ELECTRIC LIGHTWAVE, INC. FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934
For The Quarterly Period Ended March 31, 2001
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23393
ELECTRIC LIGHTWAVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-1035711
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3 High Ridge Park
P. O. Box 3801
Stamford, CT 06905
(Address, zip code of principal executive offices)
Registrant's telephone number, including area code (203) 614-5600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past ninety days.
Yes |X| No |_|
The number of shares outstanding of the registrant's class of common stock as of April 30,
2001 were:
Common Stock Class A 9,703,482
Common Stock Class B 41,165,000
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets at March 31, 2001 and December 31, 2000 (unaudited) 2
Statements of Operations for the Three Months Ended 3
March 31, 2001 and 2000 (unaudited)
Condensed Statements of Cash Flows for the Three Months Ended 4
March 31, 2001 and 2000 (unaudited)
Statements of Shareholders' Equity (Deficiency) for the Three Months Ended 5
March 31, 2001 and the Year Ended December 31, 2000 (unaudited)
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 10
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION 17
SIGNATURE 18
1
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(In thousands, except share data)
- ---------------------------------
(Unaudited)
March 31, December 31,
Assets 2001 2000
------------- -------------
Current assets:
Cash $ 9,959 $ 10,318
Trade receivables, net 28,657 35,491
Other receivables 6,212 6,001
Other current assets 4,311 5,080
------------- -------------
Total current assets 49,139 56,890
Property, plant and equipment, net 834,395 846,716
Goodwill, net 41,904 42,601
Other assets 2,961 3,567
------------- -------------
Total assets $ 928,399 $ 949,774
============= =============
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable and accrued liabilities $ 48,914 $ 60,851
Current portion of capital lease obligations 26,699 28,798
Due to Citizens Communications Company 9,430 7,684
Other accrued taxes 18,332 16,377
Interest payable 19,139 13,244
Other current liabilities 5,885 5,718
------------- -------------
Total current liabilities 128,399 132,672
Deferred revenue 16,216 14,847
Deferred income taxes payable 3,221 3,058
Other long-term liabilities 2,780 3,295
Capital lease obligations 102,891 103,404
Long-term debt 783,000 763,000
------------- -------------
Total liabilities 1,036,507 1,020,276
------------- -------------
Shareholders' deficiency:
Common stock issued, $.01 par value
Class A, authorized 110,000,000 shares, 9,703,482 shares
and 9,658,437 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively 97 96
Class B, authorized 60,000,000 shares, 41,165,000 shares
issued and outstanding at March 31, 2001 and
December 31, 2000 412 412
Additional paid-in-capital 373,017 372,930
Accumulated Deficiency (481,634) (443,940)
------------- -------------
Total shareholders' deficiency (108,108) (70,502)
------------- -------------
Total liabilities and shareholders' deficiency $ 928,399 $ 949,774
============= =============
See accompanying notes
2
STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
- ----------------------------------------
(Unaudited)
For the three months ended March 31,
------------------------------------
2001 2000
------------- -------------
Revenue $ 62,562 $ 56,778
------------- -------------
Operating expenses:
Network access 16,731 20,696
Operations 12,336 11,575
Selling, general and administrative 30,202 31,172
Depreciation and amortization 18,894 12,755
------------- -------------
Total operating expenses 78,163 76,198
------------- -------------
Loss from operations (15,601) (19,420)
Interest expense, net 22,050 15,196
Loss (gain) on disposal of assets (11) 567
Interest income and other (109) (279)
------------- -------------
Net loss before income taxes (37,531) (34,904)
Income tax expense 163 235
------------- -------------
Net loss $ (37,694) $ (35,139)
============= =============
Net loss per common share:
Basic $ (0.74) $ (0.70)
Diluted $ (0.74) $ (0.70)
Weighted average shares outstanding 50,844 50,183
See accompanying notes
3
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------
(Unaudited)
For the three months ended March 31,
------------------------------------
2001 2000
------------- -------------
Net cash provided by (used for) operating activities $ 2,599 $ (11,514)
------------- -------------
Cash flows used for investing activities:
Capital expenditures (20,334) (25,371)
------------- -------------
Cash flows from financing activities:
Revolving bank credit facility proceeds - 40,000
Long term funding from Citizens 20,000 -
Payments of capital lease obligation (2,611) -
Other (13) 1,497
------------- -------------
Net cash provided by financing activities 17,376 41,497
------------- -------------
Net increase (decrease) in cash (359) 4,612
Cash at January 1, 10,318 21,378
------------- -------------
Cash at March 31, $ 9,959 $ 25,990
============= =============
Supplemental cash flow information:
Cash paid for interest, net of capitalized portion $ 16,156 $ 8,184
Non-cash increase in capital lease asset $ - $ 23,412
See accompanying notes
4
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(In thousands, except share data)
- ---------------------------------
(Unaudited)
Class A Common Stock, Class B Common Stock,
-------------------- --------------------- Additional
$.01 per share $.01 per share Paid-in- Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficiency Equity(Deficiency)
-----------------------------------------------------------------------------------------
Balance, January 1, 2000 8,966,276 $ 90 41,165,000 $ 412 $ 326,477 $ (307,478) $ 19,501
Stock issued in connection with
employee incentive plans, net 692,161 6 - - 6,228 - 6,234
Amortization of restricted stock - - - - 1,422 - 1,422
Stock units payable to non-
employee director - - - - 56 - 56
Acquisition by Citizens of
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)
Stock issued in connection with
employee incentive plans, net 45,045 1 - - (107) - (106)
Amortization of restricted stock - - - - 183 - 183
Stock units payable to non-
employee director - - - - 11 - 11
Net loss - - - - - (37,694) (37,694)
--------------------------------------------------------------------------------------
Balance, March 31, 2001 9,703,482 $ 97 41,165,000 $ 412 $ 373,017 $ (481,634) $ (108,108)
======================================================================================
See accompanying notes
5
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION AND USE OF ESTIMATES
Electric Lightwave, Inc. is referred to as "we", "us" or "our" in this re-
port. We have prepared these unaudited financial statements in accordance
with generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, we have condensed or omitted certain
information and footnote disclosures. In our opinion, these financial
statements include all adjustments and recurring accruals necessary to
present fairly the results for the interim periods shown.
Preparing financial statements in conformity with GAAP requires us to make
estimates and assumptions which affect the amounts of assets, liabilities,
revenue and expenses we have reported and our disclosure of contingent
assets and liabilities at the date of the financial statements. The results
of the interim periods are not necessarily indicative of the results for
the full year. We have made certain reclassifications of balances
previously reported to conform to the current financial statement
presentation. You should read these financial statements in conjunction
with the audited financial statements and the related notes included in our
Annual Report on Form 10-K for the year ended December 31, 2000.
b. CAPITALIZED INTEREST
Property, plant and equipment includes interest costs capitalized during
the installation and expansion of our telecommunications network.
Approximately $958,000 and $2,033,000 of interest costs were capitalized in
the three months ended March 31, 2001 and 2000, respectively.
c. REVENUE RECOGNITION
We recognize revenues from communications services when the services are
provided. Long-term prepaid network services revenue agreements are
deferred and recognized on a straight-line basis over the terms of the
related agreements. Installation fees and related costs (up to the amount
of installation revenue) are deferred and recognized over the average
contract life. Installation related costs in excess of installation fees
are expensed when incurred.
d. NET LOSS PER SHARE
We follow the provisions of SFAS No. 128, "Earnings Per Share" which
requires presentation of both basic and diluted earnings per share (EPS) on
the face of the statements of operations. Basic EPS excludes dilution and
is computed using the weighted average number of common shares outstanding
during the period. The diluted EPS calculation assumes that all dilutive
stock options or contracts to issue common stock were exercised or
converted into common stock at the beginning of the period. We have
excluded certain common stock equivalents from our diluted EPS calculation
during the quarters ended March 31, 2001 and 2000 as their effect would
have reduced our net loss per share.
6
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are as follows:
($ In thousands) March 31, 2001 December 31, 2000
------------- -----------------
Property, plant and equipment $ 983,041 $ 978,327
Accumulated depreciation and amortization (148,646) (131,611)
------------- --------------
Property, plant and equipment, net $ 834,395 $ 846,716
============= ==============
Depreciation expense was $18,056,000 and $12,598,000 for the three months
ended March 31, 2001 and 2000, respectively.
3. COMMITMENTS AND CONTINGENCIES
We have entered into various capital and operating leases for fiber optic
cable to interconnect our local networks with long-haul fiber optic routes.
The terms of the various agreements range from 20 to 25 years, with varying
optional renewal periods.
In addition to the long-haul agreements above, we have also entered into
certain operating and capital leases to develop our local networks. The
terms of the various agreements range from 15 to 30 years, with varying
optional renewal periods. One of these contracts provides us with an
exclusive right to use the facilities as long as certain minimum usage
is satisfied. We continued to meet those requirements as of March 31, 2001.
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.
4. RELATED PARTY TRANSACTIONS
On December 1, 1997, we entered into an Administrative Services Agreement
(Agreement) under which Citizens Communications Company (Citizens) provides
us with certain administrative services including, but not limited to, fi-
nancial management services, information services, legal and contract ser-
vices, planning and human resources services. Under the terms of the Agree-
ment, 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.
Citizens owns all of our Class B Common Stock and 2,287,644 shares of our
Class A Common Stock, in total representing an 85% economic interest in us.
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 June 30, 2002. The
remaining balance may be drawn to pay interest due under the Citizens
Credit Facility until maturity. As of March 31, 2001, there was $58 million
outstanding under the Citizens Credit Facility.
7
This table summarizes the activity in the liability account Due to Citizens
Communications Company for the three months ended March 31,
($ In thousands) 2001 2000
------------- --------------
Balance beginning of period $ 7,684 $ 14,650
Guarantee fees 7,292 6,356
Interest expense on Credit Facility 1,695 -
Administrative services:
Services provided by Citizens 2,223 1,154
ELI expenses paid by Citizens 1,692 2,313
Payments to Citizens (11,156) (19,325)
------------- --------------
Balance end of period $ 9,430 $ 5,148
============= ==============
5. INCOME TAXES
Citizens includes us in their consolidated federal income tax return which
uses a calendar year reporting period. We record income taxes as if we were
a stand-alone company. We recorded income tax expense of $163,000 and
$235,000 for the three months ended March 31, 2001 and 2000, respectively.
This expense represents the deferred tax effect of the increase in
temporary differences between our GAAP financial statements and our tax
return that may not be fully offset with the use of tax loss carryforwards
when the temporary differences reverse in future periods.
The income taxes payable by Citizens' consolidated group have been reduced
as a consequence of our losses for tax purposes in past years. We would
have been able to carry-forward our tax losses to future periods to offset
taxable income in these future periods had we been a stand-alone company.
In accordance with our tax sharing agreement, Citizens has agreed to
reimburse us for the taxes we would be required to pay in the future, if we
have taxable income, to the extent that these loss carryforwards would
otherwise remain available on a stand-alone basis.
8
6. 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.
PRODUCTS AND SERVICES
We group our products and services into Network Services, Local Telephone
Services, Long Distance Services and Data Services. The revenue generated
by these products and services for the three months ended March 31 were:
($ In thousands) 2001 2000
------------- --------------
Network services $ 25,768 $ 16,004
Local telephone services 21,797 24,274
Long distance services 3,084 4,596
Data services 11,913 11,904
------------- --------------
Total $ 62,562 $ 56,778
============= ==============
We do not currently provide products or services outside the United States.
MAJOR CUSTOMER
Qwest Communications (Qwest) accounted for 12% and 21% of our total revenue
for the three months ended March 31, 2001 and 2000, respectively. Most of
the Qwest revenue was generated from reciprocal compensation agreements. No
other customer accounted for 10% or more of our total revenue for the three
months ended March 31, 2001 or 2000.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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. 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. We adopted SFAS 133 on January 1, 2001. As of March 31, 2001 we
have not identified any derivative instruments subject to the provisions of
SFAS 133. Therefore, SFAS 133 did not have any impact on our first quarter
2001 financial statements.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------------------------------
We caution you that this quarterly report on Form 10-Q contains
forward-looking statements within the meaning of the Securities 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 quarterly report on Form 10-Q
involve certain risks, uncertainties and assumptions. They are not
guarantees of future performance. Factors that may cause actual results to
differ materially from those expressed or implied in any forward-looking
statements include, but are not limited to, any of the following
possibilities:
o if 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 com-
bination of existing competitors and/or the more effective provision of
products and services from our competitors, including Incumbent Local
Exchange Carriers (ILECs), or other public utilities;
o if our business strategy or its execution, including financial perfor-
mance goals, is not as successful as we anticipate;
o if state or federal regulatory changes are implemented that assist
our competitors, impair our competitive position, threaten our costs
or impact our rate structures, including the ability to bill and collect
reciprocal compensation for calls terminated to Internet Service
Providers (ISPs);
o if we do not receive the services and support which we require from the
regional ILECs or cannot maintain our current relationships with ILECs;
o if we are not able to effectively manage rapid growth, including
integrating any businesses acquired;
o if we are not able to correctly identify future markets, successfully
expand existing ones, or successfully expand through acquisitions;
o if the mix of products and services we are able to offer in our target
markets is not appropriate to the demands of our customers;
o if we are not able to obtain additional financing;
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 con-
tained in this report and/or made by us or on our behalf.
----------------------------------------------------------------------------
The following information has not been audited. You should read this information
in conjunction with the condensed financial statements and related notes to
financial statements included in this report. In addition, please see our
Management's Discussion and Analysis of Financial Condition and Results of
Operations, audited financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 2000. Electric
Lightwave, Inc. is referred to as "we", "us", or "our" in this report.
10
OVERVIEW
We have built an extensive fiber-optic network in the western United
States, which includes expansive local networks in seven major cities and
their surrounding areas, connected by our long-haul routes. In addition, we
provide data services in certain strategic markets across the nation. Our
product offerings include:
o Network services - includes dedicated service between two points for
a customer's exclusive use. We offer this in both local and long-haul
applications and collocation facilities to meet us directly in our hub.
o Local telephone services - consists of the delivery of local dial
tone and related services, and related carrier and local access revenue,
as well as Integrated Services Digital Network Primary Rate Interface
(ISDN PRI). ISDN PRI provides customers with a high-speed access con-
nection 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 quan-
tities of data from one location to another through Asynchronous Trans-
fer Mode (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.
Refer to Note 4 in Part I, Item 1, for a discussion concerning our
relationship with Citizens, which owns approximately 85% of our common
stock.
a. LIQUIDITY AND CAPITAL RESOURCES
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 June 30, 2002. The
remaining balance may be drawn to pay interest due under the Citizens
Credit Facility until maturity.
We drew $20 million from the Citizens Credit Facility to fund operating and
capital expenditures for the three months ended March 31, 2001. As of March
31, 2001, we have drawn $58 million from the Citizens Credit Facility.
Additionally, we have outstanding $325 million five-year 6.05% senior
unsecured notes that mature on May 14, 2004 and a $400 million revolving
bank credit facility (Bank Credit Facility). No principal payment on the
Bank Credit Facility is due until its expiration date in November 2002.
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.
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 June 30, 2002. Citizens has
committed to continue to finance our cash requirements, at market terms and
conditions, until the earlier of completion of a public or private
financing or June 30, 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 telecommunications network. A significant portion of these
expenditures is incurred before any revenue is realized. Our capital
expenditures were approximately $20.3 million in the first quarter 2001.
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
11
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.
OTHER MATTERS
RECIPROCAL COMPENSATION
We have various interconnection agreements with Qwest, Verizon
Communications (Verizon) and Pacific Bell Telephone Company (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 ILECs' 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 $7.7 million and $9.6
million for the three months ended March 31, 2001 and 2000, respectively.
Net trade accounts receivable relating to reciprocal compensation totaled
$5.1 million and $7.7 million at March 31, 2001 and December 31, 2000,
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.
On February 25, 1999, the Federal Communications Commission (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.
On April 19, 2001, the FCC announced that it had adopted new rules
concerning intercarrier compensation for ISP-bound traffic. While the
written order is not yet available, the FCC set transitional rates for
reciprocal compensation that exceeds a 3:1 ratio. The rate for above ratio
traffic is .15 cents per minute for the first six months after the
effective date of the commission order, .10 cents per minute for the next
18 months and .07 cents per minute after that. Below ratio traffic remains
at the state established rate level. Based on our preliminary analysis, we
do not anticipate the FCC's action to cause any material deviations in
anticipated reciprocal compensation revenue for 2001.
12
b. RESULTS OF OPERATIONS
REVENUE
Revenue increased $5.8 million, or 10%, for the first quarter 2001 over the
first quarter 2000.
For the three months ended March 31,
--------------------------------------------
($ In thousands) 2001 2000 % Change
------------ ------------- -------------
Network services $ 25,768 $ 16,004 61%
Local telephone services 21,797 24,274 (10%)
Long distance services 3,084 4,596 (33%)
Data services 11,913 11,904 0%
------------ -------------
Total $ 62,562 $ 56,778 10%
============ =============
Network Services
Network services revenue increased $9.8 million, or 61%, for the first
quarter 2001 over the first quarter 2000. The increase is due to continued
growth in our network and sales of additional circuits to new and existing
customers.
Local Telephone Services
Local telephone services revenue decreased $2.5 million, or 10%, for the
first quarter 2001 compared to the first quarter 2000. Local telephone
services include ISDN PRI, dial tone, Carrier Access Billings and
reciprocal compensation.
o ISDN PRI revenue increased $0.2 million, or 3%, for the first quarter
2001 over the first quarter 2000. Dial tone revenue increased $0.2
million, or 3%, for the first quarter 2001 over the first quarter
2000. Increases in revenue for both ISDN PRI and dial tone is the
result of an increase in the average access line equivalents of
14,280, or 8%, for the first quarter 2001 over the first quarter 2000.
o Carrier Access Billings revenue decreased $0.9 million, or 41%, for
the first quarter 2001 compared to the first quarter 2000. The
decrease is the result of lower average rates per minute due to
competitive pressures in the markets in which we operate, offset by an
increase in average monthly minutes processed of 12.7 million, or 49%,
for the first quarter 2001 over the first quarter 2000.
o Reciprocal compensation revenue decreased $1.9 million, or 20%, for
the first quarter 2001 compared to the first quarter 2000. The
decrease is due to a decrease in average monthly minutes processed of
31.1 million, or 3%, for the first quarter 2001 compared to the first
quarter 2000, and lower average rates per minute due to competitive
pressures in the markets in which we operate. See "Part I., Item 2.,
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Other
Matters - Reciprocal Compensation" for further discussion of
reciprocal compensation.
Long Distance Services
Long distance services revenue decreased $1.5 million, or 33%, for the
first quarter 2001 compared to the first quarter 2000. Long distance
services include retail and wholesale long distance.
o Retail long distance revenue decreased $0.3 million, or 11%, for the
first quarter 2001 compared to the first quarter 2000. The decrease is
due to a decrease in average monthly minutes processed of 0.3 million,
or 3%, for the three months ended March 31, 2001 and lower average
rates per minute.
13
o Wholesale long distance revenue decreased $1.1 million, or 49%, for
the first quarter 2001 compared to the first quarter 2000. The
decrease is due to a decrease in average monthly minutes processed of
5.8 million, or 30%, for the three months ended March 31, 2001 and
lower average rates per minute.
Data Services
Data services revenue increased marginally over the first quarter 2000.
Data services include Internet, RSVP, Frame Relay and other services.
o Revenue from our Internet services product increased $0.6 million, or
18%, for the first quarter 2001 over the first quarter 2000.
o Revenue from our RSVP products increased $0.7 million, or 106%, for
the first quarter 2001 over the first quarter 2000.
o Revenue from our Frame Relay product increased $0.3 million, or 14%,
for the first quarter 2001 over the first quarter 2000.
o These increases were offset by a decrease of $1.6 million, or 33%, for
the first quarter 2001 compared to the first quarter 2000, as the
result of the expiration on February 28, 2001 of an 18-month
take-or-pay contract with a significant customer. This take-or-pay
contract has not been renewed.
OPERATING EXPENSES
Operating expenses increased $2.0 million, or 3%, for the first quarter
2001 over the first quarter 2000.
For the three months ended March 31,
--------------------------------------------
($ In thousands) 2001 2000 % Change
------------ ------------- -------------
Network access $ 16,731 $ 20,696 (19%)
Operations 12,336 11,575 7%
Selling, general and administrative 30,202 31,172 (3%)
Depreciation and amortization 18,894 12,755 48%
------------ -------------
Total $ 78,163 $ 76,198 3%
============ =============
Network Access
Network access expenses include circuit and usage-based charges for
carrying and terminating traffic on another carrier's network.
Network access expenses for the three months ended March 31, 2001 decreased
$4.0 million, or 19%, compared to the same period in 2000. The decrease is
a result of 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. In addition, we have made efforts to reduce off-net
long distance costs, which have resulted in a $2.0 million savings compared
to the 2000 period. These savings are partially offset by increases in
costs directly related to increased revenue growth and network expansion.
Operations
Operations expenses consist of costs related to providing facilities based
network and enhanced communications services other than network access
costs. The primary components of these expenses are right-of-way and
telecommunications equipment leases as well as operations and engineering
personnel costs.
14
Operations expenses increased $0.8 million, or 7%, for the first quarter
2001 over the first quarter 2000, primarily due to increases in payroll,
maintenance, operating rents and related expenses to support the expanded
delivery of services.
Selling, General and Administrative
Selling, general and administrative expenses include all direct and
indirect sales channel expenses and commissions, as well as all general and
administrative expenses.
Selling, general and administrative expenses decreased $1.0 million, or 3%,
for the first quarter 2001 over the first quarter 2000. The decrease is
primarily due to a reduction in personnel, partially offset by increases in
franchise fees and property taxes.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation of
telecommunications network assets including fiber-optic cable, network
electronics, network switching and network data equipment.
Depreciation and amortization expense increased $6.1 million, or 48%, for
the first quarter 2001 over the first quarter 2000. This was primarily due
to higher plant in service balances for newly completed telecommunications
network facilities and electronics.
INTEREST EXPENSE, NET
For the three months ended March 31,
--------------------------------------------
($ In thousands) 2001 2000 % Change
------------ ------------- -------------
Gross interest expense $ 23,008 $ 17,229 34%
Capitalized interest (958) (2,033) (53%)
------------ -------------
Interest expense, net $ 22,050 $ 15,196 45%
============ =============
Gross interest expense increased $5.8 million, or 34%, for the first
quarter 2001 over the first quarter 2000, primarily due to higher levels of
outstanding long-term debt and higher average interest rates. As of March
31, 2001, we had long-term debt outstanding of $783 million compared to
$625 million at March 31, 2000. The higher balance led to increased
interest and guarantee fees.
Capitalized interest decreased $1.1 million, or 53%, for the first quarter
2001 over the first quarter 2000. The decrease is due to a reduction in
average Construction Work In Process of $59.6 million, or 70%, for the
first quarter 2001 compared to the first quarter 2000, partially offset by
higher interest rates.
INCOME TAX EXPENSE
For the three months ended March 31,
--------------------------------------------
($ In thousands) 2001 2000 % Change
------------ ------------- -------------
Income tax expense $ 163 $ 235 (31%)
Income tax expense decreased $0.1 million, or 31%, for the first quarter
2001 over the first quarter 2000. In both 2001 and 2000, the benefit of our
tax loss carryforwards is not able to fully offset the deferred tax expense
associated with current year temporary differences.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE OF PRIMARY MARKET RISK AND HOW IT IS MANAGED
We are exposed to market risk in the normal course of our business
operations due to ongoing funding activities. Market risk refers to the
potential change in fair value of a financial instrument as a result of
fluctuations in interest rates and equity and commodity prices. Our primary
market risk exposure is interest rate risk, which relates primarily to our
long-term debt and capital lease obligations. We do not hold or issue
derivative instruments or other financial instruments for trading purposes.
Financial instruments that are held for other than trading purposes do not
impose a material market risk. As a result, we do not undertake any
specific actions to cover our exposure to interest rate risk and we are not
party to any interest rate risk management agreements.
We are exposed to interest rate risk since debt financing is needed to fund
the operating losses and capital expenditures associated with establishing
and expanding our telecommunications network. The interest rates that we
will be able to obtain on debt financing will depend on market conditions
at that time, and may differ from the rates we have secured on our current
debt. Citizens has committed to continue to finance our cash requirements,
at market terms and conditions, until the earlier of completion of a public
or private financing or June 30, 2002.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt and capital lease obligations, as a
majority of our obligations are fixed and most of our obligations are
guaranteed by Citizens. A hypothetical 10% adverse change in interest rates
would increase the amount that we pay on our variable obligations and could
result in fluctuations in the fair value of our fixed rate obligations.
Based upon our overall interest rate exposure at March 31, 2001, a
near-term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
SENSITIVITY ANALYSIS
At March 31, 2001, the fair value of our long-term debt and capital lease
obligations was estimated to be $854 million, based on our overall weighted
average rate of 6.8% and our overall weighted maturity of 4 years. There
has been no material change in the weighted average maturity applicable to
our obligations since December 31, 2000. However, the overall weighted
average interest rate has declined by approximately 62 basis points,
consistent with the general decline of interest rates during the first
quarter 2001. A hypothetical increase of 68 basis points (10% of our
overall weighted average borrowing rate) would result in an approximate $12
million decrease in the fair value of our fixed rate obligations.
DISCLOSURE OF LIMITATIONS OF SENSITIVITY ANALYSIS
Certain shortcomings are inherent in the method of analysis presented in
the computation of fair value of financial instruments. Actual values may
differ from those presented should market conditions vary from assumptions
used in the calculation of the fair value. This analysis incorporates only
those exposures that exist as of March 31, 2001. It does not consider those
exposures or positions that could arise after that date. As a result, our
ultimate exposure with respect to our interest rate risk will depend on the
exposures that arise during the period, the ratio of variable to fixed debt
outstanding and the fluctuation of interest rates.
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PART II: OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
We are party to routine litigation arising in the normal course of
business. We do not expect these matters, individually or in the
aggregate, to have a material adverse effect on our financial
position, results of operations or cash flows. We are also party to
various proceedings before state Public Utilities Commissions. These
proceedings typically relate to authority to operate in a state and
regulatory arbitration proceedings concerning our interconnection
agreements. See "Part I., Item 2., Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources - Other Matters - Reciprocal Compensation".
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
We received a letter from The Nasdaq Stock Market, Inc., dated April
2, 2001, informing us that our Class A Common Stock failed to maintain
a minimum bid price of $5.00 over the prior 30 consecutive trading
days which does not meet the minimum listing criteria of Nasdaq for
shares listed on the National Market System. If the bid price for our
Class A Common Stock is not at least $5.00 for 10 consecutive days
prior to July 2, 2001, subject to the filing of an application and its
approval, our listing will be transferred to the Nasdaq Small Cap
Market. In addition, we have the opportunity to appeal any change in
status to a Nasdaq Listing Qualifications Panel. We intend to explore
our options, including an appeal and a transfer to the Nasdaq Small
Cap Market, unless the price of our Class A Common Stock has achieved
the minimum level. At the close of business on May 8, 2001, the bid
price for a share of our Class A Common Stock was $2.70.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits below are filed as part of this report:
None.
b) Reports on Form 8-K
On March 8, 2001, we filed a current report on Form 8-K, under
Item 5, "Other Events", to make available a press release dated
March 8, 2001, regarding our fourth quarter and fiscal 2000
financial results.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRIC LIGHTWAVE, INC.
(Registrant)
By: /s/ Robert J. Larson
----------------------------
Robert J. Larson
Vice President and Chief Accounting Officer
May 9, 2001
18