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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-12
Electric Lightwave, Inc.
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(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
|X| No fee required
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
|_| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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Administrative Offices
4400 NE 77th Avenue
Vancouver, Washington 98662
(360) 816-3000
[graphic]
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March 23, 2001
Dear Fellow Stockholder:
I am pleased to invite you to attend the 2001 Annual Meeting of the
Stockholders of Electric Lightwave, Inc., which will be held at the Hotel
Inter-Continental, 505 North Michigan Avenue, Chicago, IL, on Thursday, May
17, 2001, at 2:00 p.m., Central Time.
It is important that your shares be represented whether or not you attend
the meeting. In order to insure that you will be represented, we ask that you
sign, date, and return the enclosed proxy. If present, you may revoke your
proxy and vote in person.
Attendance at the Annual Meeting will be limited to employees and to
stockholders as of the record date or their authorized representative. Because
of space limitations, admission to the Annual Meeting will be by admission
card only. Registered stockholders planning to attend the meeting should
complete and return the advance registration form on the back page of this
Proxy Statement. If your shares are held through an intermediary such as a
bank or broker, complete and return the advance registration form on the back
page of this Proxy Statement and mail it to Shareholder Services, Electric
Lightwave, Inc., Three High Ridge Park, Stamford, CT 06905. Please include
proof of ownership such as a bank or brokerage firm account statement or a
letter from the broker, trustee, bank or nominee holding the stock confirming
your beneficial ownership.
We look forward to seeing and meeting with you at the annual meeting.
Cordially,
[graphic]
Rudy J. Graf
Chief Executive Officer
[graphic]
Administrative Offices
[graphic] 4400 NE 77th Avenue
Vancouver, Washington 98662
(360) 816-3000
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March 23, 2001
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
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To the Stockholders of
ELECTRIC LIGHTWAVE, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Electric
Lightwave, Inc. will be held at the Hotel Inter-Continental, 505 North
Michigan Avenue, Chicago, IL, on Thursday, May 17, 2001, at 2:00 p.m., Central
Time, for the following purposes:
1. To elect directors;
2. To approve an amendment to our 1997 Equity Incentive Plan solely to
increase the number of shares of common stock reserved for issuance
thereunder; and
3. To transact such other business as may properly be brought before
the meeting or any adjournment or postponement of the meeting.
The Board of Directors has fixed the close of business on March 19, 2001, as
the record date for the determination of stockholders entitled to notice of
and to vote at the meeting or any adjournment or postponement of the meeting.
A complete list of stockholders entitled to vote at the meeting will be open
to the examination of stockholders during ordinary business hours, for a
period of ten days prior to the meeting, at the offices of Illinois Stock
Transfer Company, 209 West Jackson Boulevard, Suite 903, Chicago, IL 60606 at
the site of the meeting on the meeting date.
By Order of the Board of Directors
L. Russell Mitten
Secretary
PROXY STATEMENT
This statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Electric Lightwave, Inc., to be voted at our
annual meeting of stockholders. The mailing address of our administrative
offices is 4400 NE 77th Avenue, Vancouver, Washington 98662. The approximate
date on which this proxy statement and form of proxy are first being sent or
given to stockholders is March 31, 2001.
Only holders of record of our Class A Common Stock, par value $0.01 per
share, and Class B Common Stock, par value $0.01 per share, as of the close of
business on March 19, 2001, the record date, will be entitled to notice of and
to vote at, the annual meeting. As of the record date, there were 9,716,312
shares of Class A Common Stock outstanding, each of which is entitled to one
vote, and 41,165,000 shares of Class B Common Stock outstanding, each of which
is entitled to ten votes, at the annual meeting. As of the record date, an
additional 48,527 shares of Class A Common Stock were outstanding and held by
us as treasury shares. The presence in person or by proxy of the holders of a
majority of the outstanding shares of common stock will be necessary to
constitute a quorum for the transaction of business at the annual meeting.
Directors will be elected by a majority vote of the shares of common stock
present or represented by proxy at the meeting and entitled to vote at the
meeting. Approval of the proposed amendment to the Equity Incentive Plan also
requires the affirmative vote of a majority of the shares of common stock
present or represented by proxy at the meeting and entitled to vote at the
meeting. Abstentions will have the effect of a negative vote with respect to
the election of directors and the approval of the proposed amendment to the
Equity Incentive Plan. Brokers not receiving instructions from our
stockholders may vote at the meeting on both the election of directors and the
approval of the proposed amendment to the Equity Incentive Plan; accordingly,
unless contrary instructions are given, all proxies received pursuant to this
solicitation will be voted in favor of the election of the nominees and for
approval of the proposed amendment to the Equity Incentive Plan. Stockholders
may not cumulate their votes. Stockholders who execute proxies may revoke them
at any time before they are voted.
Stock Ownership of Certain Beneficial Owners, Directors and Executive Officers
As of February 28, 2001, no person or group of persons except for Citizens
Communications Company ("Citizens"), Buckingham Capital Management
Incorporated ("Buckingham"), Baron Growth Fund ("BGF"), Baron Small Cap Fund
("BSCF"), Salomon Brothers Holding Company Inc ("SBHC"), Salomon Smith Barney
Holdings Inc. ("SSB") and Citigroup Inc. ("Citigroup") were known by us to
beneficially own more than 5% of any class of our common stock. Except as
otherwise indicated below, each such person or group has sole voting and
investment power with respect to the securities beneficially owned. All
information regarding the number of shares beneficially owned, and regarding
voting and investment power with respect thereto, by each such person or group
other than Citizens that owns beneficially more than 5% of our common stock is
based solely upon our review of Schedules 13G on file with the Securities and
Exchange Commission as of February 28, 2001.
As of February 28, 2001, Citizens, with offices at Three High Ridge Park,
Stamford, Connecticut 06905, beneficially owns, through its wholly-owned
subsidiary CU CapitalCorp., 41,165,000 shares of Class B Common Stock,
representing all of the outstanding shares of Class B Common Stock. The Class
B Common Stock is not registered under Section 12 of the Securities Exchange
Act of 1934, and is not publicly traded. Each share of Class B Common Stock is
convertible into the Class A Common Stock on a one for one basis. CU
CapitalCorp. may be deemed the beneficial owner of an additional 41,165,000
shares of Class A Common Stock through the conversion of the shares of Class B
Common Stock into shares of Class A Common Stock. On an as-converted basis,
Citizens and CU CapitalCorp. would be deemed to be the beneficial owners of,
and to have shared voting and investment power with respect to, 43,452,644
shares of Class A Common Stock, which in the aggregate constitutes
approximately 85.41% of the shares of Class A Common Stock if all the shares
of Class B Common Stock were converted into shares of Class A Common Stock.
Citizens and CU CapitalCorp. disclaim beneficial ownership of such 41,165,000
shares of Class A Common Stock. Citizens, through CU CapitalCorp. also
beneficially owned and had shared investment and voting power over 2,287,644
shares of Class A Common Stock, representing approximately 24% of the
outstanding shares of Class A Common Stock.
According to the Schedule 13G filed by Buckingham on February 9, 2000,
Buckingham, with offices at 630 Third Avenue, Sixth Floor, New York, New York
10017, beneficially owned 808,400 shares of Class A Common
1
Stock, representing approximately 8.3% of the outstanding shares of Class A
Common Stock. Buckingham has sole voting and sole investment power over these
shares.
According to the Schedule 13G filed by BGF on July 11, 2000, and according
to the Schedule 13G filed by BSCF on February 16, 2000, BGF and BSCF, with
offices at 767 Fifth Avenue, New York, NY 10153 beneficially owned 560,000 and
500,000 shares, respectively, of Class A Common Stock, representing
approximately 5.8% and 5.1% of the outstanding shares of Class A Common Stock.
Each of BGF and BSCF has shared voting and investment power with respect to
these shares.
According to the Schedule 13G filed jointly by SBHC, SSB and Citigroup on
February 15, 2001, SBHC and SSB, with offices at 388 Greenwich Street, New
York, NY 10013, beneficially owned 487,702 and 747,102 shares, respectively,
of Class A Common Stock, representing approximately 5.0% and 7.7% of the
outstanding shares of Class A Common Stock. Each of SBHC and SSB has shared
voting and investment power with respect to these shares. According to the
Schedule 13G filed jointly by SBHC, SSB and Citigroup on February 15, 2001,
Citigroup, with offices at 399 Park Avenue, New York, NY 10043, beneficially
owned 747,102 shares of Class A Common Stock, representing approximately 7.7%
of the outstanding shares of Class A Common Stock. Citigroup has shared voting
and investment power with respect to these shares. SSB is the sole stockholder
of SBHC and Citigroup is the sole stockholder of SSB. The number of shares
beneficially owned by Citigroup includes shares held by SSB and SBHC. Each of
SSB, SBHC and Citigroup disclaims beneficial ownership of a certain portion of
these shares.
The following table reflects shares of common stock beneficially owned (or
deemed to be beneficially owned pursuant to the rules of the Securities and
Exchange Commission) as of February 28, 2001, by each of our directors and by
each of the executive officers named in the Summary Compensation Table
included elsewhere herein, and our current directors and all executive
officers as a group. Except as otherwise described below, each of the persons
named in the table has sole voting and investment power with respect to the
securities beneficially owned.
Acquirable Percentage of
Class of Common Within 60 Common Stock
Stock Owned(1) Days(2) Owned(3)
------------------------------- ------------- -------------------------------
Name Position Class A Class B Class A Class B(4)
----------- --------------------- ------------- ------------- ------------- ------------- -------------
Robert Braden(5) .. President, COO and
Director 2,337,644(6)(7) 41,165,000(8) 0 24 100
Michael L.
Daniel(5) ......... Vice President,
Retail Sales 126,801 0 122,134 * *
Rudy J. Graf(5) ... Chief Executive
Officer and Director 2,287,644(6) 41,165,000(8) 0 24 100
Guenther E.
Greiner ........... Director 46,095 0 39,602 * *
Stanley
Harfenist(5) ...... Director 2,416,091(6)(9) 41,165,000(8) 122,500 25 100
William Kraus ..... Director 23,750 0 23,750 * *
Randall J. Lis .... Vice President 141,293 0 130,134 * *
Scott N.
Schneider(5) ...... Executive Vice
President and
Director 2,287,644(6) 41,165,000(8) 0 24 100
David B.
Sharkey(5) ........ Former President and
Chief Operating
Officer and Former
Director 202,854 0 100,000 * *
Robert A.
Stanger(5) ........ Director 2,340,591(6)(10) 41,165,000(8) 42,500 24 100
Leonard Tow(11) ... Chairman and Director 2,543,148(6)(12) 41,165,000(8) 66,666 26 100
Maggie Wilderotter Director 43,447 0 42,500 * *
All Executive
Officers and
Directors as a
group (21
Persons)(13) ...... 3,398,782(6) 41,165,000(8) 937,536 35 100
- - - - ---------------
* Represents less than 1% of our outstanding common stock.
2
(1) Pursuant to rules of the Securities Exchange Commission, includes shares
acquirable as further described in footnote (2). Shares owned as of
February 28, 2001, may be determined by subtracting the number under
"Acquirable Within 60 Days" from that under "Common Stock Owned."
(2) Reflects number of shares that could be purchased by exercise of options
as of February 28, 2001, or within 60 days thereafter under our Equity
Incentive Plan.
(3) Based on number of shares outstanding at, or acquirable within, 60 days
of February 28, 2001.
(4) All Class B Common Stock is owned by CU CapitalCorp., a wholly-owned
subsidiary of Citizens. As a result of Citizens' ownership, the
percentage of Class B Common Stock beneficially owned by each of Dr. Tow
and Messrs. Braden, Graf, Harfenist, Schneider, and Stanger is deemed to
be 100%.
(5) Mr. Graf owns beneficially 547,265 shares of Citizens common stock,
200,000 shares of which are restricted shares and 83,333 shares of which
are acquirable by exercise of options as of February 28, 2001 or within
60 days thereafter. Messrs. Braden, Daniel, Lis, Harfenist, Stanger,
and Sharkey own beneficially 52,448, 37,095, 33,001, 107,024, 105,607
and 2,052 shares of Citizens common stock, respectively. Of the shares
beneficially owned by Messrs. Braden, Daniel, Harfenist and Stanger
16,666, 4,685, 93,069 and 103,068 shares, respectively, are acquirable
by exercise of options as of February 28, 2001, or within 60 days
thereafter. Mr. Harfenist's shares are held by Mr. Harfenist and his
wife, Jean Lippka Harfenist, as Trustees for the Harfenist Family Trust.
Mr. Scott N. Schneider owns beneficially 173,009 shares of Citizens
common stock, 66,666 shares of which are restricted shares and 83,333
shares of which are acquirable by exercise of options as of February 28,
2001, or within 60 days thereafter.
(6) Includes 2,287,644 shares of Class A Common Stock owned by CU Capital
Corp., a wholly-owned subsidiary of Citizens. Leonard Tow is Chairman of
the Board, Chief Executive Officer and a director of Citizens. Stanley
Harfenist and Robert A. Stanger are directors, Rudy J. Graf and Scott N.
Schneider are directors and executive officers and Robert Braden is an
executive officer of Citizens. These shares of Class A Common Stock are
included in the above table for Leonard Tow, Stanley Harfenist, Robert
A. Stanger, Robert Braden, Rudy J. Graf, and Scott N. Schneider as
required by the definition of beneficial ownership of the Securities and
Exchange Commission. By reason of the definition of beneficial
ownership, each of the above listed officers and directors and Citizens
(through its wholly-owned subsidiary CU Capital Corp.) is deemed to have
an indirect beneficial interest in these 2,287,644 shares of Class A
Common Stock. Except to the extent of such indirect interest, each of
the named individuals disclaims beneficial ownership of any of these
2,287,644 shares of Class A Common Stock.
(7) Includes 50,000 restricted shares over which Mr. Braden has sole voting
power but no dispositive power.
(8) Consists entirely of shares of Class B Common Stock owned by Citizens of
which Leonard Tow is Chairman of the Board, Chief Executive Officer and
a director, Rudy J. Graf is an executive officer and director, Stanley
Harfenist is a director, Scott N. Schneider is an executive officer and
director, Robert A. Stanger is a director and Robert Braden is an
executive officer. These shares of Class B Common Stock are included in
the above table for Leonard Tow, Robert Braden, Stanley Harfenist,
Robert A. Stanger, Rudy J. Graf, and Scott N. Schneider as required by
the definition of beneficial ownership of the Securities and Exchange
Commission. By reason of the definition of beneficial ownership, the
above listed officers and directors and Citizens (through its wholly-
owned subsidiary CU CapitalCorp.) own an approximate 97.9% voting
interest in our Class B Common Stock, and therefore each of the above
individuals is deemed to have an indirect beneficial interest in these
41,165,000 shares of Class B Common Stock. Except to the extent of such
indirect interest, each of the named individuals disclaims beneficial
ownership of any of these shares of Class B Common Stock.
(9) Includes 5,947 shares of Class A Common Stock held by Stanley and Jean
Lippka Harfenist as Trustees for the Harfenist Family Trust.
(10) Includes 4,500 shares of Class A Common Stock held by Mr. Stanger's
wife. Mr. Stanger disclaims beneficial ownership of these shares.
(11) Dr. Tow beneficially owns 9,217,970 shares of Citizens common stock,
2,425,948 shares of which are acquirable by exercise of options as of
February 28, 2001 or within 60 days thereafter and 559,974 shares of
which are restricted shares over which Dr. Tow has sole voting power but
no dispositive power. The total includes 5,344,211 shares of Citizens
common stock owned by Lantern Partners LLC, of which Dr. Tow is the sole
member, and therefore he is deemed to have a beneficial interest in
those 5,344,211 shares.
3
The total also includes 2,827 shares held by Dr. Tow's wife; 18,607
shares held by her as custodian for her minor grandchildren, 93,069
shares acquirable by her within sixty days; and 1,590 shares of common
stock are held in an individual retirement account for the benefit of
Mrs. Tow. Dr. Tow disclaims ownership of shares owned by his wife, which
shares are included in the total shares owned by Dr. Tow as required by
the definition of beneficial ownership of the Securities and Exchange
Commission. Dr. Tow owns approximately 3.5% of the common stock of
Citizens.
(12) Includes 141,667 restricted shares over which Dr. Tow has sole voting
power but no dispositive power.
(13) All of our directors and executive officers as a group own beneficially
10,404,555 shares of Citizens common stock (2,768,034 of which are
acquirable within 60 days), which represents approximately 4.0% of
Citizens common stock outstanding as of February 28, 2001 or acquirable
within 60 days thereafter.
ELECTION OF DIRECTORS
At the meeting, 9 directors are to be elected to hold office until the next
annual meeting and until their successors have been elected and qualified. All
of the nominees are currently serving as our directors. Directors will be
elected by a majority of the votes of the holders of shares of common stock,
present in person or represented by proxy at the meeting and entitled to vote
at the meeting. It is the intention of the persons named in the enclosed proxy
to vote for the election as directors of the nominees specified. In case any
such nominee should become unavailable for any reason, the proxy holders
reserve the right to substitute another person of their choice. Leonard Tow,
Rudy J. Graf, Scott N. Schneider, and Robert Braden are executive officers of
Citizens, whose wholly-owned subsidiary, CU CapitalCorp., is owner of 100% of
our Class B Common Stock and approximately 24% of our Class A Common Stock.
Leonard Tow, Stanley Harfenist, Rudy J. Graf, Scott N. Schneider, and Robert
A. Stanger are directors of Citizens. There are no family relationships among
any of our nominees and executive officers. For a description of certain
business relationships between Citizens and us, see "Agreements with Citizens"
below.
Robert Braden President, Chief Operating Officer and Director of Electric Lightwave Director since 2001
Inc., since January 2001; Vice President, Business Development of
Citizens Communications Company, 1999 to 2001; Senior Vice President,
Business Development at Centennial Communications, 1993 to 1999; Vice
President of Business Development at Century Communications, during
1999; General Manager of Message Center New York, 1991 to 1993; Vice
President and General Manager of Metromedia Paging of New York, Inc.
and Omni Communications, 1985 to 1991. Age 55.
Rudy J. Graf Chief Executive Officer of Electric Lightwave, Inc., 1999 to present; Director since 1999
Vice Chairman of the Board of Directors of Citizens Communications
Company, since 2001; President and Chief Operating Officer of
Citizens Communications Company, 1999 to present; Director, President
and COO, Centennial Cellular Corp., 1990 to 1999; Director, Citizens.
Age 52.
Guenther E. Greiner President of International Corporate Consultancy LLC, a global Director since 1998
finance consulting service, 1998 to present; Senior Group Executive/
Executive Vice President of Global Relationship Bank, 1995 to 1998,
and Group Executive/Executive Vice President of World Corporation
Group, 1989 to 1995, both at Citibank/Citicorp; Director, Ermenegildo
Zegna, New York Philharmonic, German American Chamber of Commerce,
the American Institute for Contemporary German Studies/The Johns
Hopkins University, and Corn Products International, Inc. Age 62.
4
Stanley Harfenist President and Chief Executive Officer of Adesso, Inc., manufacturer Director since 1997
of hardware for the Macintosh computer, 1993 to December 1999;
Director of Citizens Communications Company since 1992. Age 69.
William Kraus Director, Century Communications and Centennial Cellular, 1985 to Director since 2000
1999; Officer of Equitable Life Assurance Society of America, 1983 to
1985; Assistant to the Governor and the Secretary of Development,
State of Wisconsin, 1978 to 1983; Officer of Sentry Insurance to
1978. Age 75.
Scott N. Schneider Executive Vice President of Electric Lightwave, Inc. and of Citizens Director since 1999
Communications Company since 1999; Vice Chairman of the Board of
Directors of Citizens Communications Company since 2001; Director
from 1996 to October 1999, Chief Financial Officer from 1996 to
October 1999 and Senior Vice President and Treasurer of Century
Communications Corp. from 1991 to October 1999; Director, Chief
Financial Officer, Senior Vice President and Treasurer of Centennial
Cellular Company, 1991 to 1999; Director, Citizens. Age 43.
Robert A. Stanger Chairman, Robert A. Stanger & Company, investment banking and Director since 1997
consulting services, 1978 to present, Publisher, The Stanger Report,
Director, Callon Petroleum Company, Inc., exploration and production
of oil and natural gas. Director, Citizens Communications Company.
Age 61.
Leonard Tow Chairman of the Board of Electric Lightwave, Inc. since 1997. Director since 1990
Chairman and Chief Executive Officer, Citizens Communications
Company, 1990 to present and Chief Financial Officer of Citizens
Communications Company, 1991 to 1997. Chief Executive Officer and
Director of Century Communications Corp., a cable television company,
since its organization in 1973 to present, Chairman of the Board
since 1989 and Chief Financial Officer, 1973 to 1996. Director,
Hungarian Telephone and Cable Corp. Director, United States Telephone
Association. Age 72.
Maggie Wilderotter President, Chief Executive Officer and Director of Wink Director since 1997
Communications since 1997; Executive Vice President, AT&T Wireless
Services, Inc. and Chief Executive Officer of AT&T Aviation
Communications Division (Claircom), 1995 to 1997. Regional President
of McCaw Cellular Communications, Inc., 1991 to 1995. Director,
Airborne Express, The McClatchy Company, American Tower Corporation
and Gaylord Entertainment. Age 46.
5
Our Board of Directors recommends that you vote "for" the election of all
nominees for director.
Our Board of Directors held seven meetings in 2000. Each incumbent director
attended at least 75% of the aggregate of these meetings and the total number
of meetings held by all committees of the Board on which he or she served as
described below under "Committees of the Board."
Committees of the Board
The board has standing Executive, Audit, and Compensation Committees. The
full board serves as the nominating committee.
Executive Committee. Our Executive Committee is composed of Dr. Tow as
Chairman and Messrs. Graf and Schneider and, until January 10, 2001, Mr.
Sharkey. The Committee did not meet in 2000. During intervals between meetings
of the board, the Executive Committee has the power and authority of the board
over the management of our business affairs and property, except for powers
specifically reserved by Delaware law or by our Restated Certificate of
Incorporation.
Audit Committee. Our Audit Committee is composed of Mr. Greiner as Chairman
and Messrs. Harfenist, Stanger and Kraus and Ms. Wilderotter. The committee
met eight times in 2000. Each member of the Audit Committee is independent as
required by the listing standards of the National Association of Securities
Dealers. The Audit Committee operates under a charter adopted by the board of
directors, which is included in this proxy statement as Appendix A. The
committee's primary function is to monitor (1) the integrity of our financial
statements, (2) our compliance with laws, regulations and internal controls,
and (3) the independence and performance of our internal and external
auditors.
Compensation Committee. Our Compensation Committee is composed of Mr.
Stanger as Chairman and Messrs. Greiner, Harfenist and Kraus and Ms.
Wilderotter. The committee met four times in 2000. The committee reviews our
general compensation strategies, acts as the committee for our Equity
Incentive Plan and our 1998 Employee Stock Purchase Plan and establishes and
reviews compensation for our Chief Executive Officer and other executive
officers.
AUDIT COMMITTEE REPORT
1. The Audit Committee has reviewed and discussed with management the
audited financial statements of the company for the fiscal year ended December
31, 2000.
2. The Audit Committee has discussed with KPMG LLP, the independent
accountants and auditors of the company, the matters required to be discussed
by SAS 61 (Codification of Statements on Auditing Standard, AU Section 380).
3. The Audit Committee has received the written disclosures and the letter
from KPMG LLP required by Independent Standards Board Standard No. 1
(Independence Standards Board Standards No. 1, Independence Discussions with
Audit Committees) and has discussed with KPMG LLP their independence.
4. Based on such review and discussions, the Audit Committee recommended to
the board of directors that the audited financial statements for the fiscal
year ended December 31, 2000, be included in the company's Annual Report on
Form 10-K, for filing with the Securities and Exchange Commission.
Submitted by:
Guenther E. Greiner, Chairman
Stanley Harfenist
William Kraus
Robert A. Stanger
Maggie Wilderotter
6
DIRECTORS' COMPENSATION
Prior to June 30, 2000, each non-employee director was entitled to a $30,000
annual retainer and a fee of $1,000 plus reasonable expenses for each board or
committee meeting attended in person or telephonically. Committee chairs were
paid a fee of $2,000 per meeting attended. Each non-employee director elected
to have either 100% or 50% of his or her compensation paid in cash, shares of
our Class A Common Stock or stock units representing our Class A Common Stock
under our Equity Incentive Plan. If a director elected payment of his or her
compensation in stock units, those units would be purchased at 85% of the fair
market value, as defined under our Equity Incentive Plan, subject to
adjustment. These stock units, which are payable either in cash or in shares
of our common stock as per the director's irrevocable election, will be held
by us until the earlier of the director's retirement or death at which time
they will be paid to the director in accordance with his or her election. Each
non-employee director also received an annual stock option grant of 7,500
shares, priced at the fair market value of the stock on the grant date.
Effective June 30, 2000, the annual retainer was eliminated and each non-
employee director became entitled to receive annual compensation for the
remainder of the year 2000 in the form of either 2,500 stock units or 10,000
stock options. In addition to the stock units or stock options, each non-
employee director became entitled to receive a fee of $2,000 plus reasonable
expenses for each meeting attended in person or by telephone. The Committee
chairs of the Audit and Compensation Committees are each paid an annual
retainer of $5,000.
Non-employee-director compensation for the year 2001 also became effective
as of June 30, 2000. For the year 2001, each non-employee director is entitled
to receive either 5,000 stock units or 20,000 stock options. In addition, each
non-employee director will continue to receive a fee of $2,000 plus reasonable
expenses for each meeting attending in person or by telephone and Committee
chairs will be entitled to receive a $5,000 annual retainer. A director may
continue to elect to have 100% or 50% of his or her fees, and in the case of
the Audit and Compensation Committee chairs their annual retainer, paid in
cash, shares of our Class A Common Stock or stock units representing our Class
A Common Stock. The awards of stock units and stock options are made pursuant
to our Equity Incentive Plan. If a director elects payment of his fees, and in
the case of the Audit and Compensation Committee chairs their annual retainer,
in stock or stock units, those shares or units will be purchased at 85% of the
fair market value, as defined under our Equity Incentive Plan, subject to
adjustment. These stock units which are payable either in cash or in shares of
our common stock as per the director's irrevocable election will be held by us
until the earlier of the director's retirement or death at which time they
will be paid to the director in accordance with his or her election. The stock
options have an exercise price equal to 85% of the fair market value, as
defined in the Equity Incentive Plan, of the underlying common stock on the
grant date, subject to adjustment. Each non-employee director will also
continue to receive an annual stock option grant of 7,500 shares, priced at
the fair market value of the stock on the grant date. Each new non-employee
director also receives a 10,000 share sign-on option. Dr. Tow and Messrs. Graf
and Schneider, as a result of their employment with Citizens, and Mr. Braden,
as a result of his employment with us and Citizens, are deemed to be employee
directors and thus are not eligible to receive compensation for services
rendered as directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the board of directors is composed of five
independent directors who are responsible for setting and administering
compensation, including base salaries, annual incentives and stock-based
awards paid or awarded to our executive officers. The Compensation Committee
oversees and approves incentive plan design, costs and administration. This
report discusses the Compensation Committee's activities as well as its
development and implementation of policies regarding compensation paid to our
executive officers for 2000.
7
COMPENSATION OF THE EXECUTIVE GROUP
This section discusses our 2000 strategy for our compensation programs. The
compensation of our Chief Executive Officer is discussed separately in this
report.
COMPENSATION STRATEGY
o Offer a competitive mix of total compensation relative to the
Communications Industry.
o Ensure plans enable us to attract and retain employees of outstanding
ability by having flexibility based on the various labor market demands
for critical skill sets.
o Align the compensation plans across the company in order to recognize
that achievement of financial goals contribute to our overall success.
o Continue to increase performance-based compensation so that rewards to
employees have a direct correlation to shareholder value. In 2000, begin
transitioning to more pay at risk for certain levels in the organization
by holding base salaries flat and increasing the cash incentive
opportunities at certain levels of the organization.
o Create stock ownership at all levels in the organization.
Base Salary
The Compensation Committee reviews recommendations and sets the salary
levels of executive officers in the spring of each year. This review is based
on the duties and responsibilities which we expect each executive to discharge
during the current year, the executive's performance during the previous year
and the executive's total cash compensation opportunity. We perform external
market comparisons relative to industry-specific peers, based on individual
job responsibility.
Annual Cash Incentives
To retain and incent employees, the annual cash incentive plan offers a
competitive mix of total cash compensation relative to comparable industry
norms. Cash incentives are paid to eligible employees during the first quarter
based on prior year goal attainment. The plan criteria may be revised each
year to reflect changes in our business strategy.
The cash incentive plan has a voluntary deferral option for employees deemed
to be highly compensated under Department of Labor guidelines. These employees
can elect to defer all or part of their cash incentives each year into an
interest-bearing account.
The annual cash incentives for 2000 were approved by the Compensation
Committee in March 2001. Such cash incentives will be awarded in April 2001.
Awards for 2000 are based on 2000 performance and reflect our successful
performance in achieving our EBITDA financial targets.
Common Stock Long-Term Incentives
The purpose of the Equity Incentive Plan is to provide common stock-related
compensation to ensure that we can effectively attract, motivate and retain
executives and employees in our business sectors. Stock options awarded in
2000 were granted in accordance with the Equity Incentive Plan. All stock
options awarded are non-qualified, awarded at fair market value and beginning
in 2001, vesting has changed from three years to four years.
Within the Equity Incentive Plan, there are two separate award programs: the
Management Stock Option Plan and the Distinguished Performance Award. The
Management Stock Option Plan is designed to grant stock options to executives
and other key management employees for individual contributions toward
achievement of financial goals. Target awards are based on level and are
designed to compensate our employees consistent with the long-term incentive
compensation of companies in comparable industries.
8
The Distinguished Performance Award is designed to recognize and reward key
employees below the management level who are considered to have high potential
and who have made significant contributions. Recommendations are at the
discretion of the employee's manager.
In July 2000, the Compensation Committee granted stock options awards to 356
executives/managers under the Management Stock Option Plan for 1999
performance. A total of 101 employees received stock option awards under the
Distinguished Performance Award. Selected executive officers received
restricted stock grants of Citizens' common stock.
The Compensation Committee will consider Equity Incentive Plan Awards for
2000 performance in the spring of 2001. Beginning with 2000 awards, Equity
Incentive Plan Awards will only be distributed if the prior year's EBITDA
target is achieved.
In December 2000, the Compensation Committee approved an amendment to the
Equity Incentive Plan solely to increase the number of shares available
thereunder by 2,000,000 shares, subject to shareholder approval. A copy of the
full text of the amendment is included as Appendix B to this proxy statement.
The principal purpose of the Equity Incentive Plan is to provide an equity
incentive to employees to remain in our employment and to work diligently in
our best interests. The Board of Directors determined that this purpose would
not be achieved for employees holding options exercisable at prices above the
market price of our common stock, and further determined that it was critical
to our best interests and to our stockholders that we retain the services of
these employees. As such, the Board of Directors authorized the repricing of
certain stock options in 1998. In 1998 the Board of Directors offered to all
executive officers with outstanding options to purchase our common stock the
opportunity to exchange all, half or none of these options for a decreased
number of new options at a price per share equal to the fair market value of
our common stock on August 7, 1998, with no change in the stock option vesting
periods. The number of shares was determined using the Black-Scholes option
pricing model on an equivalent value basis to determine the exchange rate.
Other
The Compensation Committee approves terms of employment offers to new
executives and other officers.
The following table sets forth certain information concerning the repricing
of stock options held by the named executive officers during the last ten
years.
TEN-YEAR OPTION REPRICINGS
Length of
Number of Exercise Original
Securities Market Price Price at Option Term
Underlying of Stock at Time of Remaining at
Options/SARs Time of Repricing Date of
Repriced or Repricing or or New Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
---- ------ ------------ ------------ --------- ------------ ------------
(#) ($) ($) ($)
Randall Lis ................................... 8/7/98 73,000(1) 8.75 16.00 8.75 9.28 yrs.
Vice President
Michael L. Daniel ............................. 8/7/98 68,000(2) 8.75 16.00 8.75 9.28 yrs.
Vice President, Retail Sales
- - - - ---------------
(1) 73,000 shares exchanged on equal value basis for 43,800 shares.
(2) 68,000 shares exchanged on equal value basis for 40,800 shares.
9
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Rudy J. Graf, our Chief Executive Officer, is President and Chief Operating
Officer of our parent company, Citizens. Mr. Graf's 2000 compensation was paid
to him by Citizens. We currently expect to make future awards to our chief
executive officer under the Equity Incentive Plan. Mr. Graf's base salary will
be paid by Citizens as long as he remains an employee of that company. See
footnote 4 to the Summary Compensation Table.
Compliance with Internal Revenue Code Section 162(m)
The Compensation Committee has been advised that the compensation paid to
the named executive officers in 2000, including the chief executive officer,
met the conditions required for full deductibility under Section 162(m) of the
Internal Revenue Code. Section 162(m) of the Internal Revenue Code generally
disallows a tax deduction to public companies for compensation over $1,000,000
paid to our chief executive officer or any of the four other most highly
compensated executive officers. Section 162(m) provides that qualifying
performance-based compensation will not be subject to the tax deduction limit
if certain requirements are met. The Compensation Committee has been advised
that Section 162(m) does not apply to the stock awards granted in 2000. We
expect to structure grants under our Equity Incentive Plan in a manner that
provides for an exemption from Section 162(m). The Compensation Committee
recognizes that, in certain instances, it may be in our best interests to
provide compensation that is not deductible.
Robert A. Stanger, Chair
Guenther E. Greiner
Stanley Harfenist
William Kraus
Maggie Wilderotter
EXECUTIVE RETIREMENT AGREEMENT
In connection with David B. Sharkey's resignation as our President and Chief
Operating Officer and as a Vice President of Citizens, Citizens entered into a
severance agreement with Mr. Sharkey dated February 1, 2001. Pursuant to such
agreement, we made a lump sum severance payment to Mr. Sharkey of $125,000
along with an additional payment of $125,000 for Mr. Sharkey's assistance in
transitioning his duties to his replacement and for Mr. Sharkey's reasonable
availability to management of Citizens and us to provide information
concerning our business and financial operations. We also paid Mr. Sharkey
the present value of his split dollar life insurance policy, which amounted to
$300,000. We have also agreed to provide continuing medical, dental and vision
insurance for Mr. Sharkey for a period up to eighteen months and the same
coverage for his family for a period up to twelve months from the date his
employment terminated. Such coverage shall cease upon Mr. Sharkey's obtaining
similar insurance from a subsequent employer. Any stock options granted to
Mr. Sharkey pursuant to either Citizens' or our equity incentive plans which
otherwise would have been forfeited upon termination of employment, became
exercisable upon the date of the agreement.
10
EXECUTIVE COMPENSATION
The following table sets forth, for services rendered to us for each of the
fiscal years ended December 31, 2000, 1999 and 1998, the compensation awarded
to, earned by or paid to (i) our Chief Executive Officer during the fiscal
year ended December 31, 2000; and (ii) the four other most highly compensated
executive officers for 2000 who were serving as our executive officers on
December 31, 2000.
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
--------------------------------------- ------------------------------------
Awards Payout
---------- ---------
Long-
Other Securities term
Annual Restricted Underlying Incentive All Other
Compen- Stock Options/ Plan Compen-
Salary Salary Bonus (1) sation Awards SARs(2) Payouts sation(3)
Name Year $ $ $ ($) (#) ($) ($)
- - - - ---- ------ ------- --------- ------- ---------- ---------- --------- ---------
Rudy J. Graf(4) .................... 2000 0 0 0 0 0 0 0
Chief Executive Officer And 1999 0 0 0 0 0 0 0
Director
Scott N. Schneider(4) .............. 2000 0 0 0 0 0 0 0
Executive Vice President 1999 0 0 0 0 0 0 0
David B. Sharkey ................... 2000 256,250 0 0 0 0 0 36,704
Former President and Chief 1999 259,375 203,438 0 (5) 100,000 0 32,295
Operating Officer and 1998 229,167 150,000 0 0 0 0 33,759
Former Director
Randall Lis ........................ 2000 185,000 46,250 0 (5) 0 0 4,317
Vice President, 1999 162,717 97,125 0 0 20,000 0 3,016
Engineering & Operations 1998 151,250 62,000 0 0 0 0 3,004
Michael L. Daniel .................. 2000 162,750 41,250 0 (5) 0 0 4,676
Vice President, 1999 153,750 60,000 0 0 13,333 0 0
Retail Sales 1998 143,750 35,000 0 0 0 0 0
- - - - ---------------
(1) Bonus amounts awarded for 1998 and 1999 were for performance for the
stated Salary Year and were determined and awarded in the subsequent
year. Bonus amounts for 2000 were determined by the Compensation
Committee in March 2001 based on performance in 2000 and will be awarded
in April 2001.
(2) All awards shown are options; we have not awarded any SARs. All options
in this column are exercisable for Class A Common Stock. The Options were
granted under our Equity Incentive Plan.
(3) Includes Citizens' matching contribution to each named executive
officer's 401(k) plan. Additionally, includes $29,850 for the 2000,
$27,495 for the 1999 and $28,759 for the 1998 economic benefit of split-
dollar life insurance for Mr. Sharkey. Also included for Mr. Sharkey in
2000, is a $1,754 Citizens' matching contribution to the Citizens'
Executive Deferred Savings Plan. Also included for Mr. Lis in 2000, is a
$1,079 Citizens' matching contribution to the Citizens' Executive
Deferred Savings Plan. Mr. Graf received in 2000, a $5,000 Citizen's
matching contribution to his 401(k) plan along with a $6,439 matching
contribution to the Citizen's Executive Deferred Savings Plan.
(4) Rudy Graf, our Chief Executive Officer since November 23, 1999, has also
been the President and Chief Operating Officer of Citizens since October
11, 1999, and has been an employee of Citizens since September 1, 1999.
Mr. Schneider, our Executive Vice President since 1999, is also an
Executive Vice President of Citizens. Mr. Graf and Mr. Schneider and our
other executive officers who are employees of Citizens are compensated by
Citizens on the basis of services rendered to Citizens and its
subsidiaries, including us. Citizens paid Mr. Graf $500,000 in salary and
$475,000 in bonus awards for 2000. Citizens granted Mr. Graf 100,000
stock options in 2000 with an exercise price of $12.97 per share that
will vest 33-1/3% on each of October 18, 2001, October 18, 2002, and
October 18, 2003. Citizens paid Mr. Graf $150,000 in salary and $600,000
in bonus awards for 1999, and granted him 300,000 restricted shares that
vest in three equal annual installments beginning on September 9, 2000. As
of December 31, 2000, the total
11
number of restricted shares held by Mr. Graf was 200,000 with a market
value as of December 31, 2000 of $2,625,000. Citizens also granted Mr.
Graf 250,000 stock options in 1999 with an exercise price of $11.09 per
share, 83,333 shares of which have vested with the remainder to vest in
equal amounts on each of September 1, 2002, and September 1, 2003.
Citizens paid Mr. Schneider $300,000 in salary and $285,000 in bonus
awards for 2000. Citizens also granted Mr. Schneider 100,000 stock
options with an exercise price of $12.97 per share that will vest 33-1/3%
on each of October 18, 2001, October 18, 2002, and October 18, 2003.
Citizens paid Mr. Schneider $50,000 in salary and $300,000 in bonus
awards for 1999, and granted him 100,000 restricted shares that vest in
three equal annual installments beginning on November 1, 2000. As of
December 31, 2000, the total number of restricted shares held by Mr.
Schneider was 66,666 with a market value as of December 31, 2000, of
$874,991. Citizens also granted Mr. Schneider 250,000 stock options in
1999 with an exercise price of $11.09 per share, 83,333 shares of which
have vested with the remainder to vest in equal amounts on each of
November 1, 2002, and November 1, 2003.
(5) We granted Mr. Sharkey 25,000 restricted shares of our Class A Common
Stock on March 29, 1999. The restrictions on the restricted shares
granted to Mr. Sharkey lapsed with termination of his employment. As of
December 31, 2000, Mr. Sharkey held 16,666 shares of restricted stock.
Messrs. Lis and Daniel were each granted 30,000 restricted shares of our
Class A Common Stock on September 11, 2000. These restricted shares vest
at a rate of 33-1/3% on each of September 11, 2001, September 11, 2002,
and September 11, 2003.
2000 OPTION GRANTS
The following table sets forth certain information concerning options
granted to the named executive officers in 2000. No stock appreciation rights
were granted in 2000. Option totals are as of the grant date.
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or Grant Date
Options/SARs Employees in Base Price Expiration Present
Name Granted(#)(1) Fiscal Year ($/Sh)(2) Date Value $(3)
- - - - ---- ------------- ------------ ----------- ---------- ----------
Rudy J. Graf............................................. 100,000 1.81% 12.97 10/17/10 534,900
Scott N. Schneider....................................... 100,000 1.81% 12.97 10/17/10 534,900
- - - - ---------------
(1) All options for Messrs. Graf and Schneider are options for shares of
Citizens' common stock and granted to Messrs. Graf and Schneider by
Citizens. All options become exercisable at the rate of 33.3% per year
on October 18, 2001, 2002, and 2003.
(2) These options were granted on October 18, 2000, and the exercise price
is $12.97.
(3) Based on the Black-Scholes option pricing model adapted for use in
valuing executive stock options. The actual value, if any, an executive
may realize will depend on the excess of the stock price over the
exercise price on the date the option is exercised, so that there is no
assurance the value realized, if any, by an executive will be at or near
the value estimated by the Black-Scholes model. The estimated values
under that model are based on arbitrary assumptions as to variables such
as interest rates, stock price volatility and future dividend yield. The
pricing model assumes a dividend yield of 0.00%, a riskless rate of
return of 5.28%, a six-year term to exercise, and volatility of 0.66.
12
AGGREGATED 2000 OPTION EXERCISES AND VALUE OF
OUTSTANDING OPTIONS AT DECEMBER 31, 2000
The following table sets forth certain information concerning options
exercised by our named executive officers during 2000 and the number and value
of options held by them on December 31, 2000. There were no outstanding stock
appreciation rights relating to our common stock at December 31, 2000, and no
exercises occurred during 2000 of stock appreciation rights relating to our
common stock.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-money
Options/SARs at Options/SARs
Fiscal Year End (#) at Fiscal Year End ($)
Shares Acquired on Value ---------------------------- ---------------------------
Name Exercise (#) Realized $ Exercisable Unexercisable Exercisable Unexercisable
- - - - ---- ------------------ ---------- ----------- ------------- ----------- -------------
Rudy J. Graf ..................... 0 0 83,333 266,667 $150,835 $301,669
Scott N. Schneider ............... 0 0 83,333 266,667 125,001 249,999
Options for Messrs. Graf and Schneider are options for shares of Citizens'
common stock. All numbers are as of December 31, 2000. The fair market value
of Citizens' common stock on December 29, 2000 was $12.907 per share. Dollar
amounts shown under all columns other than "Value Realized" have not been, and
may never be, realized. The underlying options have not been, and may never
be, exercised, and actual gains, if any, on exercise will depend on the value
of our stock on the date of exercise.
PENSION PLAN
We do not have a pension plan. Messrs. Graf and Schneider are covered by
Citizens' noncontributory qualified retirement plan that provides benefits
based on formulas related to base salary and years of service. Benefits shown
are not subject to reduction for Social Security payments. The following table
illustrates the estimated annual plan pension benefits available to Messrs.
Graf and Schneider upon retirement at age 65 assuming a preretirement death
benefit election of 100% joint and survivorship benefits. The remuneration
classifications are based on the highest five-year average annual salary
(subject to the limitation of the Internal Revenue Code of 1986 on the amount
of annual compensation which may be credited to a participant's retirement
benefits) and the years of service represent years of credited service. Under
federal tax law, remuneration above a specified annual limit may not be
credited in the computation of retirement benefits under qualified plans. For
2000, this limit was $170,000. For this reason remuneration above $170,000 has
not been included in the table below.
Pension Plan Table
Remuneration
(in thousands)
----------------- Years of Service
-----------------------
5 10 15 20
--- --- --- ---
$170 .................................................................................................... $13 $26 $39 $52
Neither Mr. Graf nor Mr. Schneider has any years of credited service.
13
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Mr. Stanger as Chairman and
Messrs. Greiner, Harfenist and Kraus and Ms. Wilderotter. None of our
executive officers served as: (i) a member of the Compensation Committee (or
other board committee performing equivalent functions or, in the absence of
any such committee, the entire board of directors) of another entity, one of
whose executive officers served on our Compensation Committee; (ii) a director
of another entity, one of whose executive officers served on our Compensation
Committee; or (iii) a member of the Compensation Committee (or other board
committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as our director.
STOCK PRICE PERFORMANCE GRAPH
Nov 1997 1997 1998 1999 2000
-------- ---- ---- ---- ----
Electric Lightwave Return % 0.00 -7.03 -44.96 128.99 -82.34
Cum $ $100.00 $92.97 $51.18 $117.19 $20.70
S&P 500 Return % 0.00 6.43 28.58 21.05 -9.10
Cum $ $100.00 $106.43 $136.84 $165.64 $150.56
Nasdaq US Return 0.00 -1.23 41.02 85.84 -39.83
Cum $ $100.00 $98.77 $139.29 $258.85 $155.74
Peer Group Only Return % 0.00 2.00 -0.84 208.41 -66.20
Cum $ $100.00 $102.00 $101.14 $311.94 $105.44
Our Class A Common Stock has been publicly traded since November 24, 1997.
The graph shows the period November 24, 1997, through December 31, 2000. The
graph compares our cumulative total return with that of the Nasdaq Stock
Market-US and a peer group index. Cumulative return assumes $100 invested in
us or a respective index on November 24, 1997, as required by SEC rules, and
that all quarterly dividends were reinvested at the average closing stock
prices at the beginning and end of the quarter. Our peer group consists of us;
Advanced Radio Telecom Corp.; e.spire Communications; GST Telecom; ICG
Communications; Intermedia Communications; McLeod USA, Inc.; XO
Communications, Inc.; Teligent, Inc.; WinStar Communications; Allegiance
Telecom, Inc.; Adelphia Business Solutions, formerly known as Hyperion
Telecommunications, Inc.; ITC DeltaCom, Inc.; Mpower Communications Corp.; RCN
Corporation; and US LEC Corporation.
14
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, officers and
persons holding more than 10% of a registered class of our equity securities
to file with the Securities and Exchange Commission initial reports of
ownership, reports of changes in ownership and annual reports of ownership of
our common stock and other equity securities. Such directors, officers, and
10% stockholders are also required to furnish us with copies of all such filed
reports.
Based solely upon a review of the copies of such reports furnished to us, or
representations that no reports were required, we believe that all of our
directors, officers and 10% shareholders timely filed all required reports
under Section 16(a) in 2000.
AGREEMENTS WITH CITIZENS
General
Citizens owns, through its wholly-owned subsidiary CU Capital Corp., 100% of
our outstanding Class B Common Stock and 2,287,644 shares of our Class A
Common Stock. CU Capital Corp. acquired the shares of our Class A Common Stock
in the open market through brokerage transactions in the ordinary course of
business, solely as an investment, and to insure that Citizens maintains a
sufficient economic interest in us to permit the continued filing of
consolidated tax returns. Leonard Tow, our Chairman of the Board, is the
Chairman of the Board and Chief Executive Officer of Citizens. Rudy J. Graf,
our Chief Executive Officer, is President and Chief Operating Officer and Vice
Chairman of the board of directors of Citizens. Robert Braden, our President
and Chief Operating Officer and one of our directors, is a Vice President and
an executive officer of Citizens. Scott N. Schneider, our Executive Vice
President and one of our directors, is an executive officer and Vice Chairman
of the board of directors of Citizens. L. Russell Mitten, our Secretary, is
also Vice President, General Counsel and Secretary of Citizens. Stanley
Harfenist and Robert Stanger, our directors, are also directors of Citizens.
Our relationship with Citizens is governed by agreements entered into with
Citizens in connection with our initial public offering and certain other
agreements, the material terms of which are described below.
Administrative Services Agreement
The Administrative Services Agreement provides for Citizens to render
certain financial management services, information services, legal and
contract services, human resources services and corporate planning services to
us. Under the terms of the Administrative Services Agreement, all of the
services are rendered by Citizens subject to our oversight, supervision and
approval, acting through our Board of Directors.
The administrative costs payable by us to Citizens pursuant to the
Administrative Services Agreement are not expected to exceed the fees that
would be paid if such services were to be provided by an independent third
party.
The Administrative Services Agreement will terminate on December 31, 2005,
unless earlier terminated by Citizens or by us. The Administrative Services
Agreement will be renewed automatically for additional terms of two years
unless either party gives at least six months' written notice prior to a
scheduled termination date. The Administrative Services Agreement can be
terminated upon a material breach and will be terminated upon a change of our
control. Under the Administrative Services Agreement, $7,413,000 in fees were
payable to Citizens for 2000, excluding reimbursement for costs.
Tax Sharing Agreement
As we are included in Citizens' federal consolidated income tax group, our
federal income tax liability is included in the consolidated federal income
tax liability of Citizens and its subsidiaries. We are also included with
certain Citizens subsidiaries in combined, consolidated or unitary income tax
groups for state and local tax purposes. We and Citizens are parties to a
federal, state and local tax sharing agreement. Pursuant to the Tax Sharing
Agreement, we and Citizens make payments between us such that, with respect to
any period, the amount
15
of taxes to be paid by us, subject to certain adjustments, will generally be
determined as though we were to file separate federal, state and local income
or franchise tax returns (including, except as provided below, any amounts
determined to be due as a result of a re-determination of the tax liability of
Citizens arising from an audit or otherwise). We are responsible for any tax
liability due any foreign jurisdiction arising from its business activities.
The Tax Sharing Agreement will remain in effect so long as any taxing
jurisdiction requires the filing of a combined tax return by both Citizens and
by us.
Citizens has sole and exclusive responsibility for (i) preparing any of our
tax returns (including amended returns or claims for refund); (ii)
representing us with respect to any tax audit or tax contest; (iii) engaging
outside counsel and accountants with respect to tax matters regarding us; and
(iv) performing such other acts and duties with respect to our tax returns as
Citizens determines is appropriate. The amounts that we will pay Citizens
under the Administrative Services Agreement will encompass reimbursement to
Citizens for all direct and indirect costs and expenses incurred with respect
to our share of the overall costs and expenses incurred by Citizens with
respect to tax-related services.
Each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the Tax Sharing Agreement allocates tax liabilities
between us and Citizens, during the period in which we are included in
Citizens' consolidated group, we could be liable in the event that any federal
tax liability is incurred, but not discharged, by any other member of
Citizens' consolidated group.
Indemnification Agreement
We and Citizens are parties to an indemnification agreement. The
Indemnification Agreement provides that we will indemnify Citizens for any
liabilities incurred by Citizens under any guarantees of our obligations or
liabilities and that we will pay Citizens for its direct costs, if any, of
maintaining such guarantees.
Registration Rights Agreement
We and Citizens are parties to a Registration Rights Agreement. The
Registration Rights Agreement provides that, upon the request of Citizens, at
our expense, will use our best efforts to effect the registration under the
applicable federal and state securities laws of any of the shares of our
common stock (and any other securities issued in respect of or in exchange
therefor) held by Citizens for sale in accordance with Citizens' intended
method of disposition thereof and will take such other actions necessary to
permit the sale of these shares in other jurisdictions, subject to certain
specified limitations. Citizens will also have the right, at its expense, to
include the shares of common stock held by it in certain other registrations
of our common equity securities initiated by us on our own behalf or on behalf
of our other shareholders.
Customers and Service Agreement
We and Citizens are parties to a Customers and Service Agreement. The
Customers and Service Agreement contains provisions prohibiting us from
competing with Citizens for customers in Citizens' existing service areas and
in certain new lower density territories which Citizens was or will be first
to enter after our initial public offering. Citizens has agreed that it will
not compete with us in the service territories in which we provided services
prior to our initial public offering and in certain new higher density
territories which we were or will be first to provide services after our
initial public offering. Neither we nor Citizens may solicit an existing
wholesale customer of the other company for services which such customer is
currently receiving under contract from the other company. The relevant
provisions were intended to permit us to continue all activities in which we
engaged prior to our initial public offering, and to expand into related
markets. The Customers and Service Agreement will remain in effect until
Citizens ceases to own a majority of the voting interest of our capital stock
or its designees cease to constitute a majority of our directors.
16
Citizens' Guarantees of Our Obligations
Lease
In June 1995, we entered into agreements to lease certain equipment to be
constructed for us. The lessor has agreed to commit up to a maximum of
$110,000,000 of the cost of purchasing and installing the equipment. Rental
obligations for the equipment commenced in June 1995, and, with renewal
options, will expire on April 30, 2002. Citizens has guaranteed all of our
obligations under the lease and we will pay Citizens a guarantee fee of 3.25%
per year of the amount of the lessor's investment in the leased assets. At
December 31, 2000, $110,000,000 was outstanding on the lease.
Credit Facility
On November 2, 1997, we entered into a five-year, $400 million revolving
credit facility with Citibank, as agent for a group of lending banks. Citizens
has agreed to guarantee all debt obligations under this credit facility. The
credit facility requires that Citizens maintain a minimum net worth of at
least $1 billion and continue to own at least 51% of our outstanding common
stock. We have agreed to pay Citizens a guarantee fee at a rate of 3.25% per
annum based on the average balance outstanding. At December 31, 2000, we had
outstanding loans payable to Citibank in the amount of $400 million.
Senior Unsecured Notes
In April 1999, we completed an offering of $325 million of five-year senior
unsecured notes. The notes have an annual interest rate of 6.05% and will
mature on May 15, 2004. Citizens has guaranteed the payment of principal, any
premium and interest on the notes when due. We have agreed to pay Citizens a
guarantee fee at a rate of 4.0% per year based on the average outstanding
balance. At December 31, 2000, we had $325 million principal amount of these
notes outstanding.
For 2000, we accrued Citizens guarantee fees of $27.8 million under the
lease, the credit facility and the senior unsecured notes.
Refinancing of Obligations
We and Citizens have agreed that, if Citizens intends to reduce its economic
interest in us to less than 51%, Citizens will be entitled to request us to
refinance our obligations under the lease and the credit facility and we will
be obligated to use its best efforts to do so. This refinancing would occur
when Citizens reduces its economic interest in us to less than 51%.
License Agreement Guaranty
We have entered into a license agreement with the Bonneville Power
Administration whereby we will obtain a license to use fiber optic cable on
Bonneville's transmission system. On May 15, 2000 Citizens entered into a
guaranty agreement with Bonneville under which Citizens guaranty the payment
of the license fee, annual maintenance fee and any liquidated damages provided
for in the license agreement.
Telecommunications Services
Citizens' Communications has transactions in the normal course of business
with us. Citizens is an Incumbent Local Exchange Carrier ("ILEC") in certain
markets in which we provide services. In order to provide services in those
markets, we purchase access from Citizens. We are charged the full-tariff rate
for those services, which was $1,750,000 in 2000, representing usage-based
charges for the services provided. Citizens purchases certain services from us
at prevailing market rates. In 2000, we recognized revenue in the amount of
$2,995,000 for these related party transactions.
Network Capacity Lease
In 1996, we entered into an agreement to lease rights to fiber optic lines
on our network to Citizens over 10 years for a monthly fee of $30,000.
17
In 1999, we entered into an agreement to lease certain capacity on our
network to Citizens over 20 years. Performance under this agreement began when
services were activated during 2000. Citizens paid us $6.5 million under this
agreement in 2000.
Intercompany Agreement
We, along with Citizens, desire to provide compensation incentives for
certain employees of ELI for high levels of performance and productivity.
Therefore, we entered into an Intercompany Agreement dated as of September 11,
2000 whereby Citizens granted to certain of our employees an aggregate of
205,000 shares of our common stock in the form of restricted stock awards
pursuant to the Citizens Communications Company Equity Incentive Plan and in
consideration for those restricted stock awards, we agreed to grant Citizens
263,425 restricted shares of our Class B Common Stock. The 263,425 shares of
our restricted Class B Common Stock had on September 11, 2000 a fair market
value equivalent to the fair market value of Citizens' restricted stock
awards. The restrictions on a proportionate number of shares of our Class B
Common Stock will lapse with the lapse of restrictions on Citizens' stock. Our
Compensation Committee and the Compensation Committee of Citizens have
approved the Intercompany Agreement.
Intercompany Revolving Credit Facility
On October 30, 2000 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. Funds of $260 million for general corporate purposes are
available to be drawn by us until March 31, 2002. The remaining balance may be
drawn by us to pay interest expense due under the facility. In 2000, Citizens
advanced us $38 million.
Other
In the future, additional transactions may occur and agreements may be
reached between us and Citizens in a number of areas relating to their past
and ongoing relationships, including potential acquisitions of businesses or
properties or other corporate opportunities, potential competitive business
activities, payment of dividends, incurrence of indebtedness, guarantees, tax
matters, financial commitments, marketing functions, indemnity arrangements,
registration rights, administrative and services arrangements, and issuances
or sales of our capital stock.
APPROVAL OF AMENDMENT TO ELECTRIC LIGHTWAVE, INC. EQUITY INCENTIVE PLAN
The Company's 1997 Equity Incentive Plan (the "Plan") was approved by the
stockholders at the 1998 Annual Meeting. The Plan was intended to provide
equity incentives to attract and retain employees. As of February 28, 2001,
5,441,056 shares of common stock had been granted under the Plan and only
1,229,544 shares of common stock remained available for future grant under the
Plan. On March 19, 2001, the Board of Directors upon recommendation of its
Compensation Committee unanimously adopted, subject to stockholder
ratification, an amendment to the Plan to increase the maximum number of
shares of common stock which may be issued under the Plan from 6,670,600
shares to 8,670,600 shares. A copy of the full text of the amendment is
included as Appendix B to this Proxy Statement.
Purpose Of The Plan
The purpose of the Plan is to provide compensation incentives for high
levels of performance and productivity by our employees and the employees of
our Participating Companies (as defined below) and individuals who perform
services for us as director, consultant or otherwise. The Plan is intended to
strengthen our existing operations and our ability to attract and retain
outstanding personnel upon whose judgment, initiative and efforts our
continued efficiency, productivity, growth and development is dependent, as
well as encourage such personnel to have a greater personal financial
investment in the company through ownership of our common stock.
A copy of the Plan as amended is available upon request in writing or by
telephone from Shareholder Services, Electric Lightwave, Inc., 3 High Ridge
Park, Stamford, CT 06905, and the following description is qualified in its
entirety by the full text of the Plan as amended.
18
Shares Subject to the Plan; Duration of the Plan
Awards granted under the Plan relate to shares of our Class A or Class B
common stock. The maximum number of shares of common stock which will be
issued pursuant to awards at any time will be no more than 8,670,600 shares.
No individual may be granted more than 500,000 shares in any calendar year if
the award is denominated in number of shares or, if the award is denominated
in dollars, $750,000 in dollar value. These shares are divided among the
various components of the Plan in such manner as the Compensation Committee
may determine or authorize. No awards may be granted more than ten years after
the effective date of the Plan.
Any shares of common stock which were issued and have been forfeited or were
subject to awards under the Plan which have expired or terminated for any
reason will thereupon become available for issuance pursuant to awards granted
thereafter during the term of the Plan, except for awards to "covered
employees" within the meaning of Section 162(m) of the Internal Revenue Code
and as required to conform to the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 or other applicable law. Shares of common
stock received by us in connection with the exercise of an award are also
available for issuance under the Plan, subject to the limitations noted above.
The number and kind of securities which are authorized to be issued under
the Plan or pursuant to then outstanding awards are subject to adjustments to
prevent enlargement or dilution of rights resulting from stock dividends,
stock splits, recapitalizations, reorganizations or similar transactions.
The average of the high and low bid and ask prices quoted on Nasdaq for our
Class A common stock on February 28, 2001, was $3.91 per share.
Participation
All of our employees, officers and directors and all the employees, officers
and directors of other Participating Companies and individuals who perform
services for us as a director, consultant or otherwise upon whose judgment and
initiative, our productivity, growth and development is dependent are eligible
for selection to participate in the Plan. A "Participating Company" includes
us or any of our subsidiaries or any other affiliate which is 50% or more
owned directly or indirectly by us or which owns 50% or more of the voting
power of our shares of common stock or is controlled by, or controls, or is
under common control with, us. The Compensation Committee and the Board of
Directors have made awards of shares under the Plan in connection with the
public offering of shares of Class A Common Stock and have made subsequent
awards.
As of March 19, 2001, approximately 1,100 of our employees were eligible to
participate in the Plan, including approximately seven executive officers. In
addition, five directors are eligible to participate in the Plan.
Administration
The Compensation Committee consisting of members of the Board of Directors
administers the Plan. The administration of the Plan is intended to satisfy
any "nonemployee director" or similar requirements under the Securities
Exchange Act of 1934 rules and "outside directors" or similar requirements
under Section 162(m) of the Internal Revenue Code. Subject to the express
provisions of the Plan, the Compensation Committee is authorized among other
things, to (a) determine those eligible individuals or groups to whom awards
may be granted; (b) grant awards to any eligible individual; (c) determine the
terms and conditions (which need not be identical) of each award; (d)
establish and modify performance objectives; (e) determine the rights of each
participant after employment or the rendering of services has terminated and
the periods during which any rights may be exercised; (f) modify or amend any
award (by cancellation and re-grant or substitution of awards or otherwise and
with terms and conditions more or less favorable to the employee) or waive any
restrictions or conditions applicable to any award or the exercise or
realization thereof (except that, with certain exceptions based on regulation,
the Compensation Committee may not undertake any such modifications,
amendments or waivers if the effect thereof, taken as a whole, adversely and
materially affects the rights of any recipient of a previously granted award
without his or her consent); (g) prescribe and rescind rules, regulations and
policies for the administration of the Plan; (h) interpret, construe and
administer the Plan and any related award agreement and define the terms
employed therein; and (i) make all of the determinations necessary or
advisable with respect to the Plan or any award granted thereunder. Any power,
action, authority, or discretion granted to or exercisable
19
by the Compensation Committee pursuant to the provisions of the Plan may, if
the Compensation Committee or the Board of Directors so determines, be
exercised by or delegated by the Board of Directors.
Awards
Stock Options and Stock Appreciation Rights
Under the Plan, a stock option, which may be a non-qualified or an incentive
stock option, may be granted either alone or in conjunction with one or more
other awards. The exercise price, except in the discretion of the Compensation
Committee in the case of non-statutory options granted to new employees or
others who commence to render services, shall be equal to or greater than 85%
of the fair market value of the underlying common stock on the date of grant
or, in the case of a SAR or incentive stock options, 100% of the fair market
value on such date. The term of each stock option shall also be determined by
the Compensation Committee but may not exceed ten years from the date of
grant.
Upon exercise, the option price of each stock option is payable by the
option holder in cash or, in the sole discretion of the Compensation
Committee, through the delivery of shares of our common stock valued at their
fair market value as determined by the Compensation Committee, or in a
combination of cash and shares. The Compensation Committee may grant a
replacement stock option to an option holder to replace the shares which the
option holder delivered to us. The Compensation Committee may also accept the
surrender of the right to exercise any stock option for payment in cash or
shares or any combination thereof. The Compensation Committee may also grant
stock appreciation rights, free standing or in tandem with stock options,
which entitle the holder thereof to receive a similar payment at his or her
election.
The Compensation Committee may grant a replacement stock option to an
employee for a number of shares equal to the number of shares which the option
holder delivered to us in payment of, or sold for payment of, the price of any
stock option or stock purchase right or any related income taxes with respect
to any such stock option or stock purchase right of ours held by the employee.
The option price of any replacement stock option shall be subject to the
restrictions summarized above, except that the option price may not be less
than 100% of the fair market value of the common stock delivered to us on the
date of such payment.
The Compensation Committee is also authorized, in its sole discretion and
upon such terms and conditions as it may deem appropriate, to accept the
surrender of the right to exercise any stock option granted under the Plan as
to all or any of the shares as to which the stock option is then exercisable
for alternative settlement by payment to the option holder of an amount not to
exceed the difference between the option price and the then fair market value
of the shares as to which such right of exercise is surrendered. Such payment
may be made in cash or in shares of our common stock (valued at the then fair
market value) or any combination thereof as the Compensation Committee
determines in its sole discretion. The Compensation Committee may also grant
stock appreciation rights, free standing or in tandem with stock options,
which entitle the holder thereof to receive a similar payment at his or her
election.
Other Stock-based Awards
In order to enable us and the Compensation Committee to respond quickly to
significant developments in applicable tax and other legislation and
regulations and to trends in executive compensation practices, the Plan also
authorizes the Compensation Committee to grant other stock-based awards to
employees eligible for selection to participate in the Plan. Other stock-based
awards will consist of awards that are valued in whole or in part by reference
to, or otherwise based on, our common stock and may include, but are not
limited to, performance shares, restricted stock, and deferred stock.
Reference is made to the Plan for Plan provisions applicable to performance
shares, restricted stock and deferred stock. Subject to the terms of the Plan,
the Compensation Committee may determine any and all terms and conditions of
other stock-based awards. The total number of shares of common stock which may
be issued pursuant to all components of the Plan may not exceed the limit
stated above under "Shares Subject to the Plan; Duration of the Plan."
The performance objectives determined by the Compensation Committee for each
performance share award shall be based on: stock price; market share; sales;
earnings per share; operating cash flow; free cash flow; net income or loss;
net income or loss adjusted to exclude specified items such as gain or losses
from extraordinary or
20
non-recurring items and non-cash expense and income, and before specified
expense items such as interest, depreciation, amortization and income taxes;
EBITDA; revenues; return on equity or assets; cost control; or a combination
of any of the foregoing.
Payment or settlement of other stock-based awards is in cash or in shares of
the Company's common stock or in any combination thereof as the Compensation
Committee determines in its sole discretion. The Compensation Committee may
permit the payment of withholding taxes due in connection with awards under
the Plan by the withholding of shares to be issued under the award or by the
employee's delivery of other shares of our common stock.
"Change in Control" Provisions
Awards may include, or may incorporate from any relevant guidelines adopted
by the Compensation Committee, terms which provide that any or all of the
following actions or consequences, with any modifications adopted by the
Compensation Committee, may occur as a result of, or in anticipation of, any
change in control (as defined below) to assure fair and equitable treatment of
participants: (i) acceleration of time periods for purposes of vesting, or
realizing gain from, any outstanding award (including the immediate
exercisability in full of options held for six months or more); (ii) purchase
of any outstanding award from the holder for its equivalent value, as
determined by the Compensation Committee; (iii) adjustments or modifications
to outstanding awards, including the modification or elimination of
restrictions and performance goals, as the Compensation Committee deems
appropriate to maintain and protect the rights and interests of participants.
A change in control is defined to mean the occurrence of any of the following
events: (i) a person or group (other than Citizens) becomes the owner of stock
having 20% or more of the total number of votes that may be cast for the
election of members of the Board; (ii) a consolidation or merger or sale of
assets in which we are not the surviving corporation or, subject to
exceptions, pursuant to which our stock will be converted into cash,
securities or other property or a sale, lease, exchange or other transfer of
51% or more of our the assets; or (iii) as a result of or in connection with
any cash tender or exchange offer, merger or other business combination, sale
of assets or contested election, or any combination of the foregoing
transactions, the persons who are members of the Board of Directors before the
transaction shall cease to constitute a majority of our Board of Directors.
The Plan is subject to amendment or termination at any time by the Board of
Directors. However, no amendment or modification would become effective unless
approved by the affirmative vote of our stockholders if such approval is
necessary or deemed desirable for the continued validity of the Plan or its
compliance with any tax or securities law rule or regulation of any stock
exchange or stock market, or other legal or regulatory requirement.
These provisions in the Plan allowing the Compensation Committee to award
accelerated vesting upon a change in control could in some circumstances have
the effect of an "anti-takeover" defense because, as a result of these
provisions, a change in control could be more difficult or costly. This,
however, is not our intention in adopting the Plan, because the purpose of the
Plan is to attract and retain the most qualified persons available to
contribute to our future success.
Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax
consequences under current federal income tax laws relating to awards under
the Plan.
Stock Options
Under the Plan, the Compensation Committee may grant options which either
qualify or do not qualify as "incentive stock options" as defined in Section
422 of the Internal Revenue Code. An option holder will realize no taxable
income and no deduction will be available to us upon the grant of either type
of option. However, the tax consequences of the exercise of the option and
subsequent disposition of the shares received upon exercise will depend upon
which type of option is granted.
21
Incentive Stock Options
An option holder upon the exercise of an incentive stock option will realize
no regular taxable income if the holding period and employment requirements
contained in the Internal Revenue Code are met. However, the spread between
the exercise price and the fair market value on the date of exercise will be
an item of tax preference which may give rise to alternative minimum tax
liability at the time of exercise. Under the holding requirements, the option
holder must not dispose of the shares within two years of the date the option
was granted nor within one year from the time of exercise; and the option
holder generally must exercise the option while employed by our subsidiaries
or us or within three months after the termination of such employment.
Upon the subsequent disposition of shares acquired through the exercise of
an incentive stock option after satisfaction of the above holding period and
employment requirements, any gain or loss realized upon such disposition will
be treated as capital gain or loss to the optionee, and we will not be
entitled to any income tax deduction in respect to the exercise of the option
or the disposition of the shares received upon exercise. For purposes of
determining the amount of such gain or loss, the option holder's tax basis in
the shares will be the option price.
If the holding period or employment requirements are not met, the option
will be treated as one which does not meet the requirements of the Internal
Revenue Code for incentive stock options and the option holder will recognize
ordinary income at the time of disposition of the shares, generally in an
amount equal to the excess, if any, of the fair market value of the stock at
exercise over the option price. The balance of the gain realized, if any, will
be long-term or short-term capital gain, depending upon whether or not the
shares were sold more than one year after the option was exercised. If the
option holder sells the shares prior to the satisfaction of the holding period
requirements but at a price below the fair market value of the shares at the
time the option was exercised, the amount of ordinary income will be limited
to the amount realized on the sale over the exercise price of the option. We
and our subsidiaries will be allowed a tax deduction to the extent the option
holder recognized ordinary income.
Non-qualified Stock Options
At the time of exercise of a non-qualified option, an option holder will
realize income taxable at ordinary income tax rates, and we will be entitled
to a tax deduction, in the amount by which the then fair market value of the
shares purchased exceeds the option price of the shares. The option exercise
may be subject to the withholding requirements of the tax law.
Upon the subsequent disposition of shares received upon exercise of a non-
qualified option, an option holder will also realize income or loss in an
amount equal to the difference between the sales price of the shares and the
fair market value of the shares used for computing ordinary income or loss
realized in connection with the exercise of the option. The income or loss
will be long- or short-term capital gain or loss depending upon the length of
time the shares have been held from the date as of which ordinary income or
loss was recognized in connection with the exercise of the option.
Stock Appreciation Rights
The exercise of a stock appreciation right will result in ordinary income to
the holder in the year the stock appreciation right is exercised. The amount
of income recognized will be equal to the total value of all cash and the fair
market value of the common stock received pursuant to the exercise of the
stock appreciation right. We will be entitled to a corresponding income tax
deduction equal to such amount subject to certain requirements. The tax
treatment of a stock appreciation right is the same whether the stock
appreciation right is exercised in conjunction with an incentive stock option
or a non-qualified stock option.
All Stock Options
If an option holder tenders shares of our common stock in partial or full
payment of the option price for shares to be acquired through the exercise of
an option, the option holder generally will not recognize any taxable gain or
loss on the tendered shares. However, if the shares tendered were previously
acquired upon the exercise of an incentive stock option and such exercise
occurs prior to satisfaction of the holding period requirement for the
22
tendered shares, the tender of such shares will be an early disposition with
the tax consequences described above for an early disposition of shares
acquired upon exercise of an incentive stock option.
In the case of a tender of shares in partial or full payment of the option
price, the option holder's tax basis in the shares received upon exercise of
the option is not uniform. The number of shares acquired that equals the
number of shares tendered will take the tax basis of the tendered shares
including the effect of the tax consequences of any early disposition. The
additional shares acquired in excess of the number of shares tendered will
have a tax basis equal to the ordinary income realized on the exercise in the
case of a non-qualified option. In the case of an incentive stock option, the
tax basis in the additional shares will be zero.
Cash payments by us to an option holder upon surrender of the right to
exercise any stock option are subject to withholding and are taxable to the
option holder at ordinary income tax rates and deductible by us at the time of
payment. When such payments are made in shares of our common stock, the fair
market value of the shares at the time of payment are taxable to the option
holder at ordinary income tax rates and deductible to us. Upon the disposition
of the shares received, taxable income or loss also will be realized in an
amount equal to the difference between the sales price of the shares and the
fair market value of the shares on the date they were taxable to the option
holder. The income or loss will be a capital gain or loss depending upon the
period of time the shares have been held by the option holder.
Other Stock-based Awards
An employee will not realize any taxable income upon the grant of an award
of restricted stock subject to substantial restrictions, such as a requirement
of continued performance or the attainment of performance objectives, unless
the employee elects to be taxed at that time in accordance with Section 83 of
the Internal Revenue Code. Upon the lapse of restrictions on restricted stock
which occur in accordance with terms of such restriction, the employee will
realize taxable income and we will be entitled to a corresponding deduction
equal to the excess of the fair market value of the shares at that time over
any amount paid for the shares. The employee may be subject to the withholding
requirements of the tax law.
Generally, upon the grant of stock-based awards which are not subject to
restrictions on transfer or the achievement of goals, an employee will realize
compensation taxable as ordinary income, and we will be entitled to a
corresponding deduction, in an amount equal to the sum of any cash received by
the employee plus the fair market value of any shares of common stock received
by the employee.
The above federal income tax information is a summary only and does not
purport to be a complete statement of the relevant provisions of the Internal
Revenue Code.
Amendment, Termination and Expiration
The Plan is subject to amendment or termination at any time by our Board of
Directors. However, no amendment or modification would become effective unless
approved by affirmative vote of our stockholders if such approval is necessary
for the continued eligibility of the Plan or its compliance with Rule 16b-3 or
any successor rule under the Securities Exchange Act of 1934, Section 162(m)
of the Internal Revenue Code, or any other rule or regulation.
Recommendation
The Board of Directors recommends a vote to amend the Plan to increase the
number of shares of common stock which may be issued under the Plan to
8,670,600, subject to adjustment for stock dividends, stock splits and other
future changes in our capital stock. The proposed amendment to the Plan is
necessary to continue the Plan in effect, which the Board of Directors
believes strengthens our existing operations and its ability to attract and
retain outstanding personnel upon whose judgment, initiative and efforts our
continued efficiency, productivity, growth and development is dependent, as
well as encourage such personnel to have a greater personal financial
investment in us through ownership of our common stock. Approval of the
amendment to the Plan requires the affirmative vote of holders of a majority
of the shares of common stock present or represented by proxy at the annual
meeting and entitled to vote at the annual meeting. Abstentions will be
counted as "against" votes.
23
INDEPENDENT PUBLIC ACCOUNTANTS
Audit Fees
The aggregate fees paid to KPMG LLP, our independent public accountants, for
professional services rendered for the audit of our annual financial
statements for 2000 and for the reviews of our quarterly financial statements
included in our Forms 10-Q for 2000 were $175,000. No other fees were paid to
KPMG LLP by the Company.
General
One or more representatives of KPMG LLP will be present at our annual
meeting of stockholders. The representatives will have an opportunity to make
a statement if they desire to do so and will be available to respond to
appropriate questions.
OTHER MATTERS
We do not know of matters other than the foregoing that will be presented
for consideration at the meeting.
STOCKHOLDER PROPOSALS
For proposals, if any, to be considered for inclusion in the proxy materials
for the 2002 annual meeting, they must be received by November 24, 2001. Under
our Bylaws, if any stockholder intends to propose at the Annual Meeting a
nominee for director or the adoption or approval of any other matter by the
stockholders, other than matters included in the proxy statement in accordance
with the foregoing sentence, the proponent must give written notice to us no
earlier than January 1, 2002, nor later than February 15, 2002.
The entire cost of soliciting management proxies will be borne by us.
Proxies will be solicited by mail and may be solicited personally by our
directors, officers or regular employees, who will not be compensated for such
services. Morrow & Co. has been retained to assist in soliciting proxies at a
fee of $1,500, plus distribution costs and other expenses.
By Order of the Board of Directors
L. Russell Mitten
Secretary
24
Appendix A
ELECTRIC LIGHTWAVE, INC.
Audit Committee Charter
Status
The Audit Committee is a committee of the Board of Directors.
Membership
The Committee shall consist of three or more directors all of whom in the
judgment of the Board of Directors shall be independent. Each member shall
have the ability to read and understand the Company's basic financial
statements or shall at the time of appointment undertake training for that
purpose. At least one member of the Committee shall, in the judgment of the
Board of Directors, have accounting or financial management expertise.
Independence and financial ability is to be determined by the Board of
Directors in its business judgment.
Powers and Responsibilities
1. Receive from the outside auditors on a periodic basis, as required by
Independence Standards, a written report delineating all relationships
between the auditors and the Company and discuss with the outside
auditors any disclosed relationships or services that may impact their
objectivity and independence, and recommend that the Board of Directors
take necessary action in response to this report to satisfy the Board of
the outside auditors' independence. The Audit Committee is to be the
Company's principal agent in monitoring this independence.
2. Review with members of the Company's outside auditing firm, the scope of
the prospective audit, the estimated fees therefor, the extent to which
Company resources were or can be used in the future, and such other
matters pertaining to such audit as the Committee may deem appropriate.
Receive copies of the annual comments from the outside auditors on
accounting procedures and systems of internal control and audit, and
review with them the significant matters and any suggestions they may
have relating to the systems of internal control and audit.
3. Review, at least annually, the then current and future programs of the
Company's internal audit department, including the procedure for assuring
implementation of accepted recommendations made by the auditors and the
department. Receive summaries of all formal audit reports issued by the
internal audit department; and review the significant matters contained
in such reports.
4. Make or cause to be made, from time to time, such other examinations or
reviews as the Committee may deem necessary with respect to the
accounting practices and systems of internal control of the Company and
with respect to current accounting trends and developments, and recommend
such action with respect thereto as may be deemed necessary.
5. Recommend annually the public auditing firm to be outside auditors for
the Company and recommend their compensation, for approval by the Board
of Directors. Among the Board of Directors, Audit Committee and the
outside auditors, the outside auditors are ultimately accountable to the
Board of Directors. The Board of Directors has the ultimate authority and
responsibility to select, evaluate and, when appropriate, replace the
outside auditors (or, if the outside auditors are approved by the
stockholders, to nominate the outside auditors to be proposed for
shareholder approval in any proxy statement).
6. Review with management and the outside auditors for the Company the
annual and quarterly financial statements of the Company and any material
changes in accounting principles or practices used in preparing the
financial statements incorporated in Form 10-K and Form 10-Q prior to the
filing of these forms with the Securities and Exchange Commission (SEC).
Such review is to include items brought to the Committee's attention as
required by Auditing Standards.
7. Review matters that have come to the attention of the Committee through
reports of management, legal counsel and others, that relate to the
status of compliance and anticipated future compliance with laws,
25
regulations, internal controls, and that may be expected to be material
to the Company's financial statements.
8. Recommend to the Board the retention of persons with professional or
expert competence, or with special knowledge or experience.
Meetings
The Committee shall meet at least four times each year and at such other
times as it deems necessary to fulfill its responsibilities.
Reports and Other Requirements
The Committee shall prepare all reports concerning this charter and the
activities of the Committee required by regulations of the SEC or the National
Association of Securities Dealers ("NASD"). The Company acknowledges that the
Company and the Committee operate under regulations promulgated by the SEC and
the NASD.
Amendment
This Charter may be amended only by the affirmative vote of the Board of
Directors.
26
Appendix B
SECOND AMENDMENT TO ELECTRIC LIGHTWAVE, INC.
1997 EQUITY INCENTIVE PLAN
This SECOND AMENDMENT (this "Amendment") to Electric Lightwave, Inc. 1997
Equity Incentive Plan (the "Plan") is made on this 19th day of March, 2001, by
Electric Lightwave, Inc. (the "Company"), a corporation duly organized and
existing under the laws of the State of Delaware.
WHEREAS, the Company has determined that it is in its best interests to
amend the Plan as set forth herein.
NOW THEREFORE, upon approval of this Amendment by the Board of Directors and
the Stockholders of the Company, the Plan shall be amended as follows:
1. Section 3, paragraph (a) of the Plan shall be amended by deleting the
number "6,670,600" in the first sentence of such paragraph and replacing it
with the number "8,670,600."
2. Except as specifically amended hereby, the Plan shall remain in full
force and effect as prior to this Amendment.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed on
the day and year first above written.
ELECTRIC LIGHTWAVE, INC.
By:
Name:
Title:
27
See Advance Registration Form on back cover.
28
Electric Lightwave, Inc.
Administrative Offices
4400 NE 77th Avenue
Vancouver, Washington 98662
2001 Annual Meeting of Stockholders
2:00 p.m., Central Time, May 17, 2001
Hotel Inter-Continental
Chicago, Illinois
ADVANCE REGISTRATION FORM
Please send your completed and signed proxy form in the enclosed envelope.
Include this advance registration form in the envelope if you plan to attend
or send a representative to the Annual Meeting.
Attendance at the Annual Meeting is limited to Electric Lightwave's
stockholders, or their authorized representative and guests and employees of
the Company.
If your shares are held in the name of any intermediary, please see
instructions in the Chief Executive Officer's letter (front cover of this
proxy statement).
Cut off at dotted line.
.. .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... .. .. .. .
(Please type or print)
Stockholder's
Name
Address
City State Zip
I am an Electric Lightwave stockholder. I am sending the following person as
my representative:
Stockholder's Signature
ELECTRIC LIGHTWAVE, INC.
PROXY
TO VOTE BY MAIL
To vote by mail, complete both sides, sign, date and return this proxy in the
envelope provided.
TO VOTE BY TELEPHONE
Your telephone vote is quick, confidential and immediate. Just follow these
easy steps:
1. Read the accompanying Proxy Statement.
2. Using a Touch-Tone telephone, call 1.800.555.8140 and follow the
instructions.
3. When asked for your Voter Control Number, enter the number printed just
above your name on the front of the proxy card below.
Please note that all votes cast by telephone must be submitted prior to midnight
Central Time, May 15, 2001.
Your telephone vote authorizes the named proxies to vote your shares to the same
extent as if you marked, signed, dated and returned the proxy card.
If You Vote By TELEPHONE Please Do Not Return this Proxy By Mail.
TO VOTE BY INTERNET
Your Internet vote is quick, confidential and immediately submitted. Just follow
these easy steps:
1. Read the accompanying Proxy Statement.
2. Visit our Internet voting site at http://www.eproxyvote.com/ist-elicm and
follow the instructions on the screen.
3. When prompted for your Voter Control Number, enter the number printed
just above your name on the front of the proxy card.
Please note that all votes cast by Internet must be submitted prior to midnight
Central Time, May 15, 2001.
Your Internet vote authorizes the named proxies to vote your shares to the
same extent as if you marked, signed, dated and returned the proxy card.
If You Vote By INTERNET Please Do Not Return This Proxy By Mail.
Proposal 1
- - - - ----------
Election of Directors Nominees:
For Withheld 01 Robert Braden
/ / / / 02 Rudy J. Graf
03 Guenther E. Greiner
04 Stanley Harfenist
05 William Kraus
06 Scott N. Schneider
07 Robert A. Stanger
08 Leonard Tow
09 Maggie Wilderotter
For, except vote withheld from
the following Nominee(s): __________________________________
(Continued and to be signed on other side)
Proposal 2
- - - - ----------
Approve Amendment to Electric Lightwave, Inc. 1997 Equity Incentive Plan
For Against Abstain
/ / / / / /
[ELECTRIC LIGHTWAVE LOGO]
Annual Meeting of Shareholders
May 17, 2001
PROXY VOTING
You can choose one of three ways to vote your proxy: By mail, by
phone or by Internet. See the reverse side of this sheet for instructions.
IF YOU ARE NOT VOTING BY TELEPHONE OR BY INTERNET, COMPLETE BOTH SIDES OF
THIS PROXY, DETACH AND RETURN IN THE ENCLOSED ENVELOPE TO:
Illinois Stock Transfer Co.
209 West Jackson Boulevard, Suite 903
Chicago, Illinois 60606
DETACH PROXY CARD HERE
- - - - --------------------------------------------------------------------------------
ELECTRIC LIGHTWAVE, INC.
Proxy Solicited on Behalf of Board of Directors
The undersigned hereby appoints Guenther E. Greiner, Stanley Harfenist and
Maggie Wilderotter or any of them with full power of substitution, proxies to
vote at the Annual Meeting of Stockholders of Electric Lightwave, Inc. (the
"Company") to be held on Thursday, May 17, 2001, at 2 p.m., Central Daylight
Time, and at any adjournments thereof, hereby revoking any proxies heretofore
given, to vote all shares of common stock of the Company held or owned by the
undersigned as directed, and in their discretion upon such other matters as may
come before the meeting.
Signature:________________________________________
Signature:________________________________________
Date:________________________________________ ,2001
Note: Please sign exactly as name appears hereon.
Joint owners should each sign. When signing as
attorney, executor, administrator, trustee or
guardian, please give full title as such.
This proxy when properly executed will be voted in the manner directed by the
signatory stockholder. If no direction is made, this proxy will be voted "For"
Proposal 1 and "For" Proposal 2. Abstentions are counted as "Against" votes for
Proposal 2. (over for Proposals)