backbone network providing Internet connectivity
in each of our markets, including presence at all major network access points
and include "peering arrangements" with other Internet backbone service
providers. A peering arrangement is an agreement where Internet backbone service
providers agree to allow each other direct access to Internet data contained on
their networks. In addition, our broadband network consists of frame relay
switches, Asynchronous Transfer Mode (ATM) switches and network-to-network
interfaces. National and international coverage is provided through strategic
relationships with other communications providers.
We own or lease broadband long-haul fiber-optic network connections between our
major cities in the west and our strategic markets across the nation. To the
extent that we carry traffic on our own facilities, we are able to maximize the
utilization of our network facilities and minimize network access costs as well
as other interconnection costs. During 2000, we completed construction of a
SONET-ring in the western United States. The self-healing ring connects
Portland, Sacramento, San Francisco, Los Angeles, Las Vegas, Salt Lake City and
Boise. The network will include Dense Wave Division Multiplexing (DWDM)
equipment and will support voice and data traffic at speeds up to OC-192. DWDM
is a technique for transmitting 16 or more different light-wave frequencies at
speeds up to OC-192 on a single fiber to increase transmission capacity.
In the development of our long-haul facilities, we have formed strategic
relationships with utility companies that enabled us to do the following:
* utilize existing rights-of-way and fiber-optic facilities,
* utilize their construction expertise and local permitting experience and
* minimize our near-term cash requirements in order for us to extend our
network infrastructure more quickly and economically.
We entered into a fiber-swap agreement during 1999 which will exchange unused
fiber on our network for unused fiber on another carrier's network. This
exchange will provide us with a fiber route from Salt Lake City to Denver and
continuing on to Dallas. We anticipate the fiber network and the exchange to be
completed in 2001.
3
The primary focus in 2001 is targeted at increasing new and existing customer
usage of our installed asset base. We expect a substantial portion of our growth
to come from increased penetration of existing on-net buildings, a focus on
sales to customers that are connected to the network and an increase in market
share in our seven major cities and surrounding areas. We anticipate continued
growth in our sales to other carriers with the completion of our long-haul
routes, and will continue to market our excess dark fiber.
Significant Customer
Qwest (formerly U S WEST) accounted for approximately 19% of our revenue in 2000
and 1999, and 20% in 1998. No other customer accounted for more than 10% of
2000, 1999 or 1998 revenue.
PRODUCTS AND SERVICES
We provide facilities-based products and services over our switched broadband
digital network platform. This network platform enables us to integrate high
revenue generating products into our existing portfolio. 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). ISDN
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 ATM, Frame Relay
and Internet Protocol (IP) 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.
The revenues for each of these four product categories over the last three
years are presented in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in this report. The
following discussion summarizes the components of our product and services
categories.
Network Services
The Network Services product consists of point-to-point dedicated services that
provide a private transmission channel for our customer's exclusive use between
two or more locations. This product line is offered in both local and long-haul
applications.
Local services are provided over the SONET networks that we have built in each
of our major cities. Dedicated point-to-point and multiplexed services are
provided from DS-0 to OC-192 transmission levels over protected routes to our
on-net locations. Additionally, an extensive use of ILEC collocations allows us
to extend the reach of our products to more than just on-net locations.
Long-haul services are provided over owned or leased broadband long-haul fiber.
As an added value, we provide an end-to-end solution by providing local loop
connectivity in local markets. Long-haul services are offered in transmission
speeds ranging from DS-0 to OC-48.
4
Local Telephone Services
Our Local Telephone Services product line consists of the delivery of local dial
tone and related products to various business, internet service provider (ISP)
and wholesale customers.
Integrated Service Digital Network Primary Rate Interface (ISDN PRI) provides
customers with a high-speed, flexible digital access connection to the public
switched telephone network for voice, video and data applications. ISDN PRI
products are provided in Data Only, Data and Voice, and Dialable Wideband
Service configurations, according to the customer's need. For Voice and Data
applications, calling features and Direct Inward Dialing functions are provided.
We offer a selection of trunk products to medium and large businesses with their
own private branch exchange (PBX) or key system equipment. Trunk products are
provided as incoming, outgoing, or 2-way call paths to the our central office
and the public switched telephone network. The primary offering in this category
provides trunks to customers in full DS-1 increments, providing for maximum use
of our transport network.
Business Lines are offered in the form of Basic, Enhanced and Virtual Private
Exchange. Basic business lines provide an incoming, outgoing, or 2-way call path
to the public switched telephone network. Calling features are available to
provide additional user functions. Enhanced Business Service is a product bundle
of business line, calling features and voice messaging, designed to meet small
business needs.
Virtual Private Exchange (VPX) is an alternative to the customer's PBX, key
system or ILEC-provided Centrex for medium and large businesses that require
more advanced services, such as call park, call pick-up and last number redial.
We provide approximately 28 features for a flat monthly rate with optional
features available. We also offer customer premise telephone sets designed for
easier use of VPX features and voice messaging.
Local Number Portability (LNP) is provided in Salt Lake City, Sacramento,
Portland, Phoenix, and Seattle for line, trunk and ISDN PRI products. LNP
provides our customers with a seamless transition from their current provider to
us by allowing customers to migrate all of their telephone numbers from their
current dial tone provider to us when we become their new service provider.
We offer additional calling features with our core Local Telephone Services.
These include Foreign Exchange Service to provide local service from an exchange
other than the customer's normal location; voice messaging and voice menuing;
and Custom Link bundling of a range of services over a T-1 line to a customer.
Long Distance Services
Our Long Distance Services include retail and wholesale long distance phone
services.
Retail Switched 1+ and toll-free service is offered to business customers. The
customer chooses us as its long distance/toll-free carrier and calls are routed
through our switch from the public switched network. Customers can call
intrastate, interstate or internationally.
Retail Dedicated 1+ and toll-free service is offered to high volume business
customers. The customer establishes a point-to-point circuit (i.e., DS-1 or
DS-3) from their switch/PBX to our switch. Outbound long distance and toll-free
calls are routed directly to our switch via this dedicated path. Customers can
call intrastate, interstate or internationally.
Wholesale Termination encompasses an array of services providing carriers with
LATA-wide termination services, enabling lower cost access to, or diversity
from, the ILEC's facilities. This product aggregates the termination traffic of
many carriers at our switch and terminates it at a lower cost than each of the
carriers could obtain individually.
5
Data Services
We offer a wide range of products to deliver large quantities of data from one
location to another. These products are marketed through both retail and
wholesale channels.
Dedicated Internet Services are provided in various bandwidths and
configurations to serve both ISPs and business customers. We offer internet
access through frame relay, dedicated DS-1, dedicated DS-3 and dedicated and
shared Ethernet. The capped DS-3 product allows customers to scale their
internet access from 3 Mbps to 45 Mbps over the same facility. With Managed
Router Service, we provide customers with premise equipment and a fully
supported hardware and access solution. Network monitoring and performance
management enhanced feature packages provide a turnkey solution that addresses
performance management at multiple levels of the customer's network. The result
is a correlated, end-to-end view of the customer's network infrastructure,
enabling them to understand and measure the effectiveness of their IT investment
for the first time.
Remote Systems Virtual Portal (RSVP) is a complete, bundled solution for ISPs
looking to outsource their dial-up access needs by purchasing dial-up ports
bundled with internet access. This product allows the ISP to expand their
offering or enter new markets, whether locally or nationally, without the costs
of capital expenditures, site selection, hardware purchase and system
integration. With RSVP, we enable the ISP to focus their efforts on increasing
their customer base.
Enhanced IP Services are a bundling of Managed Collocation and Internet Access
products designed to solve key problems facing any company conducting electronic
commerce via the Internet. Managed Collocation products involve the hosting of a
customer's equipment allowing them to outsource some or all of the requirements
necessary to operate an e-commerce site.
Frame Relay is a data communications alternative to traditional point-to-point
networks for wide area network (WAN) connectivity. The service provides
multi-point, wide-area connectivity using frame relay packet technology that
reduces the connection costs of distributed data networks. The service offers a
choice of interface speeds with multiple virtual circuits possible at each site.
Asynchronous Transfer Mode (ATM) is a fast packet service that formats, switches
and multiplexes various types of information, including voice, video and data at
speeds ranging from T-1 to OC-3. ATM provides Quality of Services parameters
based on the type of information being carried in a statistically multiplexed
architecture to reduce network costs. Our ATM service provides interworking
between frame relay, transparent LAN and native ATM locations.
Transparent LAN Services (TLS) are managed ATM solutions providing the customer
with LAN performances and bandwidths over wide area network locations. TLS
products provide native LAN protocols including Ethernet, Token Ring and Fiber
Distributed Data Interface (FDDI). High-speed services are provided from 4 Mbps
to 100 Mbps. Included in the transparent LAN service are point-to-point
connectivity, installed customer premise equipment and the monitoring of the
customer's network to insure connectivity.
REGULATORY ENVIRONMENT
As a common carrier, we are subject to federal, state and local regulation. The
Federal Communications Commission (FCC) exercises jurisdiction over all
interstate communications services. State commissions retain jurisdiction over
all intrastate communications services. Local governments may require us to
obtain licenses or franchises regulating the use of public rights-of-way
necessary to install and operate our network.
6
Federal Regulation
The FCC exercises regulatory jurisdiction over all facilities of, and services
offered by, communications common carriers to the extent those facilities are
used to provide, originate or terminate interstate communications. The FCC has
established different levels of regulation for "dominant" carriers and
"nondominant" carriers. For domestic interstate communications services, only
the ILECs are classified as dominant carriers, and all other carriers are
classified as nondominant carriers. Additionally, to the extent a Regional Bell
Operating Company (RBOC) is engaged in out-of-region long distance services it
is also classified as nondominant as to those services. Non-RBOC,
ILEC-affiliated long distance services are classified as nondominant regardless
of whether conducted inside or outside the ILEC service area. The FCC regulates
many of the rates, charges and services of dominant carriers to a greater degree
than those of nondominant carriers.
As a nondominant carrier, we may install and operate facilities for domestic
interstate communications without prior FCC authorization. We are no longer
required to maintain tariffs for domestic interstate long distance services. As
a provider of international long distance services, we obtained FCC operating
authority and maintain an international tariff. We are also required to submit
certain periodic reports to the FCC and pay regulatory fees.
Telecommunications Act of 1996
The Telecommunications Act of 1996 (1996 Act) dramatically changed the national
public policy framework for communications. A central focus of this sweeping
policy reform was to open local communications markets to competition. One
result of the 1996 Act has been the development of new companies known as CLECs
which compete for business with the existing carriers, known as ILECs. While we
provide more than just local exchange service, we are generally considered to be
a CLEC.
The 1996 Act preempts state and local laws to the extent that they prevent
competitive entry into the provision of any communications service. Under the
1996 Act, however, states retain authority to impose requirements on carriers
necessary to preserve universal communications service, protect public safety
and welfare, ensure quality of service and protect consumers. States are also
responsible for mediating and arbitrating interconnection agreements between
CLECs and ILECs if voluntary negotiations fail.
In order to create an environment in which local competition is a practical
possibility, the 1996 Act imposes a number of access and interconnection
requirements on all local communications providers. All local carriers must
interconnect with other carriers, permit resale of their services, provide local
telephone number portability and dialing parity, provide access to poles, ducts,
conduits, and rights-of-way, and complete calls originated by competing carriers
under reciprocal compensation or mutual termination arrangements.
RBOCs had been barred from participating in the market for interLATA services
(which is primarily long-distance traffic) in their service territories since
the break up of the Bell System in 1984. The 1996 Act provides a mechanism for
an RBOC to enter in-region interLATA markets. Full RBOC entry into interLATA
markets would increase the level of competition faced by our long distance
services.
Before an RBOC can enter an interLATA market it must first meet specific
criteria set out by section 271 of the 1996 Act. These criteria are commonly
referred to as the "14 point checklist". The checklist is meant to ensure that
the RBOCs have opened up their local markets to competition before they compete
in the long distance markets in their regions. Verizon and SBC Communications
have both successfully filed interLATA applications with the FCC.
7
Interconnection
On August 8, 1996, the FCC issued rules providing guidance to the ILECs, CLECs,
long distance companies and state public utility commissions (PUCs) on several
provisions of the 1996 Act. The rules include, among other things, FCC guidance
on:
* discounts for end-to-end resale of ILEC local exchange services;
* availability of unbundled local loops and other unbundled ILEC network
elements;
* the use of Total Element Long Run Incremental Costs in the pricing of these
unbundled network elements; and
* the ability of CLECs and other interconnecters to opt into portions of
interconnection agreements negotiated by the ILECs with other parties on
the basis of the ability to "pick and choose" among the provisions of an
existing agreement.
State Regulation
Most state PUCs require communications providers, like us, to obtain operating
authority prior to initiating intrastate services. Most states also require the
filing of tariffs or price lists and/or customer-specific contracts. In the
states in which we currently operate, we are not subject to rate-of-return or
price regulation. We are subject, however, to state-specific quality of service,
universal service, periodic reporting and other regulatory requirements,
although the extent of such requirements is generally less than that applicable
to ILECs.
Local Government Authorizations
We are generally required to obtain street opening and construction permits from
city and county authorities prior to installing or expanding our fiber-optic
network facilities. In most states in which we currently operate as a CLEC, we
must first obtain a franchise or license from each incorporated city and town,
and sometimes from each county, in which we wish to utilize public
rights-of-way. The franchise or license establishes the overall terms,
conditions and fees for use of the rights-of-way in the particular jurisdiction
although most fees are based on a percentage of revenue.
The 1996 Act now provides that while local governments may continue to manage
the public rights-of-way, they may not impose conditions on companies like us
which constitute barriers to entry in the communications market. Further, the
1996 Act requires that municipal right-of-way authorizations be granted on a
nondiscriminatory basis and that any fees be reasonable.
COMPETITION
ILEC Competition
We are a competitor to the ILECs in each of our facilities-based markets. The
ILECs currently dominate the local exchange market and historically have been a
de facto monopoly provider of local switched voice services. Primary ILEC
competitors are Qwest, PacBell and Verizon. ILECs have long-standing
relationships with their customers and have financial and technical resources
substantially greater than those available to us.
The 1996 Act imposes interconnection obligations on ILECs, and generally
requires that interconnection charges be cost-based and nondiscriminatory. To
the extent we interconnect with and use an ILEC's network to service our
customers, we are dependent upon the technology and capabilities of the ILEC to
meet certain communications needs of our customers and to maintain its service
standards.
CLEC Competition
Facility and non-facility based operational CLEC competitors in our markets
include, among others: AT&T Local Services, Time Warner Telecom, WorldCom and XO
Communications. In each of our markets in which we operate, at least one other
CLEC, and in some cases several other CLECs, offer many of the same local
communications services we provide, generally at similar prices.
8
Competition From Others
Potential and actual new market entrants in the local communications services
business include RBOCs entering new geographic markets, Inter Exchange Carriers
(IXCs), cable television companies, electric utilities, international carriers,
satellite carriers, teleports, microwave carriers, wireless telephone system
operators and private networks built by large end users, many of which may have
financial, personnel and other resources substantially greater than those
available to us. In addition, the current trend of business combinations and
alliances in the communications industry, including mergers between RBOCs, may
increase competition for us. With the passage of the 1996 Act and the entry of
RBOCs into the long distance market, we believe that IXCs may be motivated to
construct their own local facilities or otherwise acquire the right to use local
facilities and/or resell the local services of our competitors.
Network Services
Competition for network services is based on price, quality, network
reliability, customer service, service features and responsiveness to the
customer's needs. As a point of differentiation from the ILECs, our fiber-optic
networks provide both diverse access routing and redundant electronics, design
features not widely deployed within the ILEC's networks.
High-Speed Data Service
Our competitors for high-speed data services include major IXCs, other CLECs and
various providers of niche services (such as Internet access providers, router
management services and systems integrators). The interconnectivity of our
markets may create additional competitive advantages over other data service
providers that must obtain local access from the ILEC or another CLEC in each
market or that cannot obtain intercity transport rates on terms as favorable as
those available to us.
Internet Services
The market for Internet access and related services in the United States is
extremely competitive, with barriers to entry related to capital costs,
bandwidth capacity and internal provisioning and operations processes. We expect
that competition will intensify as existing services and network providers and
new entrants compete for customers. In addition, new enhanced Internet services
such as managed router service and web hosting are constantly under development
in the market, and we expect additional innovation in this market by a range of
competitors. Our current and future competitors include communications
companies, including the RBOCs, IXCs, CLECs and Cable Television (CATVs), and
other Internet access providers. Many of these competitors have greater market
presence and greater financial, technical, marketing and human resources, more
extensive infrastructure and stronger customer and strategic relationships than
are available to us.
OPERATIONS/INFORMATION TECHNOLOGY
We utilize an integrated customer care that automates our order placement,
circuit design, provisioning and billing systems. We anticipate adding
additional functionality through system enhancements as necessary. We continue
to identify opportunities for productivity improvements.
EMPLOYEES
As of December 31, 2000 we employed 1,161 persons. None of our employees is
represented by a union. We consider our employee relations to be good.
9
Item 2. DESCRIPTION OF PROPERTY
Our administrative headquarters is located at 4400 NE 77th Avenue, Vancouver,
Washington, in an office building of approximately 98,000 square feet which we
own. In addition, we have leased local office space in various markets
throughout the United States, and we also maintain a warehouse facility in
Portland, Oregon. We also lease network hub and network equipment installation
sites in various locations throughout the areas in which we provide services.
The leases for the office, warehouse and other facilities expire on various
dates through October 2008. We believe that our properties are adequate and
suitable for their intended purposes. Our 5,924 miles of fiber-optic cable is
installed under various rights-of-way and leases held by us.
Item 3. 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 PUCs. These
proceedings typically relate to authority to operate in a state and regulatory
arbitration proceedings concerning our interconnection agreements. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Other Matters - Reciprocal
Compensation".
Item 4. SUBMISSION OF MATTERS TO a VOTE OF SECURITY HOLDERS
Not applicable.
10
Executive Officers of the Registrant
Our executive officers, their respective ages and positions as of March 1, 2001
are listed below.
Name Age Title
- ---- --- -----
|X| Leonard Tow 72 Chairman of the Board and Director
|X| Rudy J. Graf 52 Chief Executive Officer and Director
|X| Robert Braden 55 President, Chief Operating Officer and Director
|X| Scott N. Schneider 43 Executive Vice President and Director
|X| Robert J. Larson 41 Vice President and Chief Accounting Officer
|X| Steven E. Adkins 49 Vice President - Information Technology and Billing Operations
|X| Donald Armour 53 Vice President and Treasurer
|X| Charles Best 47 Vice President - Administration and Legal Affairs
|X| Leslie J. Brown 43 Vice President - Revenue Assurance and Budget
|X| Michael L. Daniel 36 Vice President - Sales
|X| David P. Frezza 36 Vice President - Engineering and Operations
|X| Randall J. Lis 41 Vice President - Marketing
|X| Kerry D. Rea 42 Vice President and Controller
There is no family relationship between any of our officers. The term of office
of each of our officers will continue until the next annual meeting of the Board
of Directors and until a successor has been elected and qualified.
|X| Leonard Tow, a Director and Chairman of our Board since August 1994, has
been a Director of Citizens since April 1989. He was elected Chairman of
the Board and Chief Executive Officer of Citizens in June 1990 and was
Chief Financial Officer of Citizens from October 1991 through November
1997. He has also been a Director and Chief Executive Officer of Century
Communications Corp. since its incorporation in 1973 and Chairman of its
Board of Directors from October 1989 until October 1999. He is also a
Director of Hungarian Telephone and Cable Corporation.
|X| Rudy J. Graf, a Director and Chief Executive Officer, has been associated
with us and Citizens since September 1999, and is currently Citizens'
President and Chief Operating Officer. Prior to joining Citizens, he was
Director, President and Chief Operating Officer of Centennial Cellular
Corporation and Chief Executive Officer of Centennial DE Puerto Rico from
November 1990 to August 1999.
|X| Robert Braden joined us as President, Chief Operating Officer and Director
in January 2001. He comes from Citizens, where he was Vice President of
Business Development. Prior to joining Citizens, he was Senior Vice
President of Business Development and Senior Vice President of
International Operations at Centennial Communications. There, he
successfully launched the company's telecom services in Puerto Rico. He
also held the positions of Vice President of Business Development at
Century Communications and various positions with Metromedia Paging, Omni
Communications, VMX, Inc., and Hoffman-LaRoche Inc.
|X| Scott N. Schneider, a Director and Executive Vice President since December
1999, has been associated with Citizens since October 1999. He is currently
Executive Vice President and President, Citizens Capital Ventures, a wholly
owned subsidiary of Citizens. Prior to joining us, he was Director (from
October 1994 to October 1999), Chief Financial Officer (from December 1996
to October 1999), Senior Vice President and Treasurer (from June 1991 to
October 1999) of Century Communications Corp. He also served as Director,
Chief Financial Officer, Senior Vice President and Treasurer of Centennial
Cellular from August 1991 to October 1999.
|X| Robert J. Larson, our Chief Accounting Officer and Vice President since
July 2000, has been Chief Accounting Officer and Vice President of Citizens
since July 2000. Prior to joining Electric Lightwave, Inc., he was Vice
President, Accounting and Administration of Centennial Cellular from
October 1994 to October 1999. He was also Vice President, Controller of
Century Communications Corp. from October 1994 to October 1999.
11
|X| Steven E. Adkins joined us as Vice President - Information Technology in
1995 and has recently been appointed as Vice President - Information
Technology and Billing Operations.
|X| Donald Armour, our Vice President and Treasurer since October 2000, has
been Vice President, Finance and Treasurer of Citizens since October 2000.
Prior to joining us, he was the Treasurer of the cable television division
of Time Warner Inc. from January 1994 to September 2000. From August 1991
to March 1992, he was a consultant to the health care industry.
|X| Charles Best joined us as Vice President and General Counsel in May 2000
and has recently been appointed Vice President - Administration and Legal
Affairs. Prior to joining us, he was an attorney in private practice and
Chief Counsel for U S West Communications in Oregon from 1990 to 1995.
|X| Leslie J. Brown joined us as Vice President - Finance and Planning in
September 1999 and has recently been appointed Vice President - Revenue
Assurance and Budget. Ms. Brown was with Southern New England
Telecommunications in a variety of positions in Finance and Wireless from
1978 through 1999.
|X| Michael L. Daniel joined us as Portland Sales Manager in March 1994 and
became Vice President - Retail Sales in October 1996 and Vice President -
Sales in June 2000. He was a national account manager for MCI
Telecommunications new business development organization from 1987 to 1994.
|X| David P. Frezza joined us as Vice President - Engineering and Operations in
February 2001. Prior to joining us, he was District Manager, Manager -
Network Operations Center, Director of Customer Operations and Director of
Integration for Operations and Engineering of Citizens since 1994. Prior to
joining Citizens, he held positions with Northern Telecom, Contel and GTE.
|X| Randall J. Lis joined us as Vice President - Staff Operations in February
1995, became Senior Vice President - Operations and Engineering in 1999 and
has recently been appointed as Vice President - Marketing. Mr. Lis was
General Manager of the Mid-Atlantic Region of Nextel Communications from
1993 to 1995. He held several positions with Metromedia and Metromedia
Paging, in which he served as Business Manager, General Manager and Senior
Director of Operations from 1985 through 1993.
|X| Kerry D. Rea joined us as Vice President and Controller in October 1997.
Mr. Rea served as a Controller for Mattel, Inc. from March 1997 to October
1997 and its predecessor Tyco Toys, Inc. from November 1989 to March 1997.
12
PART II
-------
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Our Class A Common Stock is publicly traded on the NASDAQ National Market under
the ticker symbol ELIX. The table below shows high and low sales prices per
share of Class A Common Stock as reported by the NASDAQ National Market:
2000 1999
----------------------------- ----------------------------
High Low High Low
------------- ------------- ------------ ------------
First Quarter $ 27.00 $ 16.63 $ 11.88 $ 7.38
Second Quarter 25.00 15.88 16.00 9.00
Third Quarter 19.75 7.00 18.00 12.00
Fourth Quarter 8.88 2.88 20.00 12.13
As of March 1, 2001, the approximate number of record security holders of our
Class A Common Stock was 91.
Our Class B Common Stock is not publicly traded and is 100% owned by Citizens.
Dividends
We have not paid dividends and we do not anticipate paying any dividends on our
common stock in the foreseeable future.
Recent Sales Of Unregistered Securities
None.
13
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
($ in thousands, except per share and
non-dollar denominated operating data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Statements of Operations Data (years ended December 31)
Revenues $ 243,977 $187,008 $100,880 $ 61,084 $ 31,309
Loss from operations (59,876) (94,066) (73,783) (34,095) (29,383)
Net loss before cumulative effect (1) (136,462) (133,547) (67,200) (33,945) (29,383)
Net loss (136,462) (133,547) (70,017) (33,945) (29,383)
Net loss per share before cumulative effect (1) and (2) (2.70) (2.68) (1.35) (0.80) --
Net loss per share (2) (2.70) (2.68) (1.41) (0.80) --
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (as at December 31)
Total assets $ 949,774 $775,234 $532,309 $359,962 $195,656
Long-term debt and capital leases 866,404 624,997 302,256 70,511 155,395
Shareholders' equity (deficiency) (70,502) 19,501 148,493 213,314 9,286
- --------------------------------------------------------------------------------------------------------------------
Operating Data
Adjusted EBITDA (3) $ 1,787 $ (57,561) $ (56,781) $ (22,928) $ (22,191)
Cash flows used for operating activities (54,390) (97,972) (36,776) (17,189) (31,990)
Cash flows used for investing activities (108,909) (180,342) (200,791) (103,984) (56,072)
Cash flows from financing activities 152,239 286,572 224,156 147,093 88,530
Gross property, plant & equipment
- owned or under capital lease $ 978,327 $ 771,947 $ 528,582 $ 328,664 $ 189,334
- under operating lease (4) 108,541 108,541 108,541 87,426 57,279
------------ ----------- ----------- ----------- -----------
Total property, plant & equipment $1,086,868 $ 880,488 $ 637,123 $ 416,090 $ 246,613
============ =========== =========== =========== ===========
Route miles (5) 5,924 4,052 3,091 2,494 1,428
Fiber miles (5) 297,284 214,864 181,368 140,812 97,665
Buildings connected 851 824 766 610 438
Access line equivalents 200,231 161,555 74,924 34,328 8,779
Switches and routers installed:
Voice 8 8 7 5 5
Frame Relay 32 32 23 20 15
Internet 65 42 24 17 8
ATM 23 23 14 8 --
Employees 1,161 1,167 1,090 573 402
Customers 2,401 2,147 1,644 1,165 763
14
Information presented above should be read in conjunction with our Financial
Statements and accompanying Notes.
(1) We adopted SOP 98-5, "Reporting on the Costs of Start-Up Activities",
effective January 1, 1998 (See Note 5 of Notes to Financial Statements).
(2) Net loss per share for 1996 is not presented because it is not meaningful.
(3) Adjusted EBITDA is operating loss plus depreciation and amortization.
EBITDA is a measure commonly used in the communications industry to analyze
companies on the basis of operating performance. It is not a measure of
financial performance under generally accepted accounting principles, and
should not be comparable to similarly titled measures of other companies.
(4) Facilities under an operating lease agreement under which we have the
option to purchase the facilities at the end of the lease term (See Note 13
of Notes to Financial Statements).
(5) Route and fiber miles also include those to which we have exclusive use
pursuant to license and lease arrangements.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
We caution you that this annual report on Form 10-K 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. These
statements are based on our beliefs, expectations and assumptions and on
information currently available to us. We undertake no obligation to update or
revise forward-looking statements. 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 annual report on Form 10-K 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 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 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;
o if our stock price is volatile; or
o the effects of more general factors including, but not limited to, changes
in economic conditions, changes in industry conditions and changes in
accounting policies and practices adopted voluntarily or as required by
generally accepted accounting principles.
You should consider these important factors in evaluating any statement
contained in this report and/or made by us or on our behalf.
- -------------------------------------------------------------------------------
16
The following information should be read in conjunction with the financial
statements and related footnotes included in this report.
Liquidity and Capital Resources
We drew $140 million (net) from our $400 million revolving bank credit facility
(Bank Credit Facility) and a $38 million advance from Citizens to fund operating
and capital expenditures in the year ended December 31, 2000. At December 31,
2000, there are no remaining funds available for draw under our $400 million
Bank Credit Facility. We have entered into a revolving credit facility with
Citizens for $450 million with an interest rate of 15% and a final maturity of
October 30, 2005 (Citizens Credit Facility). Funds of $260 million for general
corporate purposes are available to be drawn until March 31, 2002. The remaining
balance may be drawn to pay interest due under the Citizens Credit Facility
until maturity. No principal payment on the Bank Credit Facility is due until
its expiration date in November 2002. Additionally, we have $325 million of
five-year 6.05% senior unsecured notes outstanding that mature on May 14, 2004.
Citizens has guaranteed both the Bank 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 $28.8
million consists solely of capital lease obligations.
We anticipate that our existing cash balances and cash to be generated from
operations will not be adequate to fund operating leases, working capital
deficiencies, capital expenditures, capital lease obligations and debt service
through 2001. The Citizens Credit Facility provides the funds necessary to
support cash requirements through March 31, 2002. Citizens has committed to
continue to finance our cash requirements, at market terms and conditions, until
the completion of a public or private financing or March 31, 2002, which would
provide the funds necessary to support our cash requirements. Absent the
Citizens Commitment, we do not believe there is currently a market to further
finance or refinance our existing indebtedness.
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 $215 million in the year ended December 31, 2000, including $102
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 be sure that we will achieve or sustain profitability or that
we will generate sufficient positive cash flow to fund our operating, capital
expenditure and debt service requirements.
The development and expansion of our existing and new networks and services will
require significant additional capital. Our capital additions for 2001 are
estimated to be $141 million, of which $131 million are estimated to be cash
expenditures and approximately $10 million are estimated to be non-cash capital
lease additions. 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 have the following commitments in the forms of capital leases and a
construction agency agreement:
o We have entered into certain long-term capital leases to obtain dark fiber
to more quickly expand our network. Total future minimum cash payment
commitments under these leases amounted to $276.1 million as of December
31, 2000, including principal and interest of $41.9 million due in 2001.
17
o During 1995, we entered into a $110 million construction agency agreement
and an operating lease agreement in connection with the construction of
certain network facilities. We have the option to purchase the facilities
at the end of the lease term. Payments under the lease depend on current
interest rates. Assuming continuation of current interest rates, payments
would approximate $6.7 million annually through April 30, 2002 and,
assuming exercise of the purchase option, a final payment of approximately
$110 million in 2002. If we choose not to exercise the purchase option, we
are obligated to arrange for the sale of the facilities to an unrelated
party and are required to pay the lessor any difference between the net
sales proceeds and the lessor's investment in the facilities. However, any
amount required to be paid to the lessor is subject generally to a maximum
of approximately $88 million. Citizens has guaranteed all of our
obligations under this operating lease. We have agreed to pay to Citizens a
guarantee fee at the rate of 3.25% per annum based on the amount of the
lessor's investment in the leased assets.
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. We expect the adoption of SFAS 133 could
increase the volatility of reported results and other comprehensive income in
the future. In general, the amount of volatility will vary with the level of
derivative activities during any period. As of January 1, 2001, we have adopted
SFAS 133 and have not identified any derivative instruments subject to the
provisions of SFAS 133. Therefore, SFAS 133 will not have any impact on our 2001
financial statements upon adoption on January 1, 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
which provides additional guidance in applying generally accepted accounting
principles for revenue recognition in financial statements. SAB 101 is effective
beginning in the fourth quarter of 2000 and did not have a material impact on
our financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25." FIN No. 44
includes questions and answers that address the scope of Accounting Principles
Board (APB) Opinion No. 25, including, but not limited to, the definition of an
employee for purposes of applying APB Opinion No. 25, new measurement date
requirements, variable award accounting for option repricings and accounting for
options granted by the acquirer in a business combination. The provisions of the
Interpretation were effective July 1, 2000 and apply prospectively, except for
requirements related to the definitions of an employee and option repricings,
which were effective as of December 15, 1998. FIN No. 44 did not have a material
effect on our financial statements.
Reciprocal Compensation
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.
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
$38.8 million, $34.7 million and $18.6 million during 2000, 1999 and 1998,
respectively. Net trade accounts receivable relating to reciprocal compensation
totaled $7.7 million and $14.9 million at December 31, 2000 and 1999,
respectively. These agreements are scheduled to expire between June 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 agreement.
18
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 Incumbent Local
Exchange Carriers (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.
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 second quarter 2001. We are not currently able to determine the potential
impact of that decision on us.
Results of Operations
Revenues increased $57.0 million, or 30% in 2000 over 1999 and $86.1 million, or
85% in 1999 over 1998.
Revenues
2000 1999 1998
-------------------------- --------------------------- ------------
($ In thousands) Amount % Change Amount % Change Amount
------------ ------------ ------------ ----------- ------------
Network services $ 77,437 45% $ 53,249 46% $ 36,589
Local telephone services 98,643 27% 77,591 103% 38,169
Long distance services 16,318 (39%) 26,698 117% 12,309
Data services 51,579 75% 29,470 113% 13,813
------------ ------------ ------------
Total $243,977 30% $187,008 85% $100,880
============ ============ ============
Network Services
Network services revenues increased $24.2 million, or 45%, in 2000 over 1999,
primarily due to continued growth in our network and sales of additional high
bandwidth, DS-3 and OC level circuits to new and existing customers.
Network services revenues increased $16.7 million, or 46%, in 1999 over 1998,
primarily due to the expansion of our network and the sale of additional
circuits to new and existing customers.
Local Telephone Services
Local telephone services revenue increased $21.1 million, or 27% in 2000 over
1999 and $39.4 million, or 103% in 1999 over 1998. Local telephone services
include dial tone, ISDN PRI, Carrier Access Billings and reciprocal
compensation.
o ISDN PRI revenue increased $11.5 million, or 52% in 2000 over 1999 and
$12.7 million, or 135% in 1999 over 1998. Dial tone revenue increased $5.6
million, or 41% in 2000 over 1999 and $6.9 million, or 101% in 1999 over
1998. Increases in revenue for both ISDN PRI and dial tone is the result of
an increase in the average access line equivalents of 64,206, or 46% in
2000 over 1999 and 86,631, or 115%, in 1999 over 1998.
19
o Carrier Access Billings revenue decreased $0.3 million, or 4% in 2000 over
1999 and increased $3.7 million, or 113% in 1999 over 1998. The change is
due to an increase in average monthly minutes processed of 15.0 million, or
77% in 2000 over 1999 and 11.2 million, or 133% in 1999 over 1998. For 2000
over 1999, the increase in minutes processed were offset by the effects of
lower average rate per minute primarily due to competitive pressures in the
markets in which we operate. For 1999 over 1998, the increase in minutes
processed was only partially offset by lower average rates per minute due
to competitive pressures in the markets in which we operate.
o Reciprocal compensation revenue increased $4.2 million, or 12% in 2000 over
1999 and $16.1 million, or 87% in 1999 over 1998. The increase for 2000
over 1999 is due to interconnection agreements being in place with Verizon
and PacBell during all of 2000 that were not in place for all 12 months in
1999, partially offset by lower rates applicable to new interconnection
agreements effective January 1, 2000. The increase for 1999 over 1998 is
due to new interconnection agreements being in place with Qwest, Verizon
and PacBell during parts of 1999 that were not in place at all in 1998. 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 $10.4 million, or 39% in 2000 compared
to 1999 and increased $14.4 million, or 117% in 1999 over 1998. Long distance
services include retail long distance, wholesale long distance and prepaid
services.
o Retail long distance revenue increased $2.3 million, or 35% in 2000 over
1999 and $3.6 million, or 117%, in 1999 over 1998. The increase is due to
an increase in average monthly minutes processed of 3.1 million, or 47% in
2000 over 1999 and 3.6 million, or 118% in 1999 over 1998, partially offset
by lower average rates per minute.
o Wholesale long distance revenue increased $0.1 million, or 2% in 2000 over
1999 and $2.9 million, or 86%, in 1999 over 1998. The increase is due to an
increase in average monthly minutes processed of 0.9 million, or 6% in 2000
over 1999 and 10.3 million, or 174% in 1999 over 1998, partially offset by
lower average rates per minute.
o Prepaid services revenue decreased $12.8 million, or 93% in 2000 compared
to 1999 and increased $7.9 million, or 134%, in 1999 over 1998. The
decrease in 2000 is due to our decision to exit the prepaid services market
in the third quarter of 1999. The increase in 1999 over 1998 is primarily
due to an increase in minutes processed over 1998.
Data Services
Data services revenue increased $22.1 million, or 75% in 2000 over 1999 and
$15.6 million, or 113% in 1999 over 1998. Data services include Internet, RSVP
and other services.
o Revenue from our Internet services product increased $6.1 million, or 53%
in 2000 over 1999 and $6.4 million, or 93% in 1999 over 1998.
o Revenue from our RSVP products increased $2.5 million, or 227% in 2000 over
1999 and $1.0 million, or 684% in 1999 over 1998.
o Data services revenue also increased $13.2 million, or 200% in 2000 over
1999 and $6.6 million, or 100% in 1999 over 1998, as the result of an
18-month take-or-pay contract that expired on February 28, 2001 with a
significant customer which was not renewed. This take-or-pay contract
provided $19.8 million in revenue in 2000 and $3.3 million in revenue for
2001.
20
Operating Expenses
Operating expenses increased $22.8 million, or 8%, in 2000 over 1999 and $106.4
million, or 61% in 1999 over 1998.
2000 1999 1998
-------------------------- -------------------------- ------------
($ In thousands) Amount % Change Amount % Change Amount
-------------- ------------ ------------ ------------ ---------- ------------
Network access $ 74,105 (7%) $ 79,948 57% $ 50,957
Operations 52,740 28% 41,222 46% 28,149
Selling, general and
administrative 115,345 (7%) 123,399 57% 78,555
Depreciation and amortization 61,663 69% 36,505 115% 17,002
------------ ------------ ------------
Total $303,853 8% $281,074 61% $174,663
============ ============ ============
Network Access
Network access expenses include circuit and usage-based charges for carrying and
terminating traffic on another carrier's network.
Network access expenses decreased $5.8 million, or 7%, in 2000 over 1999. The
decrease is a result of the termination of the prepaid services business which
decreased expense by approximately $16.1 million and the completion of our
inland and coastal long-haul network which has allowed us to focus on providing
on-net services resulting in reduced variable costs. These savings are partially
offset by increases in costs directly related to increased revenue growth and
network expansion.
Network access expenses increased $29.0 million, or 57%, in 1999 over 1998 as a
result of revenue growth and network expansion as well as an $11.9 million
increase in costs related to the prepaid services business.
Operations Expense
Operations expense consists 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 expense increased $11.5 million, or 28%, in 2000 over 1999 primarily
due to increases in payroll and related expenses, maintenance, operating rents
and related expenses to support the expanded delivery of services.
Operations expense increased $13.1 million, or 46%, in 1999 over 1998 primarily
due to increases in payroll and related expenses, operating rents and related
expenses to support the expanded delivery of services. Operating employee
headcount increased by 64 employees, or 13%, in 1999 over 1998 due to continued
focus on making technical resources available in each market and improve
existing processes to support the 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 decreased $8.1 million, or 7%, in
2000 compared to 1999. The decrease is primarily due to decreases in payroll and
related expenses, rent and costs related to the decision to exit our prepaid
calling card services 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.
21
Selling, general and administrative expenses increased $44.8 million, or 57%, in
1999 over 1998, primarily due to increases in payroll and related expenses to
improve internal automation and existing processes and to support the delivery
of services in new and existing markets. Headcount rose early in the year to
support the national data expansion and was reduced on November 1, 1999 due to
the dissolution of our prepaid phone card services and closure of six retail
sales offices. 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.
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 expenses increased $25.2 million, or 69%, in 2000
over 1999 and $19.5 million, or 115%, in 1999 over 1998. The increases were
primarily due to higher plant in service balances for newly completed
communications network facilities and electronics.
Non-Operating Income (Expense)
2000 1999 1998
-------------------------- --------------------------- ------------
($ In thousands) Amount % Change Amount % Change Amount
-------------- ------------ ------------ ------------ ----------- ------------
Gross interest expense $ 83,044 68% $ 49,547 176% $ 17,970
Capitalized interest (7,260) (36%) (11,304) 8% (10,444)
------------ ------------ ------------
Interest expense, net $ 75,784 98% $ 38,243 408% $ 7,526
Gross interest expense increased $33.5 million, or 68%, in 2000 over 1999 and
$31.6 million, or 176%, in 1999 over 1998, primarily due to higher levels of
outstanding long-term debt and capital lease obligations. We had outstanding
long-term debt and capital lease obligations of $895.2 million, $650.1 million
and $302.6 million at December 31, 2000, 1999 and 1998, respectively. The higher
balances led to increased interest expense and guarantee fees.
Capitalized interest decreased $4.0 million, or 36%, in 2000 compared to 1999
and increased $0.9 million, or 8%, in 1999 over 1998. The decrease in 2000
compared to 1999 is due to reduced average Construction Work In Process of $58.2
million, or 47%, for the year ended December 31, 2000 compared to 1999 due to
the completion of our long-haul networks, partially offset by higher interest
rates. The increase in 1999 compared to 1998 is due to an increase in average
Construction Work In Process of $9.7 million, or 8%, for the year ended December
31, 1999 compared to 1998.
Income Tax (Expense) Benefit
2000 1999 1998
-------------------------- --------------------------- ------------
($ In thousands) Amount % Change Amount % Change Amount
-------------- ------------ ------------ ------------ ----------- ------------
Income tax expense (benefit) $ 400 (55%) $ 898 (106%) $(14,414)
The benefit of our loss carryforwards in 2000 and 1999 are more than offset by
the deferred tax expense associated with current year timing differences. We
were able to recognize a tax benefit for our tax loss carryforwards in 1998.
Cumulative Effect of Change in Accounting Principle
Cumulative effect of change in accounting principle in 1998 represented a
write-off of the unamortized portion of deferred start-up costs of $3.4 million
due to the Company adopting AICPA Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities" on January 1, 1998.
22
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal capital 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 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 Bank Credit Facility and construction agency agreement as
of December 31, 2000. Our Bank Credit Facility and construction agency agreement
are guaranteed by Citizens. The construction agency agreement and advances
against the Bank 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 a portion of 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. In
addition, we entered into a revolving credit facility with Citizens for $450
million with an interest rate of 15% and a final maturity of October 30, 2005.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Report:
1. Financial Statements:
See Index on page F.
2. Supplementary Data:
Quarterly Financial Data is included in Note 16 to the Financial
Statements (See 1. above).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We intend to file a definitive proxy statement for the 2001 Annual Meeting of
Stockholders (proxy statement) pursuant to Regulation 14A not later than 120
days after December 31, 2000. The information which relates to our Directors,
and disclosure required by Items 401 and 405 of Regulation S-K is under the
captions "Election of Directors" in our proxy statement, and is incorporated
herein by reference. The information required by this item relating to our
executive officers and key employees is set forth under the caption "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by item 402 of Regulation S-K is included under the
caption "Executive Compensation" in our proxy statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by item 403 of Regulation S-K is included under the
caption "Stock Ownership of Certain Beneficial Owners, Directors and Executive
Officers" in our proxy statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by item 404 of Regulation S-K is included under the
caption "Agreements with Citizens" in our proxy statement and is incorporated
herein by reference.
24
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The exhibits listed below are filed as part of this Report:
----------------------------------------------------------
Exhibit
No. Description
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended By-laws.
10.4* Optical Fiber License Agreement between the Salt River Project Agricultural Improvement and Power
District and us dated September 11, 1996.
10.5 Participation Agreement between Shawmut Bank Connecticut, National Association, the Certificate
Purchasers named therein, the Lenders named therein, BA Leasing & Capital Corporation, Citizens
Utilities Company and us dated as of April 28, 1995, and the related operating documents.
10.6 Agreement for Lease of Dark Fiber between Citizens Utilities Company and us dated March 24, 1995.
10.7 Administrative Services Agreement between Citizens Utilities Company and us dated as of December 1,
1997.
10.8 Tax Sharing Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.9 Indemnification Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.10 Registration Rights Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.11 Customers and Service Agreement between Citizens Utilities Company and us dated as of December 1,
1997.
10.12 Guaranty Fee Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.13 Equity Incentive Plan of Electric Lightwave, Inc.
10.13.1 Second Amendment to the Equity Incentive Plan of Electric Lightwave, Inc.
10.14* Pre-Construction IRU Agreement between FTV Communications, LLC and us dated October 16, 1997.
10.14.1 Amendment Number One to the Pre-Construction IRU agreement between FTV Communications, LLC and us
dated November 14, 1997.
10.15 Bank Credit Agreement dated November 21, 1997.
10.18* Optical Fiber Installation and IRU Agreement between Pacific Gas and Electric Company and us dated
December 31, 1997.
10.18.1* First Amendment to Optical Fiber Installation and IRU Agreement between Pacific Gas and Electric
Company and us dated March 9, 1998.
10.19* Initial Optical Fiber Design and Installation Agreement between FOCAS, Inc. and us dated as of May
7, 1998.
10.20* Post-Completion Agreement between FOCAS, Inc. and us dated as of May 7, 1998.
10.22 Electric Lightwave, Inc. Employee Stock Purchase Plan.
10.23* IRU Fiber Construction and Lease Agreement between IXC Communication Services, Inc. and us dated as
of February 28, 1999.
10.24.1 Indenture from us to Citibank, N.A., dated April 15, 1999, with respect to the 6.05% Senior
Unsecured Notes due 2004.
10.24.2 First Supplemental Indenture from us, Citizens Utilities Company and Citizens Newco Company to
Citibank, N.A. dated April 15, 1999, with respect to the 6.05% Senior Unsecured Notes due 2004.
10.24.3 Form of our 6.05% Senior Unsecured Notes due 2004.
25
Exhibit
No. Description
- ------- -----------
10.24.4 Letter of Representations to the Depository Trust Company dated April 28, 1999, with respect to the
6.05% Senior Unsecured Notes due 2004.
10.25 ** Settlement Agreement between the United States of America Department of Energy acting by and through
the Bonneville Power Administration and us dated May 15, 2000.
10.26 ** License Agreement between the United States of America Department of Energy acting by and through
the Bonneville Power Administration and us dated May 15, 2000.
10.27 Guaranty Agreement between the United States of America Department of Energy acting by and through
the Bonneville Power Administration and Citizens Utilities Company dated May 15, 2000.
10.28 Intercompany Agreement between Citizens Communications Company and us dated September 11, 2000.
10.29 Loan Agreement between Citizens Communications Company and us dated October 30, 2000.
23.1 Auditors' Consent.
Exhibits 10.13 and 10.22 are management contracts or compensatory plans or
arrangements.
Exhibits 3.1, 10.4, 10.5, 10.6 and 10.13 are incorporated by reference to the
same exhibit designations in our Registration Statement on Form S-1, (File No.
333-35227). Exhibit 10.14 is incorporated by reference to Exhibit No. 10.17 in
our Registration Statement on Form S-1 (File No. 333-35227). Exhibits 10.7,
10.8, 10.9, 10.10, 10.11, 10.12 and 10.15 are incorporated by reference to our
Current Report on Form 8-K filed on February 19, 1998 (File No. 0-23393).
Exhibits 10.14.1, 10.18 and 10.18.1 are incorporated by reference to the same
exhibit designations in our Form 10-Q for the three months ended March 31, 1998
(File No. 0-23393). Exhibits 10.19 and 10.20 are incorporated by reference to
the same exhibit designations in our Form 10-Q for the six months ended June 30,
1998 (File No. 0-23393). Exhibit 10.22 is incorporated by reference to our Proxy
Statement on Schedule 14A filed on April 28, 1998. Exhibit 10.23 is incorporated
by reference to the same exhibit designations in our Form 10-Q for the three
months ended March 31, 1999 (File No. 0-23393). Exhibits 10.24.1, 10.24.2,
10.24.3 and 10.24.4 are incorporated by reference to the same exhibit
designations in our Form 10-Q for the six months ended June 30, 1999 (File No.
0-23393). Exhibit 10.13.1 is incorporated by reference to the same exhibit
designation in our Form 10-Q for the three months ended March 31, 2000 (File No.
0-23393). Exhibits 10.25, 10.26 and 10.27 are incorporated by reference to the
same exhibit designations in our Form 10-Q for the six months ended June 30,
2000 (File No. 0-23393). Exhibit 3.2 is incorporated by reference to the same
exhibit designation in our Form 10-Q for the three months ended September 30,
2000 (File No. 0-23393).
* Material has been omitted pursuant to a previous request for confidential
treatment that was granted by the Commission.
** Confidential material has been omitted pursuant to a previous request for
confidential treatment. Such material has been filed separately with the
Commission and the granting of the request is pending.
b. Reports on Form 8-K
-------------------
We filed the following reports on Form 8-K in the last quarter of 2000:
* November 13, 2000, under Item 5, "Other Events", to make available a press
release dated November 13, 2000, regarding our 2000 third quarter financial
results.
26
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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/ Rudy J. Graf
---------------------
Rudy J. Graf
Chief Executive Officer and Director
March 8, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 8th day of March 2001.
Signature Title
--------- -----
/s/ Robert J. Larson Vice President and Chief Accounting Officer
--------------------------------------------
(Robert J. Larson)
/s/ Kerry D. Rea Vice President and Controller
--------------------------------------------
(Kerry D. Rea)
/s/ Guenther E. Greiner Director
--------------------------------------------
(Guenther E. Greiner)
/s/ Stanley Harfenist Director
--------------------------------------------
(Stanley Harfenist)
/s/ William Kraus Director
--------------------------------------------
(William Kraus)
/s/ Scott N. Schneider Director
--------------------------------------------
(Scott N. Schneider)
/s/ Robert A. Stanger Director
--------------------------------------------
(Robert A. Stanger)
/s/ Maggie Wilderotter Director
--------------------------------------------
(Maggie Wilderotter)
/s/ Robert Braden President, Chief Operating Officer and Director
--------------------------------------------
(Robert Braden)
/s/ Leonard Tow Chairman of the Board, Member, Executive Committee
--------------------------------------------
(Leonard Tow) and Director
27
ELECTRIC LIGHTWAVE, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Balance Sheets at December 31, 2000 and 1999 F-2
Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 F-3
Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 F-4
Statements of Changes in Shareholders' Equity (Deficiency) for the Years Ended
December 31, 2000, 1999 and 1998 F-5
Notes to Financial Statements F-6
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-25
All other schedules are omitted as not applicable under the rules of
Regulation S-X.
F
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Electric Lightwave, Inc.
We have audited the accompanying balance sheets of Electric Lightwave, Inc. as
of December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electric Lightwave, Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
New York, New York
March 8, 2001
F-1
Electric Lightwave, Inc.
Balance Sheets
(In thousands, except share data)
-------------------------------
December 31,
-----------------------------------
Assets 2000 1999
--------------- ----------------
Current assets:
Cash $ 10,318 $ 21,378
Trade receivables, net 35,491 39,952
Other receivables 6,001 6,239
Other current assets 5,080 2,846
--------------- ----------------
Total current assets 56,890 70,415
--------------- ----------------
Property, plant and equipment, net 846,716 695,659
Goodwill, net 42,601 4,061
Other assets 3,567 5,099
--------------- ----------------
Total assets $949,774 $ 775,234
=============== ================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Accounts payable and accrued liabilities $ 60,851 $ 61,066
Current portion of capital obligations 28,798 25,105
Due to Citizens Communications Company 7,684 14,650
Accrued taxes, other than income taxes 16,377 11,153
Interest payable 13,244 4,950
Other current liabilities 5,718 3,314
--------------- ----------------
Total current liabilities 132,672 120,238
Deferred revenue 14,847 6,888
Deferred income taxes payable 3,058 2,658
Other long-term liabilities 3,295 952
Capital lease obligations 103,404 39,997
Long-term debt 763,000 585,000
--------------- ----------------
Total liabilities 1,020,276 755,733
--------------- ----------------
Shareholders' equity (deficiency):
Common stock issued, $.01 par value
Class A, authorized 110,000,000 shares, 9,658,437 shares
and 8,966,276 shares issued and outstanding at
December 31, 2000 and 1999 96 90
Class B, authorized 60,000,000 shares, 41,165,000 shares
issued and outstanding at December 31, 2000 and 1999 412 412
Additional paid-in-capital 372,930 326,477
Deficiency (443,940) (307,478)
--------------- ----------------
Total shareholders' equity (deficiency) (70,502) 19,501
--------------- ----------------
Total liabilities and shareholders' equity (deficiency) $ 949,774 $ 775,234
=============== ================
The accompanying Notes are an integral part of these Financial Statements.
F-2
Electric Lightwave, Inc.
Statements of Operations
(In thousands, except per-share amounts)
-------------------------------------- For the years ended December 31,
-------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Revenue $ 243,977 $ 187,008 $ 100,880
---------------- ---------------- ----------------
Operating expenses:
Network access 74,105 79,948 50,957
Operations 52,740 41,222 28,149
Selling, general and administrative 115,345 123,399 78,555
Depreciation and amortization 61,663 36,505 17,002
---------------- ---------------- ----------------
Total operating expenses 303,853 281,074 174,663
---------------- ---------------- ----------------
Loss from operations (59,876) (94,066) (73,783)
Interest expense 75,784 38,243 7,526
Loss on disposal of assets 1,402 1,438 386
Interest income and other (1,000) (1,098) (658)
---------------- ---------------- ----------------
Net loss before income taxes (136,062) (132,649) (81,037)
Income tax expense (benefit) 400 898 (13,837)
---------------- ---------------- ----------------
Net loss before cumulative effect of
change in accounting principle (136,462) (133,547) (67,200)
Cumulative effect of change in accounting
principle (net of $577 income tax benefit) - - 2,817
---------------- ---------------- ----------------
Net loss $ (136,462) $ (133,547) $ (70,017)
================ ================ ================
Net loss before cumulative effect of change
in accounting principle per share:
Basic $ (2.70) $ (2.68) $ (1.35)
Diluted $ (2.70) $ (2.68) $ (1.35)
Net loss per common share:
Basic $ (2.70) $ (2.68) $ (1.41)
Diluted $ (2.70) $ (2.68) $ (1.41)
Weighted average shares outstanding 50,484 49,893 49,709
The accompanying Notes are an integral part of these Financial Statements.
F-3
Electric Lightwave, Inc.
Statements of Cash Flows
(In thousands)
------------ For the years ended December 31,
-----------------------------------------------
2000 1999 1998
--------------- -------------- --------------
Cash flows used for operating activities:
Net loss $ (136,462) $ (133,547) $(70,017)
Adjustment to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 61,663 36,505 17,002
Deferred income taxes 400 898 (14,414)
Cumulative effect of change in accounting principle - - 3,394
Non-cash stock compensation 1,402 2,605 4,697
Loss on disposal of property, plant and equipment 1,402 1,438 386
Changes in operating assets and liabilities:
Receivables 5,261 (23,200) (2,734)
Accounts payable and other accrued liabilities 709 (1,994) 21,427
Other accrued taxes 5,224 5,576 2,441
Due to Citizens Communications Company (6,966) 9,396 4,310
Other 12,977 4,351 (3,268)
--------------- -------------- --------------
Net cash used for operating activities (54,390) (97,972) (36,776)
--------------- -------------- --------------
Cash flows used for investing activities:
Capital expenditures (108,909) (180,342) (200,791)
--------------- -------------- --------------
Cash flows from financing activities:
Revolving bank credit facility proceeds 150,000 (24,000) 224,000
Revolving bank credit facility repayments (10,000) - -
Long Term Funding from Citizens 38,000 - -
Note issuance - 325,000 -
Payments of capital lease obligation (32,071) (13,826) (343)
Debt issuance costs - (2,552) -
Issuance of common stock, net of issuance costs 7,015 2,656 499
Purchases of common stock (705) (706) -
--------------- -------------- --------------
Net cash provided by financing activities 152,239 286,572 224,156
--------------- -------------- --------------
Net increase (decrease) in cash (11,060) 8,258 (13,411)
Cash at January 1, 21,378 13,120 26,531
--------------- -------------- --------------
Cash at December 31, $ 10,318 $ 21,378 $ 13,120
=============== ============== ==============
Supplemental cash flow information:
Cash paid for interest, net of capitalized portion $ 44,467 $ 35,125 $ 6,074
Non-cash increase in capital lease asset $102,192 $ 60,321 $ 7,987
The accompanying Notes are an integral part of these Financial Statements.
F-4
Electric Lightwave, Inc.
Statements of Shareholders' Equity (Deficiency)
(Amounts in thousands, except share data)
---------------------------------------
Class A Common Stock, Class B Common Stock,
--------------------- --------------------- Additional
$.01 per share $.01 per share Paid-in- Shareholders'
Shares Amount Shares Amount Capital Deficiency Equity(Deficiency)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 8,520,000 $ 85 41,165,000 $ 412 $ 316,731 $ (103,914) $ 213,314
Issuance of common stock 121,816 1 - - 529 - 530
Amortization of restricted stock - - - - 4,666 - 4,666
Net loss - - - - - (70,017) (70,017)
-------------------------------------------------------------------------------------
Balance, December 31, 1998 8,641,816 86 41,165,000 412 321,926 (173,931) 148,493
Issuance of common stock 328,804 4 - - 2,652 - 2,656
Issuance of restricted stock 75,000 1 - - (1) - -
Forfeiture of restricted stock (13,999) - - - - - -
Purchase of common stock (65,345) (1) - - (705) - (706)
Amortization of restricted stock - - - - 2,559 - 2,559
Stock units payable to non-
employee director - - - - 46 - 46
Net loss - - - - - (133,547) (133,547)
-------------------------------------------------------------------------------------
Balance, December 31, 1999 8,966,276 90 41,165,000 412 326,477 (307,478) 19,501
Issuance of common stock 715,873 7 - - 7,008 - 7,015
Issuance of restricted stock 115,000 1 - - (1) - -
Forfeiture of restricted stock (89,666) (1) - - (75) - (76)
Purchase of common stock (49,046) (1) - - (704) - (705)
Amortization of restricted stock - - - - 1,422 - 1,422
Stock units payable to non-
employee director - - - - 56 - 56
Acquisition of Citizens
minority interest - - - - 38,747 - 38,747
Net loss - - - - - (136,462) (136,462)
-------------------------------------------------------------------------------------
Balance, December 31, 2000 9,658,437 $ 96 41,165,000 $ 412 $ 372,930 $ (443,940) $ (70,502)
=====================================================================================
The accompanying Notes are an integral part of these Financial Statements.
F-5
ELECTRIC LIGHTWAVE, INC.
Notes to Financial Statements
(1) Organization and Description of Business
----------------------------------------
Electric Lightwave, Inc. is referred to as "we", "us" or "our" in this
report. We are a facilities-based competitive local exchange carrier (CLEC)
providing a broad range of communications services. We provide the full
range of wireline telecommunications products and services in the western
United States. These include switched local and long distance voice
services as well as enhanced data communications services and dedicated
point-to-point services. Enhanced broadband data services are also offered
in selected cities throughout the country. We market to retail customers
who are primarily communications-intensive businesses, and to wholesale
customers who are primarily communications providers themselves.
We have substantial capital expenditures associated with the installation,
development and expansion of our new and existing communications networks,
and generally incur a significant portion of these expenditures before
realizing any revenues. These expenditures, together with associated
initial operating expenses, have resulted in negative cash flows and
operating losses. This will continue until we establish an adequate
customer base and revenue stream. We expect to incur losses for the
foreseeable future as we continue to install, develop and expand our new
and existing communications networks. We cannot assure anyone that we will
establish an adequate revenue base or that we will achieve or sustain
profitability or generate sufficient positive cash flow to fund our
operating and capital requirements and/or service our debt.
We incorporated in 1990. Citizens Communications Company (Citizens) owns
approximately 85% of our common stock.
We anticipate that our existing cash balances and cash to be generated from
operations will not be adequate to fund operating leases, working capital
deficiencies, capital expenditures, capital lease obligations and debt
service through 2001. Citizens has committed to continue to finance our
cash requirements, at market terms and conditions, until the completion of
a public or private financing or March 31, 2002, which would provide the
funds necessary to support our cash requirements.
We have entered into a revolving credit facility with Citizens for $450
million with an interest rate of 15% and a final maturity of October 30,
2005 (Citizens Credit Facility). Funds of $260 million for general
corporate purposes are available to be drawn until March 31, 2002. The
remaining balance may be drawn to pay interest due under the Citizens
Credit Facility until maturity.
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation and Use of Estimates
We have prepared these financial statements in accordance with
generally accepted accounting principles (GAAP). Preparing financial
statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. We have made certain
reclassifications of balances previously reported to conform to the
current financial statement presentation.
(b) Revenue Recognition
In December 1999, the Securities Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements," which provides guidance in applying generally
accepted accounting principles for revenue recognition in financial
statements. SAB 101 was effective beginning in the fourth quarter of
2000 and did not have a material impact on our financial statements.
F-6
We recognize revenues from communications services when the services
are provided. Certain revenues are deferred and recognized on a
straight-line basis over the terms of the related agreements.
Installation fees and related costs are deferred and recognized over
the average contract life.
(c) Trade and Other Receivables
Our trade customers are primarily communications-intensive businesses
and communications service providers that require state-of-the-art
communications and data services. Trade accounts receivables are net
of an allowance for doubtful accounts of approximately $2,359,000 and
$3,728,000 at December 31, 2000 and 1999, respectively. See Note 14
for a discussion of significant customers.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost and include certain
costs, which are capitalized during the installation and expansion of
our communications networks. Costs capitalized during the network
development stage include expenses associated with engineering,
construction, overhead and interest. We capitalized interest costs
related to construction of approximately $7,260,000, $11,304,000 and
$10,444,000 for the years ending December 31, 2000, 1999 and 1998,
respectively.
We use the straight-line method to compute the following:
* Depreciation of property and equipment over the estimated useful
lives of the assets
* Amortization of leasehold improvements over the shorter of the
estimated usefullives of the assets or the remaining terms of the
leases
* Amortization of capital leases included in communications networks
over the lives of the capital leases
The estimated useful lives of owned assets are as follows:
Building 40 years
Communications networks 20-25 years
Electronics and related equipment 7 - 8 years
Office equipment and other 3 - 7 years
Technological risks, rapid market changes, new products and services
and the changing demands of our customers directly affect our
communications networks. We may have to adjust the estimated useful
lives of these assets in response to these factors.
(e) Goodwill
Goodwill is being amortized utilizing the straight-line method over
periods ranging from 15 to 25 years.
(f) Other Assets
Other assets consist primarily of note origination fees. Note
origination fees were capitalized as a result of the issuance of our
senior unsecured notes in April 1999, and are being amortized
utilizing the effective interest method over a 5-year period.
F-7
(g) Income Taxes
We are included in the consolidated federal income tax return of
Citizens. We utilize the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recorded for the tax effect of temporary differences between
the financial statements and the tax bases of assets and liabilities
using tax rates expected to be in effect when the temporary
differences are expected to turn around. Citizens' policy has been to
record tax provisions, assets and liabilities at the subsidiary level
on a stand-alone basis. Citizens will reimburse us for net-operating
losses generated after our Initial Public Offering (IPO) in 1997, but
only to the extent that we could utilize such losses on a stand-alone
basis.
(h) Impairment
We review for the impairment of long-lived assets and certain
identifiable intangibles in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of". We
review for the impairment of these assets and intangibles to be held
and used whenever events or changes in circumstances indicate that we
may not be able to recover the carrying amount of the asset.
We assess the recoverability of an asset by determining whether the
amortization of the asset balance over its remaining life can be
recovered as demonstrated by projections of undiscounted future cash
flows of the related asset.
(i) Employee Stock Plans
We participated in Citizens Management Equity Incentive Plan (Citizens
MEIP) and Citizens Equity Incentive Plan (Citizens EIP) prior to our
IPO. The plans allow awards of Citizens Common Stock to eligible
officers, management employees and non-management exempt employees of
Citizens and its subsidiaries. The awards may be in the form of
incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock or other stock-based awards.
In October 1997, our Board of Directors adopted our 1997 Equity
Incentive Plan (EIP). The plan authorizes the grant of incentive stock
options, non-qualified stock options, stock appreciation rights,
restricted stock or other stock-based awards. Shareholders approved
the Employee Stock Purchase Plan (ESPP) in May 1998. As a result, we
no longer participate in Citizens' Plans.
We account for all stock option plans in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation". This allows entities to
continue to apply the provisions of Accounting Principles Board (APB)
Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and thereafter as if the fair-value-based method, as defined in SFAS
No. 123, had been applied. We have elected to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure required by
SFAS No. 123 (See Note 12).
(j) Net Loss Per Share
We follow the provisions of SFAS No. 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 dilutive 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 for all years presented as their effect
would have reduced our net loss per share.
F-8
(3) Reciprocal Compensation
-----------------------
We have various interconnection agreements with Qwest (formerly U S WEST),
Verizon (formerly 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 ILECs' networks and our network. We recognize
reciprocal compensation revenues as earned, based on the terms of the
interconnection agreements and make subsequent adjustments to revenue based
upon management judgements as to collectibility. We recognized reciprocal
compensation revenues of $38.8 million, $34.7 million and $18.6 million
during 2000, 1999 and 1998, respectively. Net trade accounts receivable
relating to reciprocal compensation totaled $7.7 million and $14.9 million
at December 31, 2000 and 1999, respectively. These agreements are scheduled
to expire between June 30 and December 31, 2001. We cannot be sure that
renewal of the interconnection agreements will be in the same form, or at
rates comparable to the current interconnection agreements.
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.
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 second quarter 2001. We are
not currently able to determine the potential impact of that decision on
us.
(4) Exit Costs
----------
In the third quarter 1999, we announced two strategic decisions that led to
$1.5 million in employee severance and facility shutdown costs that we
recorded in selling, general and administrative expense in our Statements
of Operations. On August 24, 1999, we announced that we were eliminating
our prepaid calling card and videoconferencing products, effective November
1, 1999. This initiative was taken as a result of our decision to focus on
our core business strategy. Prepaid calling cards are a high-volume,
low-margin product that we determined did not support our strategy of
accelerating EBITDA profitability. On September 1, 1999, we announced that
we were consolidating our national retail sales efforts in Dallas and
closing six retail sales offices in the eastern United States by October 8,
1999. The retail sales offices closed included Cleveland, Chicago, Atlanta,
Washington D.C., New York and Philadelphia. We have maintained all of our
data points-of-presence and wholesale sales offices.
As a result of both of these decisions, we eliminated 63 sales and sales
support positions, and incurred charges relating to employee severance and
facility shutdown costs. The following table summarizes the activity in the
related accrual account during the year ended December 31, 2000.
F-9
Balance Balance
($ In thousands) December 31, New December 31,
------------- 1999 Charges Payments 2000
---------------- ---------------- ---------------- ----------------
Severance related costs $ - $ 133 $ 133 $ -
Network and facilities costs 134 226 360 -
---------------- ---------------- ---------------- ----------------
Total $ 134 $ 359 $ 493 $ -
================ ================ ================ ================
(5) Change in Accounting Principles and New Accounting Pronouncements
-----------------------------------------------------------------
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 written-off 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 1998 statement of operations, net of income tax
benefit of $577,000.
We adopted the provisions of SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" in 1998. SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This Statement supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. See Note 14 for
segment disclosures.
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. We expect
the adoption of SFAS 133 could increase the volatility of reported earnings
and other comprehensive income in the future. In general, the amount of
volatility will vary with the level of derivative activities during any
period. As of January 1, 2001, we have adopted SFAS 133 and have not
identified any derivative instruments subject to the provisions of SFAS
133. Therefore, SFAS 133 will not have any impact on our 2001 financial
statements upon adoption on January 1, 2001.
F-10
(6) Property, Plant and Equipment
-----------------------------
The components of property, plant and equipment at December 31 are as
follows:
($ In thousands)
-------------- 2000 1999
---------------- ----------------
Communications networks $ 584,219 $ 425,147
Electronics and related equipment 220,621 130,305
Facility and leasehold improvements 50,705 31,821
Office equipment and furniture 66,895 59,349
Construction work in progress 52,228 125,045
Materials and supplies 3,659 280
---------------- ----------------
Property, plant and equipment 978,327 771,947
Accumulated depreciation and amortization (131,611) (76,288)
---------------- ----------------
Property, plant and equipment, net $ 846,716 $ 695,659
================ ================
Depreciation expense was $60,867,000, $35,776,000 and $16,065,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Communications networks include assets acquired under capital leases at
December 31, 2000 and 1999 amounting to $201,585,000 and $90,576,000,
respectively.
Materials and supplies consists primarily of new and reusable parts to
maintain and build fiber-optic networks.
(7) Accounts Payable and Accrued Liabilities
----------------------------------------
The components of accounts payable and accrued liabilities at December 31
are as follows:
($ In thousands)
-------------- 2000 1999
---------------- ----------------
Accounts payable - trade $ 10,987 $ 10,126
Accrued services purchased for resale 11,820 12,308
Accrued construction work in progress 25,171 23,128
Accrued compensation 5,508 7,265
Cash overdraft 6,965 7,825
Other accrued liabilities 400 414
---------------- ----------------
Accounts payable and accrued liabilities $ 60,851 $ 61,066
================ ================
(8) Long-term Debt
--------------
The components of long-term debt on December 31 are as follows:
($ In thousands)
-------------- 2000 1999
---------------- ----------------
Revolving bank credit facility $ 400,000 $ 260,000
Senior unsecured notes 325,000 325,000
Citizens Credit Facility 38,000 -
---------------- ----------------
Long-term Debt $ 763,000 $ 585,000
================ ================
F-11
We entered into a $400 million, 5-year revolving bank credit facility (Bank
Credit Facility), guaranteed by Citizens in November 1997. This expires in
November 2002 and has annual associated facility fees of 0.08%. We have
agreed to pay Citizens an annual guarantee fee of 3.25% on the outstanding
balance under the Bank Credit Facility (See Note 11). The weighted average
interest rate at December 31, 2000 and 1999 was 6.94% and 6.63%,
respectively. Interest rates are based on the Euro dollar rate at the time
the funds are drawn and reset periodically thereafter. No principal payment
is due until the expiration date of the Bank Credit Facility.
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 guaranteed the notes for an annual fee of 4.0% of the
outstanding balance.
We have entered into a revolving credit facility with Citizens for $450
million with an interest rate of 15% and a final maturity of October 30,
2005 (Citizens Credit Facility). Funds of $260 million for general
corporate purposes are available to be drawn until March 31, 2002. The
remaining balance may be drawn to pay interest due under the Citizens
Credit Facility until maturity.
(9) Income Taxes
------------
The components of deferred income taxes at December 31 are as follows:
($ In thousands)
-------------- 2000 1999
---------------- ----------------
Benefit of operating loss carryforwards $ (160,821) $ (106,315)
Less valuation allowance 110,364 62,462
---------------- ----------------
Net deferred tax asset (50,457) (43,853)
Deferred income tax liability, primarily
relating to property, plant and equipment 53,515 46,511
---------------- ----------------
Balance end of period $ 3,058 $ 2,658
================ ================
Citizens includes us in their consolidated federal income tax return which
uses a calendar year reporting period. 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 taxable income for tax purposes
in these future periods had we been stand-alone for tax purposes. In
accordance with our 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 loss carryforwards would otherwise remain
available on a stand-alone basis.
The following is a reconciliation of the provision for income taxes at
federal statutory rates to the effective rates:
2000 1999 1998
---------------- ---------------- ----------------
Tax benefit at federal statutory rate 35.0% 35.0% 35.0%
Valuation allowance (35.3%) (35.7%) (17.9%)
---------------- ---------------- ----------------
Effective tax benefit (provision) rate (0.3%) (0.7%) 17.1%
================ ================ ================
The provision for income taxes consisted of deferred federal tax expense
(benefit) of approximately $400,000, $898,000 and $(13,837,000) and current
tax benefits of $0 for the years ended December 31, 2000, 1999 and 1998. In
addition, a $577,000 deferred tax benefit was recorded in 1998 related to
the cumulative effect of an accounting change.
F-12
(10) Capital Stock
-------------
Capital Stock authorized consists of 110,000,000 Class A Common Stock $.01
par value per share, 60,000,000 Class B Common Stock $.01 par value per
share, and 10,000,000 shares of preferred stock $.01 par value per share.
We have granted 725,000 restricted stock awards to key employees in the
form of Class A Common Stock since our IPO in 1997. The restricted stock
awards may not be sold, assigned, pledged or otherwise transferred until
the restrictions lapse. For 600,000 shares, the restrictions lapse over one
through three-year periods based on meeting certain revenue targets from
the date of grant. For 125,000 shares, the restrictions lapsed in January
2001. A total of 118,665 shares were returned and canceled due to
terminations of employment. At December 31, 2000, 210,000 shares of this
stock were still restricted and outstanding while 396,335 shares are no
longer restricted.
At December 31, 2000, there were 9,658,437 shares of Class A Common Stock,
41,165,000 shares of Class B Common Stock, and no preferred shares
outstanding. Citizens owns all of the Class B Common Stock and 2,287,644
shares of the Class A Common Stock, in total representing an 85% economic
interest in us. The table below summarizes the activity in Class A Common
Stock.
Class A Common Stock
----------------------------------------------------
Restricted Unrestricted Total
---------------- ---------------- ----------------
Balance at January 1, 1998 520,000 8,000,000 8,520,000
Common Stock issued under stock plans - 119,345 119,345
Common Stock issued to directors - 2,471 2,471
---------------- ---------------- ----------------
Balance at December 31, 1998 520,000 8,121,816 8,641,816
Common Stock issued under stock plans - 324,813 324,813
Common Stock issued to directors - 3,991 3,991
Restricted Common Stock issued 75,000 - 75,000
Restricted Common Stock canceled (13,999) - (13,999)
Common Stock purchased - (65,345) (65,345)
Lapse of Restrictions (258,671) 258,671 -
---------------- ---------------- ----------------
Balance at December 31, 1999 322,330 8,643,946 8,966,276
Common Stock issued under stock plans - 712,997 712,997
Common Stock issued to directors - 2,876 2,876
Restricted Common Stock issued 115,000 - 115,000
Restricted Common Stock canceled (89,666) - (89,666)
Common Stock purchased - (49,046) (49,046)
Lapse of Restrictions (137,664) 137,664 -
---------------- ---------------- ----------------
Balance at December 31, 2000 210,000 9,448,437 9,658,437
================ ================ ================
Holders of Common Stock vote on certain issues. The holder of each share of
Class A Common Stock has one vote per share and the holder of each share of
Class B Common Stock has 10 votes per share. Due to the higher votes per
share of Class B stock, Citizens has 98.3% voting control. All other rights
and privileges of Class A and Class B Common Stock are identical. Class B
Common Stock is convertible into Class A Common Stock on a one-for-one
basis. Class A Common Stock does not have exchange rights.
During 2000, Citizens acquired 2,288,000 shares of our Common Stock in open
market or in negotiated transactions for approximately $38,748,000. Such
amount has been recorded in our accounts as Goodwill and Additional
paid-in-capital.
F-13
(11) Related Party Transactions
--------------------------
Transactions with Citizens
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, 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: our 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 1999, we entered an agreement to lease certain capacity on our network
to Citizens over 20 years at prevailing market prices. Services under this
agreement began in June 2000. Citizens has paid us $6.5 million for this
agreement and we recognize revenue following the straight-line method over
the term of the agreement. In 1996, we agreed to lease fiber-optic cable to
Citizens for 10 years, at a monthly rental rate of $30,000.
We have transactions in the normal course of business with Citizens'
communications sector (Citizens Communications). Citizens Communications is
an ILEC in certain markets in which we provide services. Prior to the IPO
in November 1997, Citizens and the Company combined their purchasing power
with several long distance carriers in order to receive a lower unit cost.
We purchase access from Citizens Communications in order to provide
services in those markets. Citizens charges us the full-tariff rate for
those services. We recorded $1,750,000, $1,891,000 and $4,790,000 as an
expense in 2000, 1999 and 1998, respectively, representing usage-based
charges for the services provided by Citizens Communications.
Citizens Communications purchases certain services and products from us at
prevailing market rates. We recognized related party revenue of
approximately $2,995,000, $2,517,000 and $2,882,000 in 2000, 1999 and 1998,
respectively. Outstanding trade accounts receivables from Citizens were
$751,000 and $426,000 at December 31, 2000 and 1999, respectively.
We have entered into a revolving credit facility with Citizens for $450
million with an interest rate of 15% and a final maturity of October 30,
2005 (Citizens Credit Facility). Funds of $260 million for general
corporate purposes are available to be drawn until March 31, 2002. The
remaining balance may be drawn to pay interest due under the Citizens
Credit Facility until maturity.
During 2000, Citizens acquired shares of our Common Stock in open market or
negotiated transactions (See Note 10).
F-14
A summary of the activity in the amount due to Citizens at December 31 is
as follows:
($ In thousands)
-------------- 2000 1999 1998
---------------- ---------------- ----------------
Balance beginning of period $ 14,650 $ 5,254 $ 944
Guarantee fees 27,790 19,792 8,614
Interest expense on Credit Facility 663 - -
Deferred income taxes - (61) 744
Administrative services:
Services provided by Citizens 7,413 6,689 4,827
ELI expenses paid by Citizens 6,759 18,976 6,141
Payments to Citizens (49,591) (36,000) (16,016)
---------------- ---------------- ----------------
Balance end of period $ 7,684 $ 14,650 $ 5,254
================ ================ ================
The above excludes $38 million borrowed from Citizens (See Note 8).
See Note 9 for information regarding our tax sharing agreement with
Citizens and Note 12 for information regarding participation in Citizens'
stock plans.
(12) Stock Plans
-----------
At December 31, 2000 we had two stock-based compensation plans, the
Employee Stock Purchase Plan (ESPP) and the Equity Incentive Plan (EIP).
Prior to our IPO and approval of our own plans, employees participated in
three Citizens stock-based compensation plans, Citizens Management Equity
Incentive Plan (Citizens MEIP), Citizens Equity Incentive Plan (Citizens
EIP) and Citizens Employee Stock Purchase Plan (Citizens ESPP). We recorded
$387,000 as compensation expense in our 1999 financial statements for
options issued under the stock plans. We have not recorded compensation
expense in our 2000 or 1998 financial statements for options issued under
the stock plans since the exercise price of the options granted equaled or
exceeded the market price of the stock on the date of grant and no
transactions or modifications which would require a compensation charge
have occurred subsequent to the grant. The table below shows our pro forma
loss and loss per share had we determined compensation expense based on the
fair value of the grant at the grant date for these stock plans.
($ In thousands, except per share)
-------------------------------- 2000 1999 1998
--------------- ---------------- ----------------
Net loss As reported: $ (136,462) $ (133,547) $ (70,017)
Pro forma: (151,034) (142,421) (75,783)
Net loss per share As reported:
Basic $ (2.70) $ (2.68) $ (1.41) )
Diluted (2.70) (2.68) (1.41)
Pro forma:
Basic $ (2.99) $ (2.85) $ (1.52) )
Diluted (2.99) (2.85) (1.52)
In August 1998, the Compensation Committee of our Board of Directors
approved a stock option exchange program for our EIP. Employees holding
outstanding options with an exercise price greater than $15.50 had the
right to exchange all or half of their options for a lesser number of new
options with an exercise price of $8.75. A calculation was prepared using
the Black-Scholes option-pricing model to determine the exchange rate for
each eligible grant. The exchanged options retained the same vesting and
expiration terms. This stock option exchange program had no impact on
reported earnings and resulted in a net reduction in shares subject to
option of 545,600.
F-15
In November 1998, the Compensation Committee of Citizens' Board of
Directors approved a stock option exchange program for the Citizens MEIP
and Citizens EIP. Employees of Citizens and its subsidiaries holding
outstanding options with an exercise price greater than $10.00 had the
right to exchange their options for a lesser number of new options with an
exercise price of $7.75. The exchanged options retained the same vesting
and expiration terms.
The exchange programs were approved in an effort to retain employees at a
time when a significant percentage of employee stock options had exercise
prices that were above fair market value. Compensation expense has not been
recognized in the financial statements since the exercise price of the
option was equal to the market value of the stock at the date of repricing.
Employee Stock Purchase Plan
----------------------------
The shareholders approved the ESPP on May 21, 1998 with an amendment solely
to increase the number of shares under the plan on May 20, 1999.
Eligible employees can subscribe to purchase shares, subject to certain
limitations, of Class A Common Stock at 85% of the average of the high and
low prices on the first day or the last day of the purchase period,
whichever is lower. An employee may cancel all or part of their
subscription to purchase at any time prior to the end of the purchase
period and receive a full cash credit.
The ESPP reserves 1,950,000 shares of Class A Common Stock for issuance to
employees. The shareholders approved 200,000 shares May 21, 1998 and an
additional 1,750,000 shares May 20, 1999. These shares may be adjusted for
any future stock dividends or stock splits. The ESPP will terminate when
all shares reserved have been subscribed for and purchased, unless
terminated earlier or extended by the Board of Directors. The Compensation
Committee of the Board of Directors administers the ESPP.
As of December 31, 2000, 652 employees were enrolled and participating in
the ESPP and 585,813 shares of Class A Common Stock have been purchased
under the plan.
For purposes of the pro forma calculation, compensation cost is recognized
for the fair value of the employees' purchase rights, which was estimated
using the Black-Scholes option-pricing model with the following assumptions
for subscription periods beginning in 2000, 1999 and 1998:
2000 1999 1998
--------------- --------------- ----------------
Dividend yield - - -
Expected volatility 87% 66% 71%
Risk-free interest rate 6.29% 5.25% 4.92%
Expected life 6 months 6 months 6 months
The weighted average fair value of those purchase rights granted in 2000,
1999 and 1998 was $4.59, $4.97 and $3.82 per right, respectively.
F-16
Equity Incentive Plan
----------------------
The Board of Directors approved our EIP in October 1997. The shareholders
approved the EIP May 21, 1998 with an amendment solely to increase the
number of shares that may be issued on May 20, 1999. As of December 31,
2000, there were 6,670,600 shares reserved for issuance under the terms of
this plan.
Under the EIP, awards of Class A Common Stock may be granted to eligible
directors, officers, management employees, non-management employees and
consultants in the form of incentive stock options, non-qualified stock
options, Stock Appreciation Rights (SARs), restricted stock or other
stock-based awards. The Compensation Committee of the Board of Directors
administers the EIP.
The exercise price for awards shall not be less than 85% or more than 110%
of the average of the high and low stock prices on the date of grant. The
exercise period is generally 10 years from the date of grant.
The summary below shows share activity subject to option under the EIP:
Weighted
Average
Shares Subject Option Price
to Option Per Share
--------------- ----------------
Balance at January 1, 1998 2,326,000 $ 16.00
Options granted 1,653,484 10.77
Options canceled, forfeited or lapsed (1,648,700) 16.21
----------------
Balance at December 31, 1998 2,330,784 12.14
Options granted 1,989,120 9.51
Options exercised (115,961) 9.73
Options canceled, forfeited or lapsed (680,372) 10.12
---------------
Balance at December 31, 1999 3,523,571 10.96
Options granted 2,720,092 19.08
Options exercised (455,848) 11.00
Options canceled, forfeited or lapsed (1,016,760) 13.63
---------------
Balance at December 31, 2000 4,771,055 15.05
===============
In August 1998, the Compensation Committee of the Board of Directors
approved a stock option exchange program. A total of 2,212,000 options were
eligible for exchange under the program. A total of 1,426,000 options were
canceled in exchange for 880,400 new options with an exercise price of
$8.75 per share.
F-17
The table below summarizes information as of December 31, 2000 for shares
subject to options under the EIP:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Number Range of Exercise Remaining Number Exercise
Outstanding Exercise Price Price Life in Years Exercisable Price
--------------- ------------------ ------------ ---------------- -------------- ------------
29,066 $3.27 - 7.44 $ 5.95 9.41 3,333 $ 7.44
1,610,988 8.19 - 11.38 8.83 7.77 990,084 8.82
856,402 13.13 - 18.34 15.58 7.57 650,871 15.85
2,274,599 19.25 - 22.81 19.37 9.53 667 22.19
--------------- --------------
4,771,055 3.27 - 22.81 15.05 8.58 1,644,955 11.60
=============== ==============
For purposes of the pro forma calculation, compensation cost is recognized
for the fair value of each option on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2000 1999 1998
--------------- --------------- ----------------
Dividend yield - - -
Expected volatility 87% 66% 71%
Risk-free interest rate 7.23% 5.34% 5.44%
Expected life 6 years 6 years 6 years
The weighted average fair value of those options granted in 2000, 1999 and
1998 was $14.75, $6.16 and $6.94, respectively.
We have granted 725,000 restricted stock awards to key employees in the
form of Class A Common Stock since our IPO in 1997. The restricted stock
awards may not be sold, assigned, pledged or otherwise transferred until
the restrictions lapse. A total of 118,665 shares were returned and
canceled due to terminations of employment. At December 31, 2000, 210,000
shares of this stock were still restricted and outstanding. As of December
31, 2000, 396,335 of these shares are outstanding but are no longer
restricted. Compensation expense was recorded in connection with these
grants in the amounts of $1,422,000, $2,559,000 and $4,666,000 for the
years ended 2000, 1999 and 1998, respectively.
Citizens Plans
--------------
The following information reflects our employees' participation in the
Citizens MEIP and Citizens EIP.
Under the Citizens MEIP and Citizens EIP, awards of Citizens Class A Common
Stock may be granted to eligible officers, management employees and
non-management exempt employees of Citizens and its subsidiaries in the
form of incentive stock options, non-qualified stock options, SARs,
restricted stock or other stock-based awards. The Compensation Committee of
Citizens Board of Directors administers the Citizens MEIP and Citizens EIP.
The exercise price of the stock options and SARs shall be equal to or
greater than the fair market value of the underlying Citizens common stock
on the date of grant. Stock options are generally not exercisable on the
date of grant but vest over a period of time.
Under the terms of the Citizens MEIP and Citizens EIP, subsequent stock
dividends and stock splits of Citizens have the effect of increasing the
option shares outstanding which correspondingly decreases the average
exercise price of outstanding options.
F-18
The summary below shows share activity for our employees subject to option
under the Citizens MEIP and Citizens EIP.
Citizens MEIP Citizens EIP
---------------------------------- ----------------------------------
Weighted Weighted
Shares Average Shares Average
Subject to Option Price Subject to Option Price
Option Per Share Option Per Share
--------------- --------------- ---------------- ----------------
Balance at January 1, 1998 231,109 $ 10.93 331,132 $ 8.53
Options granted 70,573 7.75 - -
Options canceled, forfeited
or lapsed (125,253) 10.77 (29,451) 8.53
--------------- ----------------
Balance at December 31, 1998 176,429 9.75 301,681 8.53
Options exercised (6,689) 7.75 (18,654) 8.53
Options canceled, forfeited
or lapsed (44,550) 11.28 (7,965) 8.53
--------------- ----------------
Balance at December 31, 1999 125,190 9.31 275,062 8.53
Options exercised (78,708) 9.47 (118,285) 8.53
Options canceled, forfeited
or lapsed (2,296) 7.75 (16,552) 8.53
--------------- ----------------
Balance at December 31, 2000 44,186 8.92 140,225 8.53
=============== ================
The table below summarizes information as of December 31, 2000 for shares
subject to options for our employees under the Citizens MEIP and Citizens
EIP:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Number Range of Exercise Remaining Number Exercise
Outstanding Exercise Price Price Life in Years Exercisable Price
--------------- ----------------- ------------ ---------------- -------------- ------------
Citizens MEIP 44,186 $7.75 - 10.54 $ 8.92 5.10 40,356 $ 8.77
Citizens EIP 140,225 8.53 8.53 6.70 140,225 8.53
As a result of the stock option exchange program approved by the Citizens'
Board of Directors Compensation Committee for the Citizens MEIP, a total of
115,000 options held by our employees were eligible for exchange. All of
the options eligible were canceled in exchange for 71,000 new options with
an exercise price of $7.75.
The weighted average fair value of options granted in 1998 was $2.18. For
purposes of the pro forma calculation, compensation cost is recognized for
the fair value of each option on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
Citizens MEIP
1998
---------------
Dividend yield -
Expected volatility 26%
Risk-free interest rate 4.49%
Expected life 4 years
F-19
(13) Commitments and Contingency
---------------------------
In 1995, we entered into a $110 million construction agency agreement and
an operating lease agreement in connection with the construction of certain
communications networks and fiber cable links. We served as agent for the
construction of these projects and upon completion of each project leased
the facilities for a three year term, with one year renewals available
through April 30, 2002. At December 31, 2000 and 1999, we were leasing
assets with an original cost of approximately $108,541,000 under this
agreement. We have the option to purchase the facilities at the end of the
lease terms for the amount of the lessor's average investment in the
facilities. Payments under the lease depend on current interest rates, and
assuming continuation of current interest rates, payments would approximate
$6.7 million annually through April 30, 2002 and, assuming exercise of the
purchase option, a final payment of approximately $110 million in April
2002. If we choose not to exercise this option, we are obligated to arrange
for the sale of the facilities to an unrelated party and are required to
pay the lessor any difference between the net sales proceeds and the
lessor's investment in the facilities. However, any amount required to be
paid to the lessor is subject generally to a maximum of 80% (approximately
$88 million) of the lessor's investment. Citizens has guaranteed our
obligations under this operating lease and we have agreed to pay to
Citizens a guarantee fee of 3.25% per annum of the $110 million.
We purchased $5.0 million of equipment from a vendor to be paid over two
years, $2.5 million is included in other long-term obligations at December
31, 2000.
We have entered into various capital and operating leases for fiber-optic
cable to interconnect our local networks with long-haul fiber-optic routes.
The terms of the various agreements covering the routes described above
range from 20 to 25 years, with varying optional renewal periods. For
certain contracts, rental payments are based on a percentage of our leased
traffic, and are exclusive, subject to certain minimums. For other
contracts, certain minimum payments are required, which are reflected in
the commitment table below.
We have also entered into certain operating and capital leases in order to
develop our local networks, including an operating lease to develop a local
network in Phoenix and a capital lease in San Francisco. The operating
lease in Phoenix provides for rental payments based on a percentage of the
network's operating income for a period of 15 years. The capital lease in
San Francisco is a 30-year indefeasible and exclusive right to use
agreement for optical fibers in the San Francisco Bay Area. We are required
to make quarterly minimum payments under the agreement, which are reflected
in the commitment table below.
F-20
Future minimum rental commitments for all long-term non-cancelable leases
as of December 31, 2000 are:
($ In thousands)
-------------- Lease Type
----------------------------------
Year Capital Operating
---- ---------------- ----------------
2001 $ 41,926 $ 16,273
2002 12,759 10,385
2003 12,764 6,098
2004 12,768 3,892
2005 12,773 2,837
Thereafter 183,107 9,333
---------------- ----------------
Total 276,097 $ 48,818
================
Less amounts representing interest (143,895)
----------------
Present value of capital lease obligations 132,202
Less current portion (28,798)
----------------
$ 103,404
================
Total operating lease rental expense included in the Company's results of
operations for the years ended December 31, 2000, 1999 and 1998 was
$19,178,000, $17,057,000 and $12,511,000, respectively.
We are also a party to contracts with several unrelated long distance
carriers. The contracts provide for fees based on leased traffic. Annual
minimum commitments are as follows:
($ In thousands)
-------------- Minimum
Year Commitment
---- ----------------
2001 $ 600
2002 600
2003 -
2004 -
2005 -
Thereafter -
----------------
Total $ 1,200
================
Our capital additions for 2001 are estimated to be $141,000,000. Certain
commitments have been entered into in connection with this budget.
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.
(14) Segment Disclosures
-------------------
We operate in a single industry segment, communications services. We
provide services utilizing our centrally planned, monitored and operated
telecommunications network. Operations are managed and financial
performance is evaluated based on the delivery of multiple services to
customers over our single fiber-optic network. As a result, there are many
shared expenses generated by the various revenue streams and geographic
locations. 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, we do not presently have systems or procedures
in place to derive all the operating costs and expenses relating to a
particular product group or service area.
F-21
Products and Services
We group our products and services into the following categories:
o Network Services - includes point-to-point dedicated service between
two or more locations for our customers' exclusive use. We offer this
product in both local and long-haul applications.
o Local Telephone Services - includes local dial tone and related
services that provide incoming and outgoing calls over the public
switched network. This category includes reciprocal compensation
revenues.
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.
The revenues generated by these products and services for the years ended
December 31 were:
($ In thousands)
-------------- 2000 1999 1998
---------------- ---------------- ----------------
Network services $ 77,437 $ 53,249 $ 36,589
Local telephone services 98,643 77,591 38,169
Long distance services 16,318 26,698 12,309
Data services 51,579 29,470 13,813
---------------- ---------------- ----------------
Total $ 243,977 $ 187,008 $ 100,880
================ ================ ================
We do not currently provide services outside the United States.
Major Customers
For the years ended December 31, 2000, 1999 and 1998, Qwest (formerly U S
WEST) accounted for 19%, 19% and 20%, respectively, of our total revenue.
As of December 31, 2000 and 1999, Qwest accounted for 28% and 45%,
respectively, of our net trade accounts receivable.
F-22
(15) Fair Value of Financial Instruments
-----------------------------------
The following table summarizes the carrying amounts and estimated fair
values for certain of our financial instruments at December 31, 2000 and
1999. For the other financial instruments, representing cash and cash
equivalents, receivables, accounts payable and other accrued and current
liabilities, the carrying amounts approximate fair value due to the
relatively short maturities of those instruments.
2000 1999
---------------------------------- ----------------------------------
Carrying Fair Carrying Fair
($ In thousands) Amount Value Amount Value
-------------- ---------------- ---------------- ---------------- ---------------
Senior unsecured notes $ 325,000 $ 276,000 $ 325,000 $ 308,000
Revolving bank credit facility 400,000 400,000 260,000 260,000
The fair value of the above financial instruments is based on prices of
comparable facilities that we could obtain at December 31, 2000 and 1999.
(16) Quarterly Financial Information (Unaudited)
------------------------------------------
Selected unaudited financial information for each of the quarters in 2000
and 1999 is as follows:
($ In thousands, except per share data) March 31, June 30, September 30, December 31,
-------------------------------------- ---------------- ---------------- ---------------- ---------------
2000:
Revenues $ 56,778 $ 60,620 $ 63,610 $ 62,969
Network access expenses 20,696 18,294 17,821 17,293
Net loss (35,139) (34,958) (32,592) (33,773)
Net loss per share (0.70) (0.69) (0.64) (0.67)
1999:
Revenues $ 38,216 $ 46,095 $ 48,602 $ 54,095
Network access expenses 25,224 23,702 14,719 16,303
Net loss (34,952) (33,205) (30,374) (35,019)
Net loss per share (0.70) (0.67) (0.61) (0.70)
F-23
The Board of Directors and Shareholders
Electric Lightwave, Inc.
We have audited and reported separately herein on the balance sheets of
Electric Lightwave, Inc. as of December 31, 2000 and 1999 and the related
statements of operations, shareholders' equity (deficiency) and cash flows
for each of the years in the three-year period ended December 31, 2000.
Our audits were made for the purpose of forming an opinion on the basic
financial statements of Electric Lightwave, Inc. taken as a whole. The
supplementary information included in Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
KPMG LLP
New York, New York
March 8, 2000
F-24
Schedule II
Electric Lightwave, Inc.
Valuation and Qualifying Accounts
($ In thousands)
Balance at Charged to Charge to Balance
Beginning of Cost and Other at End of
Accounts Period Expense Accounts Deductions Period
- ------------------------------------ -------------------------------------------------------------------------------
Allowance for doubtful accounts
1998 $ 3,569 $ 807 $ 188 $ (2,472) $ 2,092
1999 2,092 4,651 55 (3,070) 3,728
2000 3,728 6,159 71 (7,599) 2,359
Deferred income taxes valuation
allowance
1998 $ - $ 15,137 $ - $ - $ 15,137
1999 15,137 47,325 - - 62,462
2000 62,462 47,902 - - 110,364
F-25