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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-28167
Alaska Communications Systems Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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(State or other jurisdiction of incorporation or organization)
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52-2126573 |
600 Telephone Avenue
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(I.R.S. Employer Identification No.) |
Anchorage, Alaska
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99503-6091 |
(Zip Code) |
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(Address of principal executive offices) |
(Registrants telephone number, including area code): (907) 297-3000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, Par Value $.01 per Share
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The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files)
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
The aggregate market value of the shares of all classes of voting stock of the registrant held by
non-affiliates of the registrant on June 30, 2010 was approximately $370 million computed upon the
basis of the closing sales price of the Common Stock on that date. For purposes of this
computation, shares held by directors (and shares held by any entities in which they serve as
officers) and officers of the registrant have been excluded. Such exclusion is not intended; nor
shall it be deemed, to be an admission that such persons are affiliates of the registrant.
As of February 15, 2011 there were outstanding 44,729,439 shares of Common Stock, $.01 par value,
of the registrant.
Documents Incorporated by Reference
Information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to
portions of the registrants definitive proxy statement for its 2011 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of
December 31, 2010.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
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Cautionary Statement Regarding Forward Looking Statements and Analysts Reports
This Form 10-K and future filings by Alaska Communications Systems Group, Inc. and its consolidated
subsidiaries (we, our, us, the Company and Alaska Communications®) on Forms
10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements. All statements other
than statements of historical fact are forward-looking statements for purposes of federal and state
securities laws, including statements about anticipated future operating and financial performance,
financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition
and divestiture opportunities, business prospects, strategic alternatives, business strategies,
regulatory and competitive outlook, investment and expenditure plans, financing needs and
availability, other similar forecasts and statements of expectation and statements of assumptions
underlying any of the foregoing. Words such as aims, anticipates, believes, could,
estimates, expects, hopes, intends, may, plans, projects, seeks, should and
variations of these words and similar expressions are intended to identify these forward-looking
statements. These forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our historical experience and our present
expectations or projections. Forward-looking statements by us are based on estimates, projections,
beliefs and assumptions of management and are not guarantees of future performance. Such
forward-looking statements may be contained in this Form 10-K under Item 1ARisk Factors and
Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere. Actual future performance, outcomes and results may differ materially from those
expressed in forward-looking statements made by us as a result of a number of important factors.
Examples of these factors include (without limitation):
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our strongly competitive environment, which comprises national and local wireless
and wireline facilities-based competitors; |
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the entry of one or more additional facilities-based carriers into the Alaska
market; |
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our substantial debt which requires us to dedicate a substantial portion of our cash
flow from operations for payments to service our debt and to access to the capital
markets to extend maturities; |
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our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders; |
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our ability to keep pace with rapid technological developments and changing
standards in the telecommunications industry, including our ability to obtain new
devices, spectrum, bandwidth, and other network elements; |
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our ability to develop attractive integrated products and services making use of our
substantial investments in fiber optic cable facilities, including our
AKORN® and Northstar fiber optic cables that connect Alaska to the
contiguous states; |
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the financial and business performance of TekMate, LLC (TekMate), an information
technology company, of which we acquired 49% in August 2010, and our ability to use
that investment to drive future sales growth; |
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unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps, fishing boats or natural disasters; |
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changes in general industry and market conditions, and structural declines within
the telecommunications industry; |
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changes in overall national, regional or local economic conditions; |
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governmental and public policy changes, including changes in our revenues resulting
from regulatory actions affecting inter-carrier compensation or changes in revenue from
Universal Service Funds (USFs); |
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the availability of future financing in the amounts, at the terms, and subject to
the conditions necessary, to support our business and pursue growth opportunities; |
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unanticipated costs required to fund our postretirement benefit plans; |
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the success or failure of any future acquisitions; |
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loss of key personnel; |
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the outcome of an on-going Internal Revenue Service (IRS) audit and the ability of
certain third parties to pay on their indemnity to us related to that audit; and |
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the matters described under Item 1ARisk Factors. |
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In light of these risks, uncertainties and assumptions, you should not place undue reliance on any
forward-looking statements. Additional risks that we may currently deem immaterial or that are not
currently known to us could also cause the forward-looking events discussed in this Form 10-K not
to occur as described. Except as otherwise required by applicable securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events, changed circumstances or any other reason after the date of this Form
10-K.
Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree with any statement
or report issued by an analyst irrespective of the content of the statement or report. To the
extent that reports issued by securities analysts contain any projections, forecasts or opinions,
such reports are not our responsibility.
Unless the context indicates otherwise, all references in this Form 10-K to we, our, ours,
us, the Company, or Alaska Communications refer to Alaska Communications Systems Group, Inc.
and its consolidated subsidiaries.
PART I
Item 1. Business
About Alaska Communications
We provide leading integrated communications services in and out of Alaska. Our wireline and
wireless communications networks extend throughout Alaska and connect to the contiguous states via
our two diverse undersea fiber optic cable systems: (i) the AKORN system that we launched in April
2009 and (ii) the Northstar system that was acquired as part of the acquisition of Crest
Communications Corporation (Crest) in 2008.
Our wireline business comprises one of the most expansive networks in Alaska and forms the
foundation of our enterprise business. Our wireless business includes a statewide third generation
(3G) wireless network. Both segments rely on our highly skilled workforce of approximately 840
employees.
Alaska Communications was incorporated in 1998 under the laws of the State of Delaware. We began
doing business as ACS in May, 1999, following our acquisition of the Anchorage Telephone Utility
and CenturyTels Alaska assets. The Company was rebranded as Alaska Communications in September
of 2010.
Our principal executive offices are located at 600 Telephone Avenue, Anchorage, Alaska 99503. Our
telephone number is (907) 297-3000.
Business Segments
We have two reportable business segments, wireline and wireless. See Note 18 Business
Segments, in the Notes to Consolidated Financial Statements for an illustrative view of selected
financial information for 2010, 2009 and 2008.
Wireline
Our wireline segment comprises four lines of business: Enterprise, Retail, Wholesale and Access. We
provide communications services including voice, data, broadband, multi-protocol label switching
(MPLS), Metro Ethernet, network access, long distance, data hosting, video conferencing, and
other services to consumers, carriers, businesses, enterprise and government customers throughout
Alaska and to and from Alaska.
Enterprise
Our enterprise line of business integrates our data, data hosting, and information technology
services delivered over our wireline networks to business customers, multi-national corporations,
municipal, state and federal governments, and other telecommunications carriers. It relies heavily
on our ability to provide redundant, scalable and managed high bandwidth data connections
throughout Alaska and to the contiguous states and beyond. We seek to provide these customers
comprehensive, value-added services that make communications more secure, reliable and efficient.
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In 2010, we completed our purchase of a 49% equity interest in TekMate and closed several
enterprise contracts delivering services beyond connectivity: these contracts provide for video
conferencing, hosting and managed services, and are, in many cases, delivered with our partner
TekMate. We anticipate that our focus will increasingly be applied to a larger addressable market
and with the ACS solution set of Connect / Host / Managesm.
In addition to the traditional corporate and government opportunities, our enterprise customers and
future growth focus include rural education and rural healthcare, fleet management, user friendly
connectivity solutions, outsourcing, and managed services both inside Alaska and outside of it.
Retail
Our retail services include traditional voice, broadband data, internet access, long distance and
other communications products and services. Our retail line of business provides communications and
information services to residential customers, businesses and various governmental entities.
Wholesale
Our wholesale line of business serves competitive local exchange carriers by offering, for resale,
our local exchange network, including unbundled network elements.
Access
Our access line of business provides voice and data termination services through our local
telephone facilities. Our network access customers include long distance and other competing
carriers that use our local exchange facilities to provide voice telephone service to their
customers.
Network and Technology
We serve approximately 172,000 access lines in Alaska. We continue to upgrade our network in order
to provide more customers with broadband capabilities. Our fiber network, which is extensive within
Alaskas urban areas and connects the primary areas of Anchorage, Fairbanks and Juneau with each
other and the contiguous states, offers us the opportunity to provide our customers with improved
network reliability and speed for voice and data applications. We provide voice, data, and Internet
service to all of the major population centers in Alaska. Our high-speed data network relies on
advanced packet-based MPLS technology. We own and operate the most expansive IP networks in Alaska
using MPLS and Metro Ethernet technology. Our MPLS network provides the long-haul framework for our
Metro Ethernet service, which we market to businesses and government customers. Metro Ethernet
offers our customers scalable, high-speed data and customized information technology products and
services, as well as Internet connectivity.
We also own and operate extensive high-speed fiber optic cable systems throughout Alaska and
undersea fiber optic cables that connect Alaska with the contiguous states.
Our network in Oregon and Washington includes terrestrial transport components linking Nedonna
Beach, Oregon to a Network Operations Control Center (NOCC) in Hillsboro, Oregon and collocation
facilities in Portland, Oregon and Seattle, Washington. In addition, AKORN, our state-of-the-art
undersea fiber optic cable system connects our Alaskan network from Homer, Alaska to our facilities
in Florence, Oregon along a diverse path within Alaska, the Pacific Northwest and undersea in the
Pacific Ocean. Northstar, our other undersea fiber optic systems, comprises approximately 1,900
miles with cable landing facilities in Anchorage, Nikiski, Homer, Whittier, Juneau, and Valdez,
Alaska, and Florence and Nedonna Beach, Oregon. Together, these fiber optic cables provide
extensive bandwidth as well as collapsible ring protection designed to serve our most demanding
customers critical communications requirements. Through our landing stations in Oregon, we also
provide an at-the-ready landing point for other large fiber optic cables, and their operators,
connecting the U.S. to networks in Asia and other parts of the world. We currently manage landing
facilities for approximately one third of all transpacific cables in the United States.
Competition
We face strong competition in our wireline business segment. Competitors include General
Communications, Inc. (GCI), AT&T, Matanuska Telephone Association, Inc. (MTA), and,
increasingly, various wireless and broadband service providers. Factors contributing to the
industrys increasingly competitive market include regulatory changes, product substitution,
technological advances, excess network capacity and the entrance of new competitors. In this
environment, competition is based on price and pricing plans, the types of services
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offered, the combination of services into bundled offerings, customer service, the quality and
reliability of services provided, and the development of new products and services. For more
information associated with the risks of our competitive environment, see Item 1ARisk Factors.
Wireless
Our wireless segment provides facilities-based voice and data services statewide across Alaska with
roaming coverage available in the contiguous states, Hawaii, and Canada. We believe that the
features and functionality of our wireless service together with our enterprise activities can help
us to retain our existing customers, reduce the rate of customer losses and attract new customers.
Products and Services
We design and market service packages around key customer groups, from the enterprise business
accounts, to the small and medium business, and consumer markets including the young adult market.
We tailor our wireless services, which include both voice and data offerings, and postpaid and
prepaid pricing options, to the needs of these customers.
Devices
Throughout 2010 we grew our Android®-powered smart phone line-up helping to drive
penetration of data centric devices to 35% of post paid subscribers, up from 18% a year ago. As
data device availability expands to smaller carriers like ACS, we are well positioned to expand
data revenues given our marketing focus on heavy data users and our network reputation as being
built for data. Enhancing our line-up are wireless devices operating under the
Blackberry® and Windows® systems as well as mobile Wi-Fi devices and
machine-to-machine devices such as our fleet management service. The devices complement our focus
on high quality service and an optimal user experience.
Technology
Our wireless business strategy relies heavily on high network reliability. We believe that our
networks reliability differentiates us in our market and promotes customer satisfaction. We expect
to continue to strategically expand and upgrade our network to provide sufficient capacity,
seamless and superior coverage and reliability throughout our coverage areas. We conduct systematic
drive tests of our network, as well as our competitors networks, to compare the number of
blocked and dropped calls to our competitors.
Our wireless network platform is Code Division Multiple Access (CDMA). We have deployed 3G
wireless packet data technology in the form of CDMA Evolution Data Optimized Rev A (EvDO) across
a substantial portion of our network covering approximately 75% of the states population. CDMA in
the form of 1xRTT technology is deployed in all of our cell sites. This service enables email, web
browsing and other data uses on wireless devices.
Coverage
Our wireless network is among the most extensive in Alaska covering approximately 85% of Alaskas
population and supporting approximately 120,000 subscribers as of December 31, 2010. Our licenses
in the 800-900 MHz (for digital cellular voice and data services), 1800-1900 MHz (all digital PCS
voice and data services) and AWS 1710-1735 MHL (for 4G cellular service) spectrum collectively
cover virtually all of Alaska. We aim to provide our customers consistent features and high quality
service regardless of location. In addition through roaming agreements, we provide our customers a
range of services and coverage throughout the contiguous states, Hawaii and Canada.
Competition
We face strong competition in our wireless business segment. Other wireless providers, including
other cellular and PCS operators and resellers, serve each of the markets in which we operate. We
compete primarily against two other facilities-based wireless service providers: AT&T Mobility
(AT&T) and GCI. In 2010, AT&T continued to deploy 3G equipment while experiencing strong iPhone
sales and we estimate they have captured approximately 50% of the total wireless market in Alaska.
GCI, our primary wireline competitor, operates both a 3G CDMA network (previously marketed under
the Alaska Digitel brand) and a 2G Global System for Mobile (GSM) network. In 2010, GCI continued
the network expansion program it began in 2008.
Verizon Wireless (Verizon), our primary roaming partner outside of Alaska and a customer for whom
we provide roaming services in Alaska, has acquired a license for 700MHz C-Block wireless spectrum
in Alaska.
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This will allow it, alone or in partnership with another company, to provide broadband wireless
data services directly, potentially adding a third major competitor. Among the factors mitigating
the risk arising from Verizons entry into Alaska are the potential cost of market entry and the
possible benefits that a partnered entry could have to both Verizon and the Company.
We believe our pricing structure is competitive with AT&T. However, GCI competes heavily on price,
and currently offers many wireless services at prices lower than we do.
We expect competition for both customers and network usage to intensify as a result of the higher
penetration levels, the development and deployment of new technologies, the introduction of new
wireless and fixed line products and services, new market entrants, availability of additional
spectrum, particularly of the type used by the most popular devices, and regulatory changes. For
example, we face increased competition as a result of the use of other high-speed wireless
technologies, such as Wi-Fi and WiMAX, which are being deployed or proposed, to meet the growing
customer appetite for wireless communications in fixed, nomadic and fully mobile environments.
In addition, many wireless carriers are considering varying, and in many cases, incompatible,
technologies to deploy 4G services. In addition, as wireless data proliferates, content is becoming
an increasingly significant factor in the appeal of these services. This may give content providers
and other participants in the wireless value chain opportunities to compete or support one wireless
technology over another, which, in either case, may affect our ability to compete.
Marketing
Our marketing strategy targets customers needs, promotes our brand, cross markets, and in some
cases, bundles our products. One example of bundling is our Connect / Host / Managesm
suite of offerings that combine our business broadband and other communications offerings with our
newly launched data hosting services and the information technology products of our partner,
TekMate. In general, our marketing efforts are focused on a coordinated program of television,
print, radio, signage, Internet and point-of-sale media promotions.
Sales and Distribution Channels
Our sales strategy combines direct and indirect distribution channels in order to increase customer
growth while reducing customer acquisition costs.
Our company operated stores are a core component of our distribution strategy. We had 15 company
operated stores and kiosks as of December 31, 2010. In addition, our direct channel also includes
our re-imaged website and our business sales organization. We expect the website and its on-line
ordering capability to become an increasingly important component of our sales effort.
Customer Base
We generate our revenue through a diverse customer base and there is no reliance on a single
customer or small group of customers; no customer represented 10% or more of our total revenue in
the periods presented in this Annual Report on Form 10-K.
Seasonality
We believe our wireless revenue is materially impacted by seasonal factors. Roaming revenue, in
particular, declines in the winter months and increases in the summer months. We believe this is
due to Alaskas northern latitude and the resulting wide swing in available daylight and weather
conditions between summer and winter months. These uniquely Alaskan conditions affect business,
tourism and calling patterns in the state. Our wireline service offerings experience similar
seasonal effects, but we do not believe these effects are material.
Employees
As of January 31, 2011, we employed approximately 834 regular full-time employees, 13 regular
part-time employees and 8 temporary employees. Approximately 74% of our employees are represented
by the International Brotherhood of Electrical Workers, Local 1547 (IBEW). Our Master Collective
Bargaining Agreement with the IBEW, as amended, that governs the terms and conditions of employment
for all IBEW represented employees working for us in the state of Alaska expires on December 31,
2012. Management considers employee relations to be generally good, though we do face certain
constraints and issues stemming from our collective bargaining agreement.
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Regulation
The following summary of the regulatory environment in which our business operates does not
describe all present and proposed federal, state and local legislation and regulations affecting
the telecommunications industry in Alaska. Some legislation and regulations are currently the
subject of judicial review, legislative hearings and administrative proposals, which could change
the manner in which this industry operates. We cannot predict the outcome of any of these matters
or their potential impact on our business. Regulation in the telecommunications industry is subject
to rapid change, and any such change may have an adverse effect on us.
Overview
The telecommunications services we provide and from which we derive a significant share of our
revenue are subject to extensive federal, state and local regulation. Our local exchange carrier
(LEC) subsidiaries are regulated common carriers. Because they face competition, however, most of
our LEC subsidiaries may not be able to realize their allowed rates of return.
In this section, Regulation, we refer to our LEC subsidiaries individually as follows:
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ACS of Anchorage, Inc. (ACSA); |
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ACS of Alaska, Inc. (ACSAK); |
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ACS of Fairbanks, Inc. (ACSF); and |
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ACS of the Northland, Inc. (ACSN). |
In establishing rates for regulated services, our LEC subsidiaries first determine their aggregate
costs and then allocate those costs between regulated and non-regulated services, then separate the
regulated costs between the state and federal jurisdictions and finally among their various
interstate and intrastate services. This process is governed primarily by the Federal
Communications Commission (FCC) rules and regulations. The FCC is considering whether to modify
or eliminate the current jurisdictional separations process. This decision could indirectly
increase or reduce earnings of carriers subject to jurisdictional separations rules by affecting
the way regulated costs are divided between the federal and state jurisdictions if rates in both
jurisdictions are not adjusted accordingly. Maximum rates for regulated services are regulated by
the FCC for interstate services and by the Regulatory Commission of Alaska (RCA) for intrastate
services.
At the federal level, the FCC generally exercises jurisdiction over services of telecommunications
common carriers that provide, originate or terminate interstate or international communications and
related facilities. The FCC does not directly regulate information services and has preempted
inconsistent state regulation of information services. Our wireless services use FCC radio
frequency licenses and are subject to various FCC regulations, including E-911 and a number of
portability requirements.
The RCA generally exercises jurisdiction over services and facilities used to provide, originate or
terminate communications between points in Alaska. In addition, pursuant to the local competition
provisions of the Communications Act of 1934, as amended by the Telecommunications Act of 1996
(Communications Act), federal and state regulators share responsibility for implementing and
enforcing certain pro-competitive policies.
Local governments often regulate the public rights-of-way necessary to install and operate
networks. These local governments may require communications services providers to obtain licenses
or franchises regulating their use of public rights-of-way and may require carriers to obtain
construction permits and abide by building and land use codes.
Federal regulation
We must comply with the Communications Act and regulations promulgated there under, which require,
among other things, that communications carriers offer interstate services at just, reasonable and
non-discriminatory rates and terms. The amendments to the Communications Act added provisions
intended to promote competition in local telecommunications services by removing barriers to entry,
imposing obligations to offer to competing carriers interconnection and non-discriminatory access
to certain facilities and services designated as essential for local competition, making universal
service support explicit and portable and to lead to deregulation as markets become more
competitive.
Interconnection with local telephone companies and access to other facilities
In order to ensure access to local facilities and services at reasonable rates, the Communications
Act imposes a number of requirements on LECs. Generally, a LEC must: not prohibit or unreasonably
restrict the resale of its
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services; provide for telephone number portability so customers may keep the same telephone number
if they switch service providers; ensure that customers are able to route their calls to
telecommunications service providers without having to dial additional digits; provide access to
their poles, ducts, conduits and rights-of-way on a reasonable, non-discriminatory basis; and, when
a call originates on its network, compensate other telephone companies for terminating or
transporting the call.
Most incumbent LECs (ILECs) have the following additional obligations under the Communications
Act: negotiate in good faith with any carrier requesting interconnection; provide interconnection
for the transmission and routing of telecommunications at any technically feasible point in its
network on just, reasonable and non-discriminatory rates, terms and conditions; provide access to
unbundled network elements (UNEs), such as local loops and trunks at non-discriminatory,
cost-based rates to competing carriers that would be impaired without them; offer retail local
telephone services to resellers at discounted wholesale rates; provide notice of changes in
information needed for another carrier to transmit and route services using its facilities; and
provide, at rates, terms and conditions that are just, reasonable, and non-discriminatory, physical
collocation, which allows a competitive LEC (CLEC) to install and maintain its network
termination equipment in an ILECs central office, or to obtain functionally equivalent forms of
interconnection.
Our ACSN ILEC subsidiary enjoys a statutory exemption as a rural telephone company from the
requirements imposed on most ILECs to provide UNEs to a CLEC. The RCA may terminate the exemption
if it determines that interconnection is technically feasible, not unduly economically burdensome
and consistent with universal service. Although the RCA has not terminated ACSNs UNE exemption,
the RCA granted GCI, subject to certain conditions, approval to provide local exchange telephone
service in the Glacier State study area and Sitka exchange of ACSN on its own facilities. Other
than the City of Sitka, all other exchanges in the Sitka study area remain non-competitive at this
time. New facilities-based local exchange service competition may reduce our revenues and returns.
To implement the interconnection requirements of the Communications Act, the FCC adopted rules
requiring, among other provisions, that ILECs price UNEs based on forward-looking economic costs
using the total element, long run incremental cost methodology. In September 2003, the FCC began a
reexamination of its pricing standard for UNEs and may reconsider other aspects of its UNE rules.
On December 28, 2006, the FCC conditionally and partially granted ACSA forbearance from the
obligation to lease UNEs to our competitors at regulated rates. This forbearance was limited to
five wire centers within the Anchorage service area of ACSA. Even where relief was granted,
however, the FCC has required ACSA to lease loops and sub-loops at commercially negotiated rates,
or if there is no commercial agreement, at the rates for these UNEs in Fairbanks. As a result of
this decision, on March 15, 2007, ACSA, ACSAK, ACSF and ACSN entered into a five year global
interconnection and resale agreement with GCI governing the provision of UNEs and other services.
Congress may consider legislation that may further modify the interconnection requirements under
the Communications Act, and the FCC and RCA frequently consider modifications of their rules. We
cannot predict the outcome of any such action taken by the Congress, the FCC or the RCA.
Interstate access charges
The FCC regulates the prices that ILECs charge for the use of their local telephone facilities in
originating or terminating interstate transmissions.
On August 20, 2007, the FCC granted ACSA partial forbearance from certain dominant carrier
regulations related to ACSAs provision of interstate switched access services, subject to a number
of conditions. Among other things, ACSA received relief from requirements to base interstate
switched access service charges on ACSAs costs plus an authorized rate of return as well as
certain tariffing requirements. The switched access relief was conditioned upon a cap on interstate
switched access rates and a cap on USF support received on a per line basis. The FCC denied ACSAs
requested similar forbearance relief with respect to interstate special access services. ACSA and
other parties have sought reconsideration of the FCCs forbearance order. These reconsideration
petitions remain pending.
On April 17, 2009, the FCC granted ACS a waiver of certain FCC rules in order that all of the ACS
ILECs interstate prices may be regulated under price-cap regulation rather than rate-of-return
regulation and the ACS ILECs may retain their interstate common line support at the disaggregated
per line levels they were receiving in 2008. As a result, the ACS ILECs withdrew from the National
Exchange Carrier Association pool for non-traffic sensitive costs. ACS filed a price-cap tariff
effective as of July 1, 2009. On June 2, 2010, the FCC granted a
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petition filed jointly by ACSA, ACSF, and ACSAK for Phase I and Phase II pricing flexibility in the
Anchorage, Juneau and Fairbanks areas under the FCCs pricing flexibility rules. The ACS LECs can
now offer flexible pricing arrangements such as volume and term discounts for qualifying services
and dedicated transport and special access services free from FCC rate structure and price-cap
rules. The ACS LECs successfully demonstrated that competition levels within the service areas were
sufficient to justify Phase I and Phase II pricing flexibility.
The FCC is currently considering various proposals for further reform of inter-carrier
compensation. Reform proposals now under consideration include a proposed exemption for service
providers in Alaska (as well as Hawaii and U.S. Territories), which if adopted could exempt such
providers from all or some of any new inter-carrier compensation requirements the FCC ultimately
implements for the rest of the industry.
Since 2001, the FCC has been examining aspects of the regulatory framework applicable to interstate
special access services provided by price-cap LECs. In particular, the FCC has considered reform of
the appropriate rate levels and rate structures for such services; the FCC also has considered
whether and to what extent it should retain or modify its special access pricing flexibility rules,
pursuant to which price-cap carriers may request authority to provide special access services using
more flexible contract tariffs as opposed to standardized tariffs. Because the FCCs grant of the
waiver petition discussed above allowed ACS to become a price-cap company, and because the ACS
ILECs are seeking pricing flexibility under the current FCC rules, any reforms that the FCC adopts
as a part of that ongoing special access proceeding could affect ACSs revenues in ways that we
cannot currently predict.
On February 8, 2011, the FCC sought public comment on a number of proposals to change the existing
federal regulatory framework for interstate access charges and other forms of inter-carrier
compensation. These proposals are intended to update that framework to account for the evolution of
advanced telecommunications and broadband networks, technologies, and services, as well as proposed
changes to federal universal service support mechanisms. The FCC also proposed measures to address
issues with phantom traffic (i.e., traffic from which certain call signaling and other
information has been stripped so as to preclude effective inter-carrier billing) and traffic
pumping (i.e., the practice by which some carriers artificially boost traffic at certain times in
order to take advantage of regulatory arbitrage opportunities). These proposals may result in the
phasing out of interstate and intrastate access charges paid by long distance carriers, and the
requirement that carriers such as ACSA, ACSF, ACSAK and ACSN recover those interstate and
intrastate costs from a combination of end-user charges and universal service support. We cannot
predict what changes the FCC may adopt or when they may adopt them.
Federal universal service support
The Communications Act requires the FCC to establish a universal service program to ensure that
affordable, quality telecommunications services are available to all Americans. The program at the
federal level has several components, including one that pays support to LECs serving areas for
which the costs of providing basic telephone service are higher than the national average. The
Communications Act requires the FCC to make universal service support explicit, expand the types of
communications carriers that are required to pay universal support and allow competitive providers
including CLECs and wireless carriers to be eligible for universal service support, including where
they serve customers formerly served by ILECs.
USF disbursements may be distributed only to carriers that are designated as eligible
telecommunications carriers (ETCs) by a state regulatory commission. All of the ACS ILECs and
ACS Wireless, Inc. (ACSW) are ETCs in Alaska. In May 2001, the FCC adopted a proposal from the
Rural Task Force to reform universal service support for rural areas. As adopted, for an interim
period, eligible rural carriers will continue to receive support based on a modified embedded cost
mechanism. While the modified embedded cost mechanism remains in place, the FCC has indicated that
it will develop a comprehensive plan for high cost support mechanisms for rural telephone companies
which may rely on forward-looking costs.
On May 1, 2008, the FCC adopted an interim, emergency cap on the amount of high cost support
that competitive ETCs may receive, pending the FCCs adoption of comprehensive reform. Such support
for each state was capped at the level of support that competitive ETCs (CETCs) were eligible to
receive during March 2008 on an annualized basis. The cap became effective on August 1, 2008 and is
expected to constrain growth in the total amount of high cost support available to competitive
ETCs.
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In its May 1, 2008 Order, the FCC also included an exception from the interim cap for CETCs
that serve tribal lands or Alaska Native Regions. All of ACSWs service area is located in Alaska
Native Regions. On March 4, 2009 the FCC adopted an Order clarifying that CETCs electing this
exception may receive uncapped support for all eligible lines served in tribal lands and Alaska
Native Regions. The practical effect of the Order is to remove the cap on USF support for CETCs on
tribal lands and in Alaska. In addition, in March 2010, the FCC modified its rules to allow certain
ILEC ETCs that lose lines to increase their local switching support (LSS) from the universal
service fund.
Under current FCC regulations, the total amount of federal USF available to all ILEC ETCs is
subject to a yearly cap. In any year where the cap is reached, the per access line rate at which
ILECs can recover USF payments may decrease. In each of the last few years, the cap has effectively
decreased USF payments. The FCC has been considering a number of other long-term revisions to the
distribution mechanisms for universal service support. For instance, on February 8, 2011, the FCC
sought public comment on a series of proposals intended to overhaul the existing framework for
federal universal service. Perhaps most significantly, the FCC proposed to transition existing high
cost support to a new funding mechanism, which would be known as the Connect America Fund (CAF).
Unlike existing funding mechanisms, the CAF would provide explicit support for both voice and
broadband networks and services. Following the proposed transition, CAF funding in each service
area would be limited to a single provider, which would be the lowest bidder for support selected
through a reverse auction mechanism. The FCC also proposed various other reforms, intended to cap
the growth of current funding mechanisms and cut legacy high cost funding in order to then shift
the savings toward providing support for broadband (e.g., the elimination of the identical
support rule that permits competitive carriers, such as ACSW and our wireless competitors, to
apply for funding based on the support received by the ILEC).
In October 2010, the FCC sought comment on the proposed creation of a new Mobility Fund intended
to improve coverage of current generation or next generation mobile voice and Internet services. In
addition, members of Congress have indicated that they may seek enactment of legislation addressing
universal service reform, including legislation to limit growth of explicit universal service
support funds. These and other potential reforms could include an exemption for service providers
in Alaska (as well as Hawaii and U.S. Territories)such exemptions have been proposed in the
pastalthough there is no guarantee that this would be the case. These and other proposed rule
changes could reduce our support in the future, reduce the support available to our competitors, or
provide for new support, such as for broadband services. We are unable to predict whether and to
what extent we would be eligible to receive any federal high cost support under a revised support
mechanism.
Federal universal service contributions
The FCC is currently considering revisions to the current mechanism for funding universal service.
Today, our operating subsidiary companies are required to contribute to the federal USF a
percentage of their revenue earned from interstate and international services. The FCC is
considering whether to replace this funding mechanism with one based on flat-rate, per line
contributions; capacity-based contributions; or some combination of these or other proposals. The
FCC also has considered whether to adopt contribution requirements for broadband Internet access
services. We cannot predict how the outcome of these proceedings may affect our contribution
obligations.
Interstate long distance services
FCC regulation of the rates, terms or facilities of our interstate long distance services is
relatively light. However, we must comply with the general requirement that our charges and terms
be just, reasonable and non-discriminatory. Also, we must comply with FCC rules regarding
unauthorized switching of a customers long distance service provider, or slamming. The FCC has
levied substantial fines on some carriers for slamming. In addition, we must post the rates,
terms and conditions of service on our website and engage in other public disclosure activities.
The FCC requires ILECs that provide interstate long distance services originating from their local
exchange service territories to ensure that their long distance affiliates maintain separate books
of account and acquire any services from their affiliated ILECs at tariffed rates, terms and
conditions.
Under RCA rules and federal law, all of our long distance services are subject to equal access
rules that require some carriers to advise customers requesting new service of their choices in new
providers. The United States Telecom Association (USTA) has asked the FCC to waive the federal
equal access scripting requirement. The ACS LECs filed comments agreeing with USTA that the
Commission should waive the requirement for all small and mid-sized independent local exchange
carriers. A decision is pending.
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Broadband and Internet services
We provide broadband Internet access services as an Internet service provider (ISP). The FCC has
classified such services as information services, which historically have not been subject to many
of the regulatory obligations that are imposed on telecommunications services. Additionally, the
FCC generally has preempted state and local regulation of information services. The FCC has,
however, concluded that broadband Internet access providers must comply with the Communications
Assistance for Law Enforcement Act (CALEA).
The FCC has imposed particular regulatory obligations on IP-based telephony. The FCC has determined
that interconnected voice-over-IP (VoIP) providers must comply with: (i) requirements to provide
E-911 emergency calling capabilities; (ii) certain disability access requirements; (iii) rules
protecting customer proprietary network information (CPNI); (iv) local number portability (LNP)
requirements; (v) regulatory fee obligations; (vi) obligations under CALEA; (vii) the obligation to
contribute to USF; and (viii) discontinuance requirements.
In February 2009, Congress enacted the American Recovery and Reinvestment Act, which among other
things allocated funding to be used to facilitate the deployment of broadband infrastructure and
increase adoption of broadband services. Additional rules and regulations may be extended to the
Internet in the future. A variety of proposals are under consideration in federal and state
legislative and regulatory bodies. In particular, the FCC recommended a large number of
requirements and reforms through the national broadband plan that it delivered to Congress in
March 2010 as required by the American Recovery and Reinvestment Act ; the FCC may pursue other
regulatory initiatives as well. We cannot predict the outcome or the impact of any such pending or
future proceedings.
In September 2005, the FCC released a statement of principles favoring customer choice of content
and services available over broadband networks, and it pursued one enforcement action against a
broadband provider based on the view that its network management practices were inconsistent with
these principles. The U.S. Court of Appeals for the District of Columbia (DC) Circuit overturned
the FCCs decision in April 2010 on the grounds that the agency exceeded its regulatory authority.
On December 21, 2010, the FCC responded by adopting new rules intended to codify and supplement its
2005 statement of principles. These net neutrality rules encompass both wireline and wireless
providers, although the rules for mobile wireless providers are less stringent. For wireline
providers, the rules: (1) require broadband Internet access service providers to disclose their
network management practices and information about performance and terms of use to consumers and
third party users, (2) restrict providers from blocking lawful content, applications, services, and
devices, and (3) prohibit providers from engaging in unreasonable discrimination in transmitting
lawful traffic. Mobile wireless providers must comply with the disclosure requirement noted above,
and are prohibited from blocking lawful websites or applications that compete with their own voice
and video services. Under these rules, network owners may exercise reasonable network management
for legitimate network purposes, such as to address congestion, harmful traffic, and network
security. The FCC intends to enforce these rules based on case by case complaints. These rules are
scheduled to become effective later in 2010, although they could be challenged in court or
overturned through a legislative action. We cannot predict the impact of any such actions, or of
any new legislation or other regulatory initiatives addressing similar issues, on our results or
operations.
In September 2005, the FCC determined that ILECs are no longer required to lease high-speed
Internet access service transmission capability to their competitors and re-affirmed its finding
that provision of high-speed transmission service bundled with Internet access services is an
information service not subject to common carrier regulation, whether that access is provided via
cable modem, DSL services or otherwise. This ruling gives us more flexibility in how we offer and
price our DSL services. Beginning on October 1, 2009, the ACS ILECs ceased offering high-speed
Internet access transmission capability on a common carrier basis.
On August 20, 2007, the FCC granted ACSA forbearance from applying common carrier regulation to
certain broadband services sold to larger business customers, subject to a condition that it
develop a plan for allocating costs between regulated services and the non-regulated broadband
services. This ruling gives us more flexibility in how we offer and price certain broadband
services.
Wireless services
The FCC regulates the licensing, construction, operation, acquisition and sale of personal
communications services and cellular systems in the United States. All cellular and personal
communications services licenses have a 10-year term, at the end of which they must be renewed.
Licenses may be revoked for cause and license
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renewal applications may be denied if the FCC determines that renewal would not serve the public
interest. In addition, all personal communications services licensees must satisfy certain coverage
requirements. Licensees that fail to meet the coverage requirements may be subject to forfeiture of
the license.
Federal law preempts state and local regulation of the entry of, or the rates charged by, any
provider of commercial mobile radio services (CMRS), which includes personal communications
services and cellular services. The FCC does not regulate such rates; however, the FCC imposes a
variety of other regulatory requirements on CMRS operators. For example, CMRS operators must be
able to transmit 911 calls from any qualified handset without credit check or validation and are
required to provide the location of the 911 caller within an increasingly narrow geographic range.
CMRS operators are also required to provide 911 service for individuals with speech and hearing
disabilities, or TTY service. Consistent with FCC orders, all new ACSW handset activations have
been location-capable since January 1, 2006. Further, ACSW met the FCCs deadline of having 95% of
all subscribers using location-capable handsets prior to January 31, 2007.
In March 2008, the U.S. Court of Appeals for the DC Circuit stayed a November 2007 FCC order
requiring that wireless carriers meet E-911 location accuracy standards at a smaller geographic
level, the serving area of the Public Safety Answering Point (PSAP). On July 31, 2008, the FCC
asked the Court to remand the case so that it could re-evaluate the rules in response to proposals
that it measure E-911 location accuracy compliance at the county level. In September 2010, the FCC
modified its rules to require wireless providers to satisfy these location accuracy standards at
either a county-based or PSAP-based level; the FCC also sought comment on additional ways to
enhance location accuracy for new and existing wireless voice communications technologies. We
cannot fully predict the impact of these changes on compliance, especially for smaller and rural
carriers, nor can we predict the outcome of the additional proposals in this proceeding or their
impact on ACSW.
On November 18, 2009, the FCC established set timeframes for tower site applications reviewed by
state and local governments. Under the ruling, if a jurisdiction fails to act on an application
within prescribed time periods (90 days for collocations, 150 days for other tower site
applications) the applicant may file a claim for relief in court. The court will then decide what
action to take based on the facts presented. The FCC also is considering rules relating to data
roaming arrangements, by which wireless carriers are able to use their competitors networks in
areas where they do not offer service. The rules under consideration would govern the amount of
discretion a wireless carrier has to deny such an arrangement for data networks. As proposed, the
rules could require ACSW to allow competitors to use its more advanced data networks in areas where
competitors do not have their own facilities. We cannot predict the full outcome or impact of these
rule changes if they are adopted.
Other federal regulations
We are subject to various other federal regulations and statutes, including those concerning the
use of Customer Proprietary Number Information in marketing services. CPNI generally includes
information a carrier has regarding the telecommunications services to which its customer
subscribes and the customers use of those services. The FCC limits the ways in which carriers may
use or disclose CPNI and specifies what carriers must do to safeguard CPNI.
Other FCC initiatives that may impact our regulated subsidiaries include implementing capabilities
pursuant to CALEA to be used by law enforcement officials in executing court authorized electronic
surveillance, access to poles, ducts, conduits and rights-of-way, Truth-in-Billing requirements,
Equal Employment Opportunity reporting, hearing aid compatibility requirements, wireless bill
shock rules (a proposal to require that carriers notify customers when they are about to exceed
their monthly usage limits) and anti-slamming rules. We must obtain FCC approval before we transfer
control of any of our common carrier subsidiaries or our radio frequency licenses or
authorizations, make such an acquisition or discontinue an interstate service. These requirements
may impose costs on us and limit our business opportunities.
State regulation
Telecommunication companies are required to obtain certificates of public convenience and necessity
from the RCA prior to operating as a public utility in Alaska. The RCA must approve amendments to
and transfers of such certificates. In addition, RCA approval is required if an entity acquires a
controlling interest in any of our certificated subsidiaries, acquires a controlling interest in
another intrastate utility or discontinues an intrastate service. The RCA also regulates rates,
terms and conditions for local, intrastate access and intrastate long distance services, supervises
the administration of the Alaska Universal Service Fund (AUSF) and decides on ETC status for
purposes of the federal USF. Furthermore, pursuant to the Telecommunications Act and the FCCs
rules, the RCA decides various aspects of local network interconnection offerings and agreements.
In October 2009, the RCA
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requested authority from the FCC to implement certain number conservation measures due to the
possible exhaustion of numbers in the 907 area code.
Interconnection
The Telecommunications Act specifies that resale and UNE rates are to be negotiated among the
parties subject to approval by the state regulatory commission or, if the parties fail to reach an
agreement, arbitrated by the state regulatory commission. The ACS LECs have entered into
interconnection agreements with a number of entities including TelAlaska Long Distance, Inc., GCI,
AT&T, Alaska DigiTel, Alaska Wireless Communications, Bandwidth.com, Clearwire Telecommunications
Services, Inc. and ACSW. In addition, ACSW has entered into agreements with entities including KPU
Telecommunications, Alaska Telephone Company, Arctic Slope Telephone Association Cooperative, Inc.,
Matanuska Telephone Association, Mukluk Telephone Company, Inc. and the ACS LECs, to provide
service in their study areas.
Competitive local exchange regulations
In August 2005, the RCA adopted regulations addressing a variety of telecommunications related
matters including tariff policies, depreciation practices, local competitive market rules and
interexchange competitive market rules. The regulations provide for, among other things: initial
classification of all ILECs, including our rural properties and ACSA, as dominant carriers;
requirements that all carriers, both dominant and non-dominant, offer all retail services for
resale at wholesale rates consistent with 47 U.S.C. §251 and 252; and limited dominant carrier
pricing flexibility in competitive areas, under which carriers may reduce retail rates, offer new
or repackaged services and implement special contracts for retail service upon 30 days notice.
Rate increases affecting existing services are subject to full cost support showings by the
dominant carrier in areas with local competition, but the RCA may demand, and has demanded, cost
support even for rate reductions and new or repackaged services in competitive areas.
The RCA has defined most of the ACS LEC markets as competitive local exchange markets and
designated the ACS LECs as non-dominant carriers in all areas except the rural communities outside
the City of Sitka, in the Sitka study area (Sitka Bush). Consequently, non-dominant ACS LECs
serving competitive exchanges have access to relaxed tariff filing rules that allow retail offers
to be introduced to the market without advance public notice or RCA approval in all areas except
Sitka Bush.
End user local rates
The rates charged by our ILECs to end-users for basic local service are generally subject to the
RCAs regulation based on a cost-of-service method using an authorized rate of return. Competition
may prevent local rates from being sufficient to recover embedded costs for local service. Rate
cases are typically infrequent, carrier-initiated and require the carrier to meet substantial
burdens of proof. The RCA may, however, investigate, upon complaint or upon its own motion, the
rates of a LEC and hold hearings on those rates.
Intrastate access rates
ILECs not yet subject to local competition participate in a pool administered by the Alaska
Exchange Carriers Association (AECA) for intrastate access charges to long distance carriers.
AECA pools their access costs and sets a statewide average price which participating ILECs charge
to long distance carriers for originating or terminating calls. Access revenues are collected in a
pool and then redistributed to the ILECs based on their actual costs.
The RCA requires an ILEC to exit the AECA pool and to file separate, individual company access
charge tariffs when a competitor enters its service area. These tariffs are based on the ILECs
most recently approved stand-alone revenue requirement. ACSN was our last ILEC to exit the AECA
pool. Prior to ACSNs formal exit from the pool, AECA administered ACSNs intrastate access tariff,
but ACSN had already implemented a standalone rate. In March 2008, the RCA re-affirmed that it
would continue to require ILECs in competitive markets to exit the AECA pool. In June 2008, the RCA
accepted ACSNs stipulation allowing it to fully exit the pool. ACSN now operates under a
price-capped individual access tariff.
In August 2010, the RCA adopted new access charge rules. It eliminated long distance carriers
payment of intrastate carrier common line charges to LECs and required them to gradually reduce
their intrastate long distance rates to parity with interstate long distance rates. The carrier
common line rate element will now be paid through a new AUSF program and through a phased-in
increase to the Network Access Fee (NAF). The NAF, a flat fee paid by residential and business
customers, would annually increase between $.50 and $.75 per month from its
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current level of $3.00 per line to $5.75 per month maximum. That RCA order also established formal
obligations for Carriers of Last Resort (COLRs) and created a new COLR support program paid for
through the AUSF. ACSA will not be a COLR or receive COLR support under the new rules. The three
other ACS LECs will qualify as COLRs and receive support from the AUSF.
E-911
In 2007, the Commission adopted standards related to E-911 service for multi-line telephones. The
rules do not impose any new obligations on local exchange carriers. The owners of the multi-line
telephones, such as hotels or motels, will be responsible for changes in their systems so that 911
callers can be identified more accurately.
Alaska Universal Service Fund
The AUSF serves as a complement to the federal USF, but must meet federal statutory criteria
concerning consistency with federal rules and regulations. Currently, the AUSF supports a portion
of certain higher cost carriers switching costs, the costs of lifeline service (which supports
rates of low income customers) and a portion of the cost of Public Interest Pay Telephones. The RCA
has adopted regulations that limit high cost switching support to local companies with access lines
of 20,000 or less. This change has eliminated the switching support that our rural ILECs received.
The RCAs August 2010 access charge order added a new Carrier Common Line (CCL) support program.
The RCA deferred the issue of expanding the AUSF to support high cost interexchange facilities of
long distance carriers for consideration in the future.
ETC Determinations
The RCA granted GCIs request that it be designated an ETC in the Anchorage, Fairbanks, Juneau,
Eielson, Fort Wainwright and Glacier State areas, all of which are currently served by our
subsidiaries. Further, ACSW has been granted ETC status in the MTA, ACSF, ACSA, ACSAK-Juneau,
ACSN-Glacier State, Copper Valley , KPU Telecommunications and the Alaska Telephone Company study
areas.
In January, 2008, GCI applied for ETC status in the area served by Mukluk Telephone Company (Nome
and surrounding areas) using a hybrid approach incorporating both wireless and fixed wireless
(CLEC) technologies. A common carrier designated as an ETC must offer services supported by federal
universal service mechanisms throughout the ETC service area either by using its own facilities or
a combination of its own facilities and resale of another carriers services. The RCA rejected
GCIs request for a single designation and treated its filing as two separate applications. The RCA
granted GCI ETC status for its wireless service but denied it ETC status for its wireline and fixed
wireless service. It instructed GCI to request a declaratory ruling from the FCC to resolve
unanswered questions regarding the capabilities and appropriate jurisdictional classification of
GCIs fixed wireless service. GCI subsequently withdrew its ETC application for fixed wireless. The
RCAs ruling could impact the level of universal service funding available to our competitor.
In August 2008, the RCA adopted regulations governing the state process for obtaining and
maintaining an ETC designation that were based in part on the FCCs minimum ETC requirements. The
rules added new requirements for ETCs, including that they must strengthen emergency backup
capability, provide detailed plans showing how they will serve the entire service area over time
and file periodic reports showing progress on meeting network development plans for each community.
The rules will apply to carriers already designated as ETCs as well as new ETCs. An ETC may lose
its ETC status or USF support if it fails to follow its network build-out and service commitments.
On October 21, 2010, ACSW filed a petition with the RCA requesting a further seventeen month
extension of its waiver of the new rule that it maintain at least eight hours of emergency backup
power capability at its cell sites in ETC service areas. The RCA originally granted ACSW a five
month waiver in May 2010. ACSW needs additional time to determine its current backup power
capabilities at each site through field inspections and implement upgrades where required. We
cannot predict the outcome of the proceeding at this time.
Other RCA Proceedings
ACSN serves approximately 200 customers in very remote parts of Alaska. ACSN has used fixed
wireless technology because these customers live in areas difficult to serve via traditional
wireline facilities. Several consumers in two remote Southeast locations, South Thorne Bay and
Klawock on Prince of Wales Island (PWI), complained to the RCA about the quality of service
provided by the time division multiple access (TDMA) facilities we used to provide telephone
service. The RCA opened a docket to formally investigate the complaints. Two years
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ago, ACSN upgraded its fixed wireless service from TDMA to CDMA. The RCA subsequently investigated
whether the CDMA upgrade addressed customers service quality complaints and met state service
quality rules. Further, in May 2009, ACSN filed a settlement proposal with the RCA that would
extend its wireline network to fixed wireless customers in the Klawock and Thorne Bay subdivisions
under line extension terms specified in its existing tariff. Under the proposed settlement and
applicable tariff, certain customers would be required to pay line extension fees to defray, in
part, our costs attributable to the wireline extension. These customers could also retain their
existing fixed wireless service. We cannot predict whether the RCA will approve the proposed
settlement; nor can we assure you that we will be able to rely on our tariff to pass-through to our
customers the cost of any wireline construction that could be mandated by the RCA.
Website Access to Reports
Our investor relations website Internet address is www.alsk.com. The information on our website is
not incorporated by reference in this annual report on Form 10-K. We make available, free of
charge, on our investor relations website, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act. These reports are available as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the U.S. Securities
and Exchange Commission (SEC).
Code of Ethics
We post our code of business conduct and ethics entitled Code of Ethic, on our corporate website
at www.alsk.com. Our code of business conduct and ethics complies with Item 406 of SEC Regulation
S-K and the rules of NASDAQ. We intend to disclose any changes to the code that affect the
provisions required by Item 406 of Regulation S-K and any waivers of the code of ethics for our
executive officers, senior financial officers or directors, on our corporate website.
Item 1A. Risk Factors
We face a variety of risks that may affect our business, financial condition and results of
operations, some of which are beyond our control. The risks described below are not the only ones
we face and should be considered in addition to the other cautionary statements and risks described
elsewhere and the other information contained in this report and in our other filings with the SEC,
including our subsequent reports on Forms 10-Q and 8-K. Additional risks and uncertainties not
known to us or that we currently deem immaterial may also affect our business. If any of these
known or unknown risks or uncertainties actually occurs, our business, financial condition and
results of operations could be seriously harmed.
Risks Relating to Our Industry
The telecommunications industry in Alaska is extremely competitive and will become even more
competitive if and when Verizon enters the market.
The telecommunications industry in Alaska is extremely competitive and will become even more
competitive if and when Verizon enters the market. We face increasing competition for a small
number of customers from national wireless carriers that have entered or will enter our market. New
market entrants will make it more difficult for us to attract and retain customers. We may also
lose roaming revenues from carriers that enter the Alaskan market.
Wireless Competition
We face strong competition from wireless competitors including AT&T and GCI. Our principal wireless
competitor, AT&T, is one of the largest wireless service providers in the U.S. AT&T also has more
Alaskan customers than we do and we believe that they serve more than 50% of the wireless customers
in Alaska. In addition, Verizon Wireless has acquired the 700 MHz C-Block wireless spectrum license
covering Alaska. Verizon currently holds no other spectrum in Alaska, and we expect it to use the
acquired spectrum to deploy 4G services in Alaska, although we cannot predict when Verizon would
choose to deploy the service in Alaska. We cannot predict whether Verizon will build its own
facilities in Alaska or provide service through a local partner. If Verizon partners with a local
provider that currently competes with us, both Verizon and such local competitor would gain
strength in our market.
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As large national carriers, both AT&T and Verizon have vastly greater access to financial,
technical and other resources than we do. They have greater access to popular devices and greater
market power to obtain these devices on more favorable terms than we do. AT&T and Verizon, thus,
may be able to offer lower prices, additional products, services, features or other incentives that
we cannot match. Larger competitors, such as AT&T and Verizon may also be in a position to respond
more quickly to new technologies and be able to undertake more extensive marketing campaigns.
Moreover, AT&T and Verizon operate their own nationwide network, whereas we rely on roaming
agreements with other carriers to provide coverage outside Alaska, and conversely, provide revenue
to us for our coverage in Alaska. Our reliance on these agreements could adversely affect our
ability to maintain competitive pricing or roaming revenues, which would have a material adverse
effect on our financial results.
Wireline Competition
Our principal wireline competitor, GCI, is the dominant cable television provider in Alaska. In
consumer markets, GCI attempts to use its dominant cable television position by bundling its cable
services with competitive telephony services, which are often based on leases of our facilities. We
do not offer television service, and thus, are unable to offer competing bundles. In addition, GCI
has aggressively deployed cable telephony in order to move its telephone customers off of our
network and onto its own cable system. Significant, continued migration of customers would result
in a significant reduction of revenue for us. In addition, GCI holds a dominant position in the
current long-haul voice and data markets, where it owns and operates two of the four existing
undersea fiber optic cables connecting Alaska to the contiguous states and has a number of
significant contracts with large carrier customers. GCI competes very aggressively on price in this
market to defend its market share. In addition, AT&T has acquired a substantial amount of
interstate and intrastate fiber optic capacity from GCI, which may allow it to offer additional
competing service from its national platform.
These strong competitive pressures in both our wireless and wireline business segments could have a
material adverse effect on our business, operating results, margins and financial condition.
Device Access
Exclusive Arrangements between wireless device manufacturers and large wireless carriers hamper our
ability to procure and sell many popular wireless handsets and other devices.
Our wireless business competes against national and well-funded wireless service providers, most
notably, AT&T and in the future, potentially, Verizon. As a smaller carrier, we do not have access
to many wireless products and services that AT&T and Verizon can offer. We are precluded from
obtaining new wireless devices subject to exclusive agreements with large wireless carriers, such
as the iPhone®, which only AT&T and Verizon can offer. Other than AT&T and potentially,
Verizon, no other national wireless provider has a presence in our market. Even so, exclusive
arrangements for new devices, into which other national carriers enter, make them unavailable to
us. Because devices subject to exclusivity agreements may be those most sought after by customers,
our inability to sell those devices may harm our ability to stay competitive. Because wireless
subscribers are permitted to retain their wireless phone numbers when changing to another wireless
carrier within the same geographic area, customers may change carriers simply to obtain a device
that we do not offer. Our limited ability to procure certain devices could increase wireless
customer churn and may also limit our flexibility to price our services for quality of customer
experience, which could have a material adverse effect on our revenue, results of operations and
cash flows.
If we do not adapt to rapid technological advancements and changes in telecommunications standards,
our ability to compete would be strained, and as a result, we would lose customers.
Our success will likely depend on our ability to adapt to rapid technological changes in the
telecommunications industry. Our failure to adopt a new technology or our choice of one technology
over another may have an adverse effect on our ability to compete or meet the demands of our
customers. Technological changes could, among other things, reduce the barriers to entry facing our
competitors providing local service in our service areas. The pace of technology change and our
ability to deploy new technologies may be constrained by insufficient capital and/or the need to
generate sufficient cash to make interest payments on our debt and to maintain our dividend policy.
New products and services may arise out of technological developments and our inability to keep
pace with these developments may reduce the attractiveness of our services. Some of our competitors
may have greater resources to respond to changing technology than we do. If we fail to adapt
successfully to technological
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changes or fail to obtain access to new technologies, we could lose customers and be unable to
attract new customers and/or sell new services to our existing customers. We may be unable to
successfully deliver new products and services, and we may not generate anticipated revenues from
such products or services.
Risks Relating to Our Debt
Substantial Debt
Our substantial debt could adversely affect our financial health, financing options and liquidity
position.
We have a substantial amount of debt. As of December 31, 2010, and for the year then ended, we had
total debt of $553.3 million and a loss before income tax expense of $0.8 million. Our debt could
have important consequences for you as a holder of our common stock. For example, our substantial
debt and the related loan covenants could:
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require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures, future business opportunities, our dividend and
other general corporate purposes; |
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limit our flexibility to plan, adjust or react to changing economic, market or
industry conditions, reduce our ability to withstand competitive pressures and increase
our vulnerability to general adverse economic and industry conditions; |
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place us at a competitive disadvantage to many of our competitors who are less
leveraged than we are; |
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limit our ability to borrow additional amounts for working capital, capital
expenditures, future business opportunities, including strategic acquisitions and other
general corporate requirements or hinder us from obtaining such financing on terms
favorable to us or at all; or |
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limit our ability to refinance our debt. |
The terms of our senior credit facility and the terms of our other debt allows us and our
subsidiaries to incur additional debt upon the satisfaction of certain conditions. If new debt is
added, the related risks described above would intensify.
Our substantial debt exposes us to adverse changes in interest rates. In the past we have entered
into floating-to-fixed interest rate swaps to hedge our exposure to interest rate changes. With the
refinancing of our senior debt on October 21, 2010, we terminated the related swaps and entered
into replacement swaps that will fix the interest rates on $385.0 million of notional term loan
value at 6.47% for the period June 30, 2012 through September 30, 2015. Until that time, while we
have partially limited our exposure to interest rate risk by acquiring an interest rate cap that
limits the London Interbank Offered Rate (LIBOR) to 3.0%, we will be directly exposed to
increases in our interest expense any time LIBOR exceeds 1.5% up to a cap of 3.0%. We are also
subject to credit risk related to our counterparties on the swaps and the interest rate cap and to
interest rate fluctuations on interest generated by our debt in excess of the notional term loans
referenced above. For more specific information related to our exposure to changes in interest
rates and our use of floating-to-fixed interest rate swaps, please see Item 7AQuantitative and
Qualitative Disclosures About Market Risk.
Debt-Related Financial Covenants
Financial covenants in our debt instruments limit our operating flexibility.
Our senior credit facility requires us to maintain certain financial ratios and adhere to other
covenants that, among other things, restrict our ability to take specific actions, even if we
believe such actions are in our best interest. These include restrictions on our ability to:
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pay dividends or distributions on, redeem or repurchase our capital stock; |
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issue certain preferred or redeemable capital stock; |
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incur additional debt; |
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create liens; |
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make certain types of investments, loans, advances or other forms of payments; |
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issue, sell or allow distributions on capital stock of specified subsidiaries; |
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prepay or defease specified debt; |
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enter into transactions with affiliates; or |
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merge, consolidate or sell our assets. |
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Our ability to meet the financial ratios is dependent, among other factors, on our achieving
targeted results of operations. We may not be able to achieve these targets for a variety of
reasons, some of which are beyond our control, including the potential negative impact on our
operations that could occur if, and when, Verizon enters the Alaska market. For example, based on
our current total leverage, if competition from Verizon and the related loss of roaming revenue (or
any other factor or combination of factors) caused the Companys Adjusted EBITDA, as defined in our
senior credit facility, to drop below approximately $107.6 million for any four consecutive quarters,
the Company would be required to suspend its dividend. If Adjusted
EBITDA dropped below $102.5
million for any four consecutive quarters then the company could be in default (for comparison,
Adjusted EBITDA was $126.3 million in 2010). Upon the occurrence of an event of default under our
senior credit facility, the lenders could elect to declare all amounts outstanding under our senior
credit facility to be immediately due and payable. Such a default or acceleration may allow our
other creditors to accelerate our other debt. If the lenders accelerate the payment of the debt
under our senior credit facility, our assets may not be sufficient to repay our debts.
Debt Service Requirements
We require a significant amount of cash to service our debt, pay dividends, fund our growth
projects and meet other liquidity needs.
Our ability to make payments on and to refinance our debt, including amounts borrowed under our
senior credit facility and our 5.75% Convertible Notes due 2013, to pay dividends, and to fund
planned capital expenditures, including any strategic acquisitions we may make, if any, will depend
on our ability to generate cash in the future. We cannot assure you that our business will generate
sufficient cash flow from operations such that our currently anticipated growth in revenues and
cash flow will be realized on schedule or that future borrowings will be available to us in an
amount sufficient to enable the repayment of our debt, pay dividends or to fund our other liquidity
needs.
We may need to refinance all or a portion of our debt, including the convertible notes, on or
before maturity. Our 2010 senior credit facility requires $100.0 million of our currently
outstanding convertible notes to be repaid or refinanced by December 19, 2012, to prevent a default
event. We may not be able to refinance any of our debt on commercially reasonable terms or at all.
If we are unable to refinance our debt or obtain new financing under these circumstances, we would
have to consider other options, including:
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sales of certain assets to meet our debt service requirements; |
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reduce cash available for dividends; |
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sales of equity; and |
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negotiations with our lenders to restructure the applicable debt. |
If we are forced to pursue any of the above options our business and the value of our common stock
could be adversely affected.
Convertible Debt Related Risks
The call options we purchased and the warrants we sold contemporaneously with the sale of our
convertible notes may affect the trading price of our common stock and the value of the convertible
notes.
The counterparties to the call options we purchased and warrants we sold may engage in hedging
activities and modify their hedge positions from time to time prior to the conversion or maturity
of our senior convertible notes, particularly around the time of any conversion of the notes. These
hedging activities may include purchasing and selling shares of our common stock, or other of our
securities, or other instruments, including over-the-counter derivative instruments. The effect, if
any, of these activities on the trading price of our common stock or the convertible notes, will
depend in part on market conditions at the time and cannot be reasonably predicted at this time.
Any of these activities could adversely affect the trading price of our common stock and the value
of the convertible notes.
Risks related to our Business
AKORN and Northstar Fiber Profitability
We may not successfully operate our AKORN and Northstar fiber facilities that connect Alaska to the
contiguous states profitably.
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Realization of the anticipated benefits of our redundant interstate investments will depend on our
ability to attract significant enterprise customers requiring robust data service capabilities. We
will continue to be required to devote significant management attention and resources to sustaining
and promoting operations and maintaining support. We will face challenges in our abilities to do
the following:
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develop attractive products and services that operate seamlessly with our existing
technology and infrastructure; |
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maintain and upgrade timely the complex underlying hardware and software technology
that drives optimal use of these facilities; |
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attract a sufficient volume of traffic on these fiber facilities to make them
profitable; |
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offer products and services that use these fiber facilities that are attractive to
our target customers; |
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preserve key customer, supplier and other important relationships and resolve
potential conflicts that may arise; and |
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generate sufficient revenues to maintain increased indebtedness raised to complete
these projects. |
If we do not maintain or improve our current relationships with existing customers and develop new
large volume and enterprise customers, we may not be able to realize our targets for sales and
revenue growth. If we are unable to achieve our projected revenue growth and margins anticipated
from the investment, we may be unable to profitably operate these facilities.
Long-Haul Fiber Competition
Increased supply of interstate and international long-haul fiber in Alaska could adversely impact
prices for bandwidth, which could in turn, adversely affect our projected and actual sales, margins
and profitability of our fiber facility.
Significant increases in fiber transport capacity in the United States have at times exerted
downward pressure on prices, margins and profitability. The market for long-haul fiber in Alaska is
characterized by high capital investment and relatively high fixed costs, coupled with a limited
number of large customers. Some of our existing and potential competitors have greater name
recognition and more established relationships with our target customers. Further, these
competitors may have more experience with the repair and maintenance of the underlying data
transport technology, and its associated costs, than we do. Our primary wireline competitor, GCI,
has adopted a very aggressive pricing policy in the long-haul interstate voice and data markets.
GCI has also sold a very large amount of capacity to AT&T, which allows them to serve their own
needs and sell to others, effectively establishing a national competitor in this market. We cannot
predict with any certainty what the prevailing market prices will be for interstate voice and data
transport or when prices for these services will stabilize, if at all.
Access Lines
We provide services to many customers over access lines, and if we continue to lose access lines,
our revenues, earnings and cash flow from operations may decrease.
Our business generates revenue by delivering voice and data services over access lines. We have
experienced net access line loss consistently over the past few years. During the year ended
December 31, 2010, the number of access lines we serve declined by 7.1%. We expect to experience
net access line loss in our markets for an unforeseen period of time. Our inability to retain
access lines would adversely affect our revenues, earnings and cash flow from operations.
Access Charges and USF Support
Revenues from network access charges may be reduced or lost.
We received approximately 17.6% of our operating revenues for the year ended December 31, 2010 from
local exchange network access charges. The amount of revenue that we receive from these access
charges is calculated in accordance with requirements set by the FCC and the RCA. Any change in
these requirements may reduce our revenues and earnings. Access charges have consistently decreased
in past years. We do not receive access revenue related to our competitors retail customers that
are served by UNEs or by the competitors own facilities. To the extent that competitors move
customers on to UNEs or off our network entirely, our access revenues will decrease. We do not
receive access revenue from VoIP calls and growth of this service will reduce our access revenues.
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The FCC has actively reviewed new mechanisms for inter-carrier compensation that, in some
cases, could eliminate access charges entirely. Elimination of access charges would likely have a
material adverse effect on our revenue and earnings. In any event, we believe that new mechanisms
for inter-carrier compensation would more likely than not reduce this source of revenue. Similarly,
the RCA has adopted regulations modifying intrastate access charges that may reduce our revenue.
In addition, we have periodically been involved in disputes about interstate access revenues. We
cannot assure you that claims alleging excess charges will not be made in the future nor whether we
would prevail against such claims.
We may not continue to receive as much USF support as we have in the past.
We receive USF (and equivalent state universal service support) revenues to support our wireline
operations in high cost areas. The FCC has proposed new rules requiring competitive carriers to
justify support based on some measure of their own costs or on a model and allowing certain ILEC
ETCs that lose lines to increase their local switching support from the USF. The FCC also has
proposed reforms that could affect the amount of funding for ILECs, including using reverse
auctions to determine one or more recipients of high cost support in any geographic area based on
the lowest bidder for that support and phasing out support for voice services and targeting support
to broadband networks. Notably, on February 8, 2011, as part of a request for public comment, the
FCC indicated support for the elimination of the identical support rule that permits competitive
carriers, such as ACSW and our wireless competitors, to apply for funding based on the support
received by the incumbent carrier. Should those changes be implemented, the extent of any
transition period or any special treatment for carriers located in Alaska is uncertain. In
addition, members of Congress have indicated that they may seek enactment of legislation addressing
universal service reform, including legislation to limit growth of explicit universal service
support funds. These and other proposed rule changes could reduce our support in the future. For
more information on this and our regulatory environment, please see Item 1BusinessRegulation.
Roaming Charges
We derive a significant portion of our wireless revenue from roaming charges. This revenue may
fluctuate or decline in the future as a result of general economic, contractual and competitive
factors.
Approximately 7.8% of our revenue for the year ended December 31, 2010 was derived from roaming
charges incurred by other wireless providers whose customers traveled within our coverage areas.
The revenue we recognize from these roaming charges may in the future be volatile or decline as a
result of a number of factors, many of which are outside our control. These factors include the
strength of the Alaskan economy and its primary industries, including tourism, general economic
factors affecting commerce between Alaska and other States and countries, unresolved political
matters which may affect public and private spending in Alaska and others. For example, our service
areas include a number of summer tourist destinations in Alaska. As a result, in these areas, our
roaming revenue generally increases during summer months and declines during other periods and
depends heavily on the number of tourists who visit Alaskan tourist destinations. In addition, we
cannot assure you our roaming agreements with other providers will continue to generate similar
roaming revenues. Our agreements with other carriers have varying terms of varying length,
including some which are terminable on short notice. In the event these roaming agreements expire
or are terminated, we may be unable to renegotiate or replace these agreements on similar or
acceptable terms. Failure to obtain acceptable roaming agreements could lead to a significant
decline in our revenue and operating income. Lastly, changes in the network footprints of our
roaming partners, or those of our competitors who are able to provide roaming coverage in our
service areas, could have a material adverse effect on us. For example, if Verizon enters the
Alaska market, we estimate we could potentially lose up to 90% of our roaming revenue and we may
also lose roaming revenue from other partners if they moved their roaming relationship to Verizon
or if we retained the relationship, but the presence of Verizon, coupled with our other
competitors, pushed down market rates for roaming charges.
Economic Conditions
The successful operation and growth of our businesses depends heavily on economic conditions in
Alaska.
The vast majority of our customers and operations are located in Alaska. Due to our geographical
concentration, the successful operation and growth of our businesses depends on economic conditions
in Alaska. The Alaskan economy, in turn, depends upon many factors, including:
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the strength of the natural resources industries, particularly oil production and
prices;
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the strength of the Alaskan tourism industry; |
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the level of government and military spending; and |
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the continued growth of services industries. |
The customer base for telecommunications services in Alaska is small and geographically
concentrated. According to the Alaska Department of Labor and Workforce Development estimates, the
population of Alaska is approximately 710,231 as of April 31, 2010, approximately 60% of whom live
in Anchorage, Fairbanks and Juneau. Alaskas economy is heavily dependent on investment by oil
companies and state tax revenues correlate with the price of oil. During 2010, the price of crude
oil continued to exhibit significant volatility. We do not know what the long-term effect on the
Alaskan economy will be or if it will even be stable.
Pension and Deferred Compensation Plans
We may incur substantial and unexpected liabilities arising out of our pension and deferred
compensation plans.
Our post-retirement benefits, pension, and deferred compensation plans could result in substantial
liabilities on our balance sheet. These plans and activities have and will generate substantial
cash requirements for us and these requirements may increase beyond our expectations in future
years based on changing market conditions. The difference between plan obligations and assets, or
the funded status of the plans, is a significant factor in determining the net periodic benefit
costs of our pension plans and the ongoing funding requirements of those plans. Changes in interest
rates, mortality rates, health care costs, early retirement rates, investment returns and the
market value of plan assets can affect the funded status of our defined benefit pension, other
post-retirement and post-employment benefit plans and cause volatility in the net periodic benefit
cost and future funding requirements of the plans. In the future, we may be required to make
additional contributions to our defined benefit plan. Plan liabilities may impair our liquidity,
have an unfavorable impact on our ability to obtain financing and place us at a competitive
disadvantage compared to some of our competitors who do not have such liabilities and cash
requirements.
In addition, on behalf of substantially all of our employees, we participate in the Alaska
Electrical Pension Fund (the AEPF). The AEPF is a multi-employer pension plan to which we make
fixed, per employee contributions through our collective bargaining agreement with the IBEW, which
covers our IBEW represented workforce, and a special agreement, which covers most of our
non-represented workforce. Because our contribution requirements are fixed, we cannot easily adjust
our annual plan contributions to address our own financial circumstances. Further, because we do
not control the AEPF, we are not aware at all times whether the plan is fully funded. In general,
if a funding shortfall in the AEPF exists, we incur a contingent withdrawal liability. Our
contingent withdrawal liability is an amount based on our pro-rata share among AEPF participants of
the value of the funding shortfall. This contingent liability becomes due and payable by us if we
terminate our participation in the AEPF. Moreover, if another participant in the AEPF goes
bankrupt, we would become liable for a pro-rata share of the bankrupt participants vested, but
unpaid, liability for accrued benefits for that participants employees. This could result in a
substantial unexpected contribution requirement and making such a contribution could have a
material adverse effect on our cash position and other financial results. These sources of
potential liability are difficult to predict.
Regulations
New governmental regulations may impose obligations on us to upgrade our existing technology or
adopt new technology that may require additional capital and we may not be able to comply in a
timely manner with these new regulations.
Our markets are heavily regulated. We cannot predict the extent the government will impose new
unfunded mandates on us. Such mandates have included those related to emergency location, providing
access to hearing-impaired customers, law enforcement assistance and local number portability. Each
of these government mandates has imposed new requirements for capital that we could not have
predicted with any precision. Along with these obligations, the FCC has imposed deadlines for
compliance with these mandates. We may not be able to provide services that comply with these
mandates in time to meet the imposed deadlines. Further, we cannot predict whether other mandates
from the FCC or other regulatory authorities, will occur in the future or the demands they may
place on our capital expenditures. For more information on our regulatory environment and the risks
it presents to us, see Item 1 Business Regulation.
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Labor
Labor costs and the terms of our principal collective bargaining agreement may hurt our ability to
remain competitive, which could cause our financial performance to suffer.
Labor costs are a significant component of our expenses and approximately 74% of our workforce is
represented by the IBEW. As a result of our collective bargaining agreement with the IBEW, we may
experience pressure to increase wages and benefits for our employees. We believe our labor costs
are higher than our competitors who employ a non-unionized workforce. In addition, we may make
strategic and operational decisions that require the consent of the IBEW. The IBEW may not provide
consent when we need it, or it may require additional wages, benefits or other consideration be
paid in return for its consent.
Our primary in-state competitor, GCI, does not use union labor and pays lower compensation than we
do. We cannot assure you that our labor costs will ever become competitive.
In addition, the IBEW has brought and may continue to bring grievances to binding arbitration. The
IBEW may also bring court actions and may seek to compel us to engage in the bargaining processes
where we believe we have no such obligation. If successful, there is a risk these judicial or
arbitral avenues could create additional costs that we did not anticipate.
Key Members of Senior Management
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of key members of our senior
management team as well as our ability to attract and retain other highly qualified management and
technical personnel. There is intense competition for qualified personnel in our industry and we
may not be able to attract and retain the personnel necessary for the development of our business.
Our remote location also presents a challenge to us in attracting new talent. If we lose one or
more of our key employees, our ability to successfully implement our business plan could be
materially adversely affected. We do not maintain any key person insurance on any of our
personnel.
Vendors
We rely on a limited number of key suppliers and vendors for timely supply of equipment and
services for our network infrastructure and customer support services. If these suppliers or
vendors experience problems or favor our competitors, we could fail to obtain the equipment and
services we require to operate our business successfully.
We depend on a limited number of suppliers and vendors for equipment and services for our network
and certain customer services. If suppliers of our equipment or providers of services on which we
rely experience financial difficulties, service or billing interruptions, patent litigation or
other problems, subscriber growth and our operating results could suffer.
Suppliers that use proprietary technology, including CDMA technology, as an integral component of
our network, effectively lock us into one or few suppliers for key network components. Other
suppliers require us to maintain exclusive relationships under a contract. As a result, we have
become reliant upon a limited number of network equipment manufacturers and one wireless billing
service provider. In the event it becomes necessary to seek alternative suppliers and vendors, we
may be unable to obtain satisfactory replacement suppliers or vendors on economically attractive
terms on a timely basis, or at all, which could increase costs and may cause disruption in service.
Network / E-911 Failure
A failure of our network could cause significant delays or interruptions of service, which could
cause us to lose customers.
To be successful, we will need to continue to provide our customers reliable service over our
network. Our network and infrastructure are constantly at risk of physical damage to access lines
or other facilities as a result of human, natural or other factors. These factors may include
pandemics, acts of terrorism, sabotage, natural disasters, power surges or outages, software
defects, contractor or vendor failures, labor disputes and other disruptions that may be beyond our
control. Should we experience a prolonged system failure or a significant service interruption, our
customers may choose a different provider and our reputation may be damaged. Further, we may not
have adequate insurance coverage, which would result in unexpected expense. Notably,
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similar to other undersea fiber optic cable operators, we do not carry insurance that would cover
the cost of repair of our undersea cables and, thus, we would bear the full cost of any necessary
repairs.
A failure of enhanced emergency calling services associated with our network may harm our business.
We provide E-911 service to our customers where such service is available. We also contract from
time to time with municipalities to upgrade their public safety answering points such that those
facilitates become capable of receiving our transmission of a 911 callers location information and
telephone number. If the emergency call center is unable to process such information, the caller is
provided only basic 911 services. In these instances, the emergency caller may be required to
verbally advise the operator of such callers location at the time of the call. Any inability of
the answering point to automatically recognize the callers location or telephone number, whether
or not it occurs as a result of our network operations, may cause us to incur liability or cause
our reputation or financial results to suffer.
Wireless Devices
Wireless devices may pose health and safety risks and driving while using a wireless phone may be
prohibited; as a result, demand for our services may decrease.
Media reports have suggested that, and studies have been undertaken to determine whether, certain
radio frequency emissions from wireless handsets and cell sites may be linked to various health
concerns, including cancer. Further, radio frequency emissions may interfere with various
electronic medical devices, including hearing aids and pacemakers. If consumers health concerns
over radio frequency emission increase, they may be discouraged from using wireless handsets. In
addition, studies have indicated that using wireless devices while driving may impair a drivers
attention. Regulators may impose or increase restrictions on the location and operation of cell
sites or increase regulation on the use of handsets, and wireless providers may be exposed to
litigation. Our fleet management service allows for the remote starting of vehicles. In certain
situations this could result in injuries or damages for which we may be exposed to litigation. New
government regulations in any of these matters may adversely affect our results of operations.
Future Acquisitions
Future acquisitions could result in operating and financial difficulties.
Our future growth may depend, in part, on acquisitions. To the extent that we grow through
acquisitions, we will face the operational and financial risks that commonly accompany that
strategy. We would also face operational risks, such as failing to assimilate the operations and
personnel of the acquired businesses, disrupting their ongoing businesses, increasing complexity of
our business, impairing management resources and their relationships with employees and customers
as a result of changes in their ownership and management. Further, the evaluation and negotiation
of potential acquisitions, as well as the integration of an acquired business, may divert
management time and other resources. Some acquisitions may not be successful and their performance
may result in the impairment of their carrying value. Certain financial and operational risks
related to acquisitions that may have a material impact on our business are:
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Use of cash resources and incurrence of debt and contingent liabilities in funding
acquisitions may limit other potential uses of our cash, including stock repurchases,
dividend payments and retirement of outstanding indebtedness; |
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Amortization expenses related to acquired intangible assets and other adverse
accounting consequences; |
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Costs incurred in identifying and performing due diligence on potential acquisition
targets that may or may not be successful; |
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Difficulties and expenses in assimilating the operations, products, technology,
privacy protection systems, information systems or personnel of the acquired company; |
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Impairment of relationships with employees, suppliers and affiliates of our business
and the acquired business; |
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The assumption of known and unknown debt and liabilities of the acquired company; |
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Failure to generate adequate returns on our acquisitions and investments; |
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Entrance into markets in which we have no direct prior experience; and |
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Impairment of goodwill or other intangible assets arising from our acquisitions. |
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Risks related to the On-going IRS Audit
We are subject to a significant ongoing IRS audit, which could, in the event we prove unable to
effectively enforce the indemnification obligations of third parties, require us to pay significant
amounts.
As discussed in the section entitled Legal Proceedings in Item 3 of this Report, the Internal
Revenue Service (the Service) issued a Notice of Proposed Adjustment (NOPA) on April 19, 2010
with respect to the 2006, 2007 and 2008 taxable years of Crest. In that notice, the Service asserts
that advances made to entities which Crest acquired out of bankruptcy in 2002 should be
characterized as debt for tax purposes. Crest had characterized the advances as equity for tax
purposes. The Service asserts that debt characterization resulted in cancellation of indebtedness
income. On November 2, 2010, the Service issued a revised Notice of Proposed Adjustment in which it
continues to assert that the advances referenced above are debt for tax purposes and seeks to
impose penalties in respect of the asserted income tax deficiencies. In addition, the revised
notice asserts that the method employed by the same entities acquired by Crest to determine cost of
goods sold related to the sales of indefeasible rights of use was unreasonable and that the
entities inappropriately depreciated basis in dark fiber. Should the appeals process fail to
overturn the proposed adjustments; should we be unable to preserve the corporate structure of the
Crest subsidiaries; and should we prove unable to effectively enforce the indemnification
provisions in the Stock Purchase Agreement (SPA), this could have a material effect on our
consolidated financial position, results of operations and cash flows.
Risks related to our Common Stock
Dividends
You may not receive the level of dividends provided for in our dividend policy or any dividends at
all.
We are not obligated to pay dividends. Our Board of Directors may decide not to pay dividends at
any time and for any reason. We might not generate sufficient cash from operations in the future to
pay dividends on our common stock in the intended amounts or at all. If our cash flows from
operations for future periods were to fall below our minimum expectations, we would need either to
reduce or eliminate dividends or, to the extent permitted under the terms of our senior credit
facility or any future agreement governing our debt, fund a portion of our dividends with
borrowings or from other sources. Future dividends, if any, will depend on, among other things, our
results of operations, cash requirements, financial condition, contractual restrictions, business
opportunities, any competitive or technological developments, our increased need to make capital
expenditures, provisions of applicable law and other factors that our Board of Directors may deem
relevant. For example, if Verizon enters our markets, the results of its presence could, over time,
significantly reduce our cash available for dividends, both through reduction of our customer and
roaming revenues and through the need for us to devote additional cash toward capital expenditures
to attempt to remain competitive and/or pay down debt to maintain debt covenant compliance. Should
we reduce or eliminate dividends, the market price of our common stock may decline.
Volatility
Continued volatility in the price of our common stock would negatively affect us and our
stockholders.
The trading price of our common stock was volatile during 2010 in response to a number of factors,
many of which are beyond our control, including actual or anticipated variations in quarterly
financial results, actual or anticipated variations in our dividend policy, changes in financial
expectations by securities analysts and announcements by our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital commitments. In addition, our
financial results or dividend payments may be below the expectations of securities analysts and
investors. Broad market and industry factors have also negatively affected the price of our common
stock regardless of our operating performance and we do not know how long these adverse market
conditions will continue. Future volatility in our stock price could materially adversely affect
the trading market and prices for our common stock as well as our ability to issue additional
securities or to secure additional financing.
Item 1B. Unresolved Staff Comments
None
25
Item 2. Properties
Our principal properties do not lend themselves to simple description by character and location.
The components of our gross investment in property, plant and equipment consisted of the following
as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Land, buildings and support assets |
|
$ |
247,568 |
|
|
$ |
246,518 |
|
Central office switching and transmission |
|
|
366,154 |
|
|
|
361,784 |
|
Outside plant cable and wire facilities |
|
|
678,178 |
|
|
|
669,572 |
|
Wireless switching and transmission |
|
|
100,352 |
|
|
|
104,536 |
|
Other |
|
|
4,026 |
|
|
|
3,991 |
|
Construction work in progress |
|
|
20,440 |
|
|
|
27,357 |
|
|
|
|
|
|
|
|
|
|
$ |
1,416,718 |
|
|
$ |
1,413,758 |
|
|
|
|
|
|
|
|
Our property, plant and equipment are used in each of our wireline and wireless business segments
and we allocate assets to our segments.
Land, buildings and support assets consist of land, land improvements, cellular towers, central
office and certain administrative office buildings as well as general purpose computers, office
equipment, vehicles and other general support equipment. Central office switching and transmission
and wireless switching and transmission consist primarily of switches, routers and transmission
electronics for our regulated and wireless entities, respectively. Outside plant and cable and wire
facilities include primarily conduit and cable. We own substantially all of our telecommunications
equipment required for our business. However, we lease certain facilities and equipment under
various capital and operating lease arrangements when the leasing arrangements are more favorable
to us than purchasing the assets.
We own and lease office facilities and related equipment for executive headquarters, administrative
personnel, central office buildings and operations in locations throughout Alaska and Oregon. Our
principal executive and administrative offices are located in Anchorage, Alaska. We believe we have
appropriate easements, rights-of-way and other arrangements for the accommodation of our pole
lines, underground conduits, aerial, underground and undersea cables and wires and wireless towers
and antennas. However, these properties do not lend themselves to simple description by character
and location.
In addition to land and structures, our property consists of equipment necessary for the provision
of communication services. This includes central office equipment, customer premises equipment and
connections, radio and wireless antennas, towers, pole lines, video head-end, remote terminals,
aerial, underground and undersea cable and wire facilities, vehicles, furniture and fixtures,
computers and other equipment. We also own certain other communications equipment held as inventory
for sale or lease. Substantially all of our communications equipment and other network equipment is
located in buildings that we own or on land within our local service or wireless coverage area.
We have insurance to cover losses incurred in the ordinary course of business, including excess
general liability, property coverage including business interruption, director and officers and
excess employment practices liability, excess auto, crime, fiduciary and non-owned aircraft
insurance in amounts typical of similar operators in our industry and with reputable insurance
providers. Central office equipment, buildings, furniture and fixtures and certain operating and
other equipment are insured under a blanket property insurance program. This program provides
substantial limits of coverage against all risks of loss including fire, windstorm, flood,
earthquake and other perils not specifically excluded by the terms of the policies. As is typical
in the communications industry, we are self-insured for damage or loss to certain of our
transmission facilities, including our buried, undersea and above ground transmission lines. We
self-insure with respect to employee health insurance and workers compensation, primary general
liability, primary auto liability and primary employment practices liability subject to stop-loss
insurance with insurance carriers that caps our liability at specified limits. We believe our
insurance coverage is adequate; however, if we become subject to substantial uninsured liabilities
due to damage or loss to such facilities, our financial position, results of operations or
liquidity may be adversely affected.
Substantially all of our assets (including those of our subsidiaries) have been pledged as
collateral for our senior credit facility.
26
Item 3. Legal Proceedings
We are involved in various claims, legal actions and regulatory proceedings arising in the ordinary
course of business, including various legal proceedings involving regulatory matters described
under Item 1BusinessRegulation. We have recorded litigation reserves of $1.0 million as of
December 31, 2010 against certain current claims and legal actions. We believe that the disposition
of these matters will not have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
On April 19, 2010, the Service issued a Notice of Proposed Adjustment with respect to the 2006,
2007 and 2008 taxable years of Crest, which we acquired on October 30, 2008. Crest had acquired
certain entities out of bankruptcy in 2002. The original majority stockholder of these entities, an
Australian insurance company, AMP, had made certain advances to the entities. These entities
entered into bankruptcy in 2001 and the bankruptcy court approved a plan which effectively
subordinated these advances to all other creditors. Upon acquiring the entities in 2002, Crest
characterized the advances as equity for tax purposes. The Service asserted that characterization
of the AMP advances as equity was incorrect and that Crest had additional income due to the
cancellation of debt.
On November 2, 2010, the Service issued revised Notices of Proposed Adjustments (Revised NOPAs)
in which it continues to assert that the advances referenced above are debt for tax purposes and
seeks to impose penalties in respect of the asserted income tax deficiencies. In addition, the
Revised NOPAs assert that the method employed by the same entities acquired by Crest to determine
cost of goods sold related to the sales of indefeasible rights of use (IRUs) was unreasonable as
well as the entities inappropriately depreciated tax basis in unlit fiber pairs. The cancellation
of indebtedness income at the amounts set out in the Revised NOPAs, including issues surrounding
IRU sales and the depreciation of unlit fiber pairs, could result in a charge to income tax expense
of approximately $89.8 million, $50.4 million of which would be a result of additional taxes
payable and $39.4 million of which would be a result of the reduction in recognized deferred tax
assets.
On December 17, 2010, we filed a response to the Revised NOPAs in which we objected to the proposed
adjustments set forth. On January 6, 2011, the Service requested additional factual information
relating to the IRUs. We responded to these requests on January 27, 2011.
We believe there are errors within the adjustments asserted by the Service. If the Service accepts
the corrections we believe are appropriate, but still prevails on the underlying debt versus equity
issue, the result is expected to be a receivable from the IRS for the overpayment of Alternative
Minimum Tax of $2.8 million, a charge to income tax expense of approximately $29.7 million, and a
net reduction in recognized deferred tax assets. We are unable to say it is more likely than not it
will prevail on the underlying debt versus equity issue, but we believe it is more likely than not
that we will prevail on the other issues contained in the NOPAs. Therefore, in the second quarter
of 2010, in accordance with the guidance in Accounting Standards Codification (ASC) Topic 740,
Income Taxes (ASC 740), we recorded $29.7 million in additional income tax expense, and $2.8
million receivable pending resolution with the IRS.
The additional income tax expense of $29.7 million is made up of two components: the first
representing $11.0 million for the tax effect of losing net operating losses (NOLs) while the
remaining $18.7 million represents a deferred tax liability for the difference in outside basis in
certain Crest subsidiaries. Through enforcing indemnification rights, preserving the corporate
structure of the Crest subsidiaries and other proactive steps, it should be possible to mitigate
most or all of the cash impact of the $18.7 million deferred tax liability for as long as the
Company remains a going concern. ASC 740 requires recognition of a deferred tax liability for
outside basis differences. An outside basis difference represents the amount by which the book
basis of an investment in a domestic subsidiary for financial reporting purposes exceeds the tax
basis in such subsidiary. For certain Crest subsidiaries, the cancellation of debt created a
difference in outside basis that we cannot recover in a tax-free manner and as such, a deferred
liability was established.
The SPA underlying our acquisition of Crest provides for indemnification for the Company by the
former stockholders (Selling Stockholders) of Crest. This indemnity was entered into with the
intent to mitigate the impact our potential tax exposure to items such as those raised by the
NOPAs. We and the selling stockholders intend to contest all issues raised by the NOPAs through
various avenues of appeal. However, should the appeals process fail to overturn the NOPAs, should
we be unable to preserve the corporate structure of the Crest subsidiaries and should we prove
unable to effectively enforce the indemnification provisions in the SPA, this could have a material
effect on our consolidated financial position, results of operations and cash flows.
27
For an additional discussion of certain risks associated with legal proceedings, see Risk Factors
in Item 1A of this Report.
Item 4. (Removed and Reserved)
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Our common stock is traded on the NASDAQ Global Select Market under the symbol ALSK. The
following table presents, for the periods indicated, the high and low sales prices of our common
stock as reported by NASDAQ.
|
|
|
|
|
|
|
|
|
2010 Quarters |
|
High |
|
Low |
4th |
|
$ |
11.65 |
|
|
$ |
9.76 |
|
3rd |
|
$ |
10.62 |
|
|
$ |
8.40 |
|
2nd |
|
$ |
9.22 |
|
|
$ |
7.58 |
|
1st |
|
$ |
8.69 |
|
|
$ |
6.77 |
|
|
|
|
|
|
|
|
|
|
2009 Quarters |
|
High |
|
Low |
4th |
|
$ |
9.17 |
|
|
$ |
6.53 |
|
3rd |
|
$ |
9.41 |
|
|
$ |
6.22 |
|
2nd |
|
$ |
7.72 |
|
|
$ |
5.61 |
|
1st |
|
$ |
9.85 |
|
|
$ |
4.92 |
|
As of February 15, 2011, there were 44.7 million shares of our common stock issued and outstanding
and approximately 531 record holders of our common stock. Because brokers and other institutions
hold many of our shares of existing common stock on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these record holders.
Dividends
On October 28, 2004, we announced the adoption of a dividend policy by our Board of Directors and
declared our first quarterly dividend. The following table summarizes all of the dividends paid
from that date forward:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend |
|
|
|
|
|
Dividend |
|
|
|
|
|
|
|
|
|
|
per |
|
Number |
|
Announcement Date |
|
|
Date |
|
|
Record Date |
|
|
Payment Date |
|
|
Share |
|
1 |
|
|
10/28/2004 |
|
|
|
12/29/2004 |
|
|
|
12/31/2004 |
|
|
|
1/19/2005 |
|
|
$ |
0.185 |
|
2 |
|
|
3/21/2005 |
|
|
|
3/29/2005 |
|
|
|
3/31/2005 |
|
|
|
4/19/2005 |
|
|
$ |
0.200 |
|
3 |
|
|
6/14/2005 |
|
|
|
6/28/2005 |
|
|
|
6/30/2005 |
|
|
|
7/20/2005 |
|
|
$ |
0.200 |
|
4 |
|
|
9/16/2005 |
|
|
|
9/28/2005 |
|
|
|
9/30/2005 |
|
|
|
10/19/2005 |
|
|
$ |
0.200 |
|
5 |
|
|
11/29/2005 |
|
|
|
12/28/2005 |
|
|
|
12/30/2005 |
|
|
|
1/18/2006 |
|
|
$ |
0.200 |
|
6 |
|
|
2/23/2006 |
|
|
|
3/29/2006 |
|
|
|
3/31/2006 |
|
|
|
4/19/2006 |
|
|
$ |
0.215 |
|
7 |
|
|
6/21/2006 |
|
|
|
6/28/2006 |
|
|
|
6/30/2006 |
|
|
|
7/19/2006 |
|
|
$ |
0.215 |
|
8 |
|
|
9/15/2006 |
|
|
|
9/27/2006 |
|
|
|
9/29/2006 |
|
|
|
10/18/2006 |
|
|
$ |
0.215 |
|
9 |
|
|
12/19/2006 |
|
|
|
12/27/2006 |
|
|
|
12/29/2006 |
|
|
|
1/17/2007 |
|
|
$ |
0.215 |
|
10 |
|
|
3/21/2007 |
|
|
|
3/28/2007 |
|
|
|
3/30/2007 |
|
|
|
4/18/2007 |
|
|
$ |
0.215 |
|
11 |
|
|
6/20/2007 |
|
|
|
6/27/2007 |
|
|
|
6/29/2007 |
|
|
|
7/18/2007 |
|
|
$ |
0.215 |
|
12 |
|
|
9/18/2007 |
|
|
|
9/26/2007 |
|
|
|
9/28/2007 |
|
|
|
10/17/2007 |
|
|
$ |
0.215 |
|
13 |
|
|
12/17/2007 |
|
|
|
12/27/2007 |
|
|
|
12/31/2007 |
|
|
|
1/17/2008 |
|
|
$ |
0.215 |
|
14 |
|
|
3/14/2008 |
|
|
|
3/27/2008 |
|
|
|
3/31/2008 |
|
|
|
4/16/2008 |
|
|
$ |
0.215 |
|
15 |
|
|
6/13/2008 |
|
|
|
6/26/2008 |
|
|
|
6/30/2008 |
|
|
|
7/16/2008 |
|
|
$ |
0.215 |
|
16 |
|
|
9/15/2008 |
|
|
|
9/26/2008 |
|
|
|
9/30/2008 |
|
|
|
10/15/2008 |
|
|
$ |
0.215 |
|
17 |
|
|
12/16/2008 |
|
|
|
12/29/2008 |
|
|
|
12/31/2008 |
|
|
|
1/21/2009 |
|
|
$ |
0.215 |
|
18 |
|
|
3/20/2009 |
|
|
|
3/27/2009 |
|
|
|
3/31/2009 |
|
|
|
4/15/2009 |
|
|
$ |
0.215 |
|
19 |
|
|
6/16/2009 |
|
|
|
6/26/2009 |
|
|
|
6/30/2009 |
|
|
|
7/15/2009 |
|
|
$ |
0.215 |
|
20 |
|
|
9/21/2009 |
|
|
|
9/28/2009 |
|
|
|
9/30/2009 |
|
|
|
10/21/2009 |
|
|
$ |
0.215 |
|
21 |
|
|
12/15/2009 |
|
|
|
12/29/2009 |
|
|
|
12/31/2009 |
|
|
|
1/20/2010 |
|
|
$ |
0.215 |
|
22 |
|
|
3/22/2010 |
|
|
|
3/29/2010 |
|
|
|
3/31/2010 |
|
|
|
4/21/2010 |
|
|
$ |
0.215 |
|
23 |
|
|
6/14/2010 |
|
|
|
6/28/2010 |
|
|
|
6/30/2010 |
|
|
|
7/21/2010 |
|
|
$ |
0.215 |
|
24 |
|
|
9/21/2010 |
|
|
|
9/28/2010 |
|
|
|
9/30/2010 |
|
|
|
10/20/2010 |
|
|
$ |
0.215 |
|
25 |
|
|
12/16/2010 |
|
|
|
12/29/2010 |
|
|
|
12/31/2010 |
|
|
|
1/19/2011 |
|
|
$ |
0.215 |
|
28
Based on approximately 44.7 million shares outstanding on February 15, 2011 and an assumed dividend
of $0.86 per share per annum, dividends payable during 2011 would be approximately $38.5 million.
Our ability to make dividend payments in the future will depend on future competitive market and
economic conditions and on financial, business, regulatory and other factors, many of which are
beyond our control. Accordingly, our Board of Directors may modify or revoke this policy at any
time. Thus, you may not receive any dividends.
Factors that may affect our dividend policy are:
|
|
|
we are a holding company and rely on dividends, interest and other payments,
advances and transfer of funds from our subsidiaries to meet our debt service and pay
dividends; |
|
|
|
|
we may not have enough cash to pay dividends due to changes in our operating
earnings, working capital requirements and anticipated cash needs; |
|
|
|
|
nothing requires us to declare or pay dividends; |
|
|
|
|
while the dividend policy adopted by our Board of Directors reflects an intention to
distribute a substantial portion of our cash generated by our business in excess of
operating needs, interest and principal payments on debt and capital expenditures to
pay dividends, our board could modify or revoke this policy at any time; |
|
|
|
|
even if our dividend policy is not modified or revoked, the actual amount of
dividends distributed under the policy and the decision to make any distribution will
remain, at all times, entirely at the discretion of our Board of Directors; |
|
|
|
|
the amount of dividends that we may distribute will be limited by restricted payment
and leverage covenants in our senior credit facility and potentially, the terms of any
future debt that we may incur; |
|
|
|
|
the amount of dividends that we may distribute is subject to restrictions under
Delaware law; and |
|
|
|
|
our stockholders have no contractual or other legal right to dividends. |
See Item 1ARisk FactorsRisks related to our Common Stock. You may not receive the level of
dividends provided for in our dividend policy or any dividends at all.
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in this Report under Item 12Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder MattersSecurities Authorized for Issuance under
Equity Compensation Plans is incorporated herein by reference.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto in Part IV, Item 15 and Managements
Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of
this report. We derived the selected consolidated financial data as of December 31, 2010, 2009,
2008, 2007 and 2006 and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006 from our
audited consolidated financial statements, and accompanying notes, included in Part IV, Item 15 of
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands/except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
341,524 |
|
|
$ |
346,040 |
|
|
$ |
349,682 |
|
|
$ |
348,790 |
|
|
$ |
319,331 |
|
Net income (loss) |
|
|
(30,688 |
) |
|
|
33,777 |
|
|
|
(11,674 |
) |
|
|
144,050 |
|
|
|
11,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share basic |
|
$ |
(0.69 |
) |
|
$ |
0.77 |
|
|
$ |
(0.27 |
) |
|
$ |
3.37 |
|
|
$ |
0.28 |
|
Income (loss) per share diluted |
|
$ |
(0.69 |
) |
|
$ |
0.77 |
|
|
$ |
(0.27 |
) |
|
$ |
3.26 |
|
|
$ |
0.28 |
|
Cash dividends per share |
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
620,615 |
|
|
$ |
675,298 |
|
|
$ |
751,028 |
|
|
$ |
664,781 |
|
|
$ |
556,216 |
|
Long-term debt, including current portion |
|
|
553,309 |
|
|
|
539,350 |
|
|
|
539,641 |
|
|
|
432,996 |
|
|
|
438,213 |
|
29
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and related notes and the other financial information included elsewhere in this Form
10-K.
Important Changes to Presentation
In the quarter ended March 31, 2010, we identified a cumulative adjustment which reduced wireline
revenue by $5.8 million and wireline income tax expense of $2.4 million over a five year period
beginning January 1, 2005. The adjustment was determined to be an immaterial error in the
calculation of a regulatory liability payable to the Universal Service Administration Company
(USAC) for high cost loop support, and the related income tax expense. We concluded that these
errors were not material to any of its prior period financial statements under the guidance of SEC
Staff Accounting Bulletin (SAB) No. 99 Materiality. Although the errors were and continue to be
immaterial to prior periods, because of the significance of the out of period correction in the
first quarter of 2010, we applied the guidance of SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, and
revised its prior period financial statements. In addition to an increase of $3.1 million in the
Companys accumulated deficit on December 31, 2008, the schedules that follow recast the immaterial
error to reflect the balances as if they had been recorded in the proper periods.
The following schedule presents a reconciliation of the effects of the adjustments made to our
previously reported balance sheet line items for December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
(in thousands) |
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Noncurrent deferred income taxes |
|
$ |
111,625 |
|
|
$ |
2,369 |
|
|
$ |
113,994 |
|
Total assets |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
Accounts payable, accrued and
other current liabilities |
|
|
62,887 |
|
|
|
5,764 |
|
|
|
68,651 |
|
Total current liabilities |
|
|
73,031 |
|
|
|
5,764 |
|
|
|
78,795 |
|
Total liabilities |
|
|
639,494 |
|
|
|
5,764 |
|
|
|
645,258 |
|
Accumulated deficit |
|
|
(154,077 |
) |
|
|
(3,395 |
) |
|
|
(157,472 |
) |
Total stockholders equity |
|
|
33,435 |
|
|
|
(3,395 |
) |
|
|
30,040 |
|
Total liabilities and stockholders equity |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
The following schedule presents a reconciliation of the effects of the adjustments made to our
previously reported annual consolidated statements of operations for the twelve months ended
December 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
(in thousands) |
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Operating revenues |
|
$ |
346,508 |
|
|
$ |
(468 |
) |
|
$ |
346,040 |
|
|
$ |
351,138 |
|
|
$ |
(1,456 |
) |
|
$ |
349,682 |
|
Operating income |
|
|
33,045 |
|
|
|
(468 |
) |
|
|
32,577 |
|
|
|
14,830 |
|
|
|
(1,456 |
) |
|
|
13,374 |
|
Income (loss) before
income
tax (benefit) expense |
|
|
(5,275 |
) |
|
|
(468 |
) |
|
|
(5,743 |
) |
|
|
(17,792 |
) |
|
|
(1,456 |
) |
|
|
(19,248 |
) |
Income tax benefit
(expense) |
|
|
1,982 |
|
|
|
192 |
|
|
|
2,174 |
|
|
|
6,975 |
|
|
|
599 |
|
|
|
7,574 |
|
Income (loss) before extraordinary
item, net of taxes |
|
|
(3,293 |
) |
|
|
(276 |
) |
|
|
(3,569 |
) |
|
|
(10,817 |
) |
|
|
(857 |
) |
|
|
(11,674 |
) |
Net income (loss) |
|
|
34,053 |
|
|
|
(276 |
) |
|
|
33,777 |
|
|
|
(10,817 |
) |
|
|
(857 |
) |
|
|
(11,674 |
) |
30
The following schedule presents a reconciliation of the effects of the adjustments made to our
previously reported consolidated statements of cash flows for the twelve months ended December 31,
2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
(in thousands) |
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Net income |
|
$ |
34,053 |
|
|
$ |
(276 |
) |
|
$ |
33,777 |
|
|
$ |
(10,817 |
) |
|
$ |
(857 |
) |
|
$ |
(11,674 |
) |
Deferred income taxes |
|
|
(1,982 |
) |
|
|
(192 |
) |
|
|
(2,174 |
) |
|
|
(6,918 |
) |
|
|
(599 |
) |
|
|
(7,517 |
) |
Changes in operating
assets
and liabilities |
|
|
(2,279 |
) |
|
|
468 |
|
|
|
(1,811 |
) |
|
|
(10,385 |
) |
|
|
1,456 |
|
|
|
(8,929 |
) |
Additionally, on July 1, 2009, our incumbent local exchange carrier operations discontinued
accounting for regulated enterprises as prescribed by ASC Topic 980 Regulated Operations (ASC
980) and reassessed certain other related practices. As a result, we were required to:
|
|
|
recognize an extraordinary item as a result of the extinguishment of all our
jurisdictional assets and liabilities net of the liability representing our asset
retirement obligation in accordance with ASC Topic 410 Asset Retirement and
Environmental Obligations (ASC 410); |
|
|
|
|
eliminate all intercompany transactions; |
|
|
|
|
reclassify bad debt expense as a component of Selling, General and Administrative
(SG&A); and |
|
|
|
|
make certain other reclassifications in the Consolidated Statement of Operations to
separate operating expenses into cost of services and sales and SG&A. |
The discussion that follows in this Item 7Managements Discussion and Analysis of Financial
Condition and Results of Operations, unless otherwise specifically indicated, takes these
foregoing changes into account.
Overview
The sections that follow provide information about important aspects of our operations and
investments and include discussions of our results of operations, financial condition and sources
and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent
practicable. The content and organization of the financial and non-financial data presented in
these sections are consistent with information we use in evaluating our own performance and
allocating our resources. We also monitor the state of the economy in general. In doing so, we
compare Alaskan economic activity with broader economic conditions. In general, we believe that the
Alaskan telecommunications market, as well as general economic activity in Alaska, is affected by
certain economic factors, which include:
|
|
|
activity in the oil and gas markets; |
|
|
|
|
tourism levels; |
|
|
|
|
military activity; |
|
|
|
|
the cost of long-haul telecommunications bandwidth; |
|
|
|
|
local customer preferences; |
|
|
|
|
average usage of Internet technology: |
|
|
|
|
unemployment levels; and |
|
|
|
|
housing activity. |
We have observed variances in the factors affecting the Alaskan economy as compared to the U.S. as
a whole. Some factors, particularly the price of oil and gas, may have the opposite effect on the
Alaskan economy than the U.S. economy as a whole. In forecasting the local economic conditions that
affect us, we take particular note of these factors.
We have also responded to the difficult market conditions experienced throughout the fiscal years
ended December 31, 2009 and 2010 in the U.S. as a whole. During that time, our management developed
and executed a cost reduction plan designed to aggressively reduce costs while seeking to
reallocate resources to growth areas of our business.
31
Strategy
Our results of operations, financial position and sources and uses of cash in the current and
future periods reflect our focus on the following strategic imperatives:
Emphasis on Top-Line Growth
We emphasize revenue growth as well as growth in net cash provided by operating activities. We
devote more resources to higher growth markets such as wireline broadband connections, including
our long-haul fiber optic cables connecting our network to the contiguous states, as well as
expanded strategic services to business markets and wireless broadband, rather than to the
traditional wireline voice market.
Investment with Discipline
We focus on gaining market share in those markets that contain high revenue producing customers. In
our wireline business, we focus on deploying and selling broadband connections to enterprise
customers in each market covered by our network. We have targeted investment in deploying
high-speed fiber conductivity in and between Alaskas urban centers. We invested heavily in
interstate capacity through our acquisition of Crest and construction of AKORN. We have
increasingly targeted carrier voice and customers with demand for sophisticated data solutions.
Revenues from these customers grew 7.1% compared with last year, primarily driven by sales of
advanced IP services and increases in revenues from agreements with carriers to terminate their
Alaskan long distance traffic. We have directed resources towards offering wireless plans that
encourage customer adoption of data services, large monthly minute postpaid plans and unlimited
postpaid plans. By directing resources carefully, we seek to distinguish ourselves from our
competitors in a cost effective way.
Grow our Connect / Host / Managesm Offerings
We seek to drive increased enterprise sales both inside and outside of the state with our extensive
Alaskan network, the development of our data hosting and server collocations products and our 49%
investment in TekMate. Ultimately, this strategy is aimed to develop both geographic and line of
business expansion.
Continuous Enhancement of Products and Services
We intend to continue to introduce new services that draw upon our core competencies and that we
believe will be attractive to our target customers. In considering new services, we look for market
opportunities that we believe present significant growth opportunities, such as our investments in
our AKORN and Northstar cable systems and our first-to-market deployment of 3G services. We also
plan to selectively pursue acquisitions that will enable us to broaden our service offerings.
Process Improvement to Achieve Operational Excellence
While focusing resources on revenue growth and market share gains, we continually challenge our
management team and employees at all levels to lower expenses and enhance the customer experience.
We have made certain investments in web based sales and service capabilities in 2010 and we expect
to maintain our focus on (a) building necessary infrastructure and (b) front-line employee driven
process improvement aimed at excellence in customer experience.
Pay for Performance
We embrace a culture of urgency and accountability. We establish goals for all of our employees
that are tied to the imperatives described above. We seek to provide our non-represented employees
cash incentives and equity compensation that are tied to these goals. We design executive
compensation programs carefully to align executives and stockholders long-term interests.
Careful Cash Flow Management
We aim to create value for our shareholders by carefully investing cash flows generated by the
business in specific opportunities and transactions that support these imperatives. In addition, we
use our cash flows to maintain and grow our dividend payout to shareholders. In light of continued
uncertainty in the U.S. credit markets, our Board of Directors has continued to maintain our
current $0.86 per share annual dividend policy. Under this policy, we returned $38.4 million in
cash dividends to our stockholders during 2010.
32
Revenue Sources by Segment
Wireline
Revenue from our wireline business services is generated from enterprise, retail and wholesale
customer segments as well as from the provision of network access services to interexchange and
wireless carriers.
Enterprise
We generate enterprise revenue from:
|
|
|
multi-site business customers and state and federal governments by providing
connectivity, hosting and collocation services; and advanced network services; and |
|
|
|
|
other carriers by providing capacity and transport services; and local and long
distance private line and data services. |
Retail
We generate revenue from retail residential and business customers primarily from:
|
|
|
basic local telephone service including features to customers within our service
areas; |
|
|
|
|
ISP services including DSL and dial up; |
|
|
|
|
long distance services; and |
|
|
|
|
CPE sales to business customers. |
The number of local telephone customers we serve continues to steadily decline. We expect this
trend to continue.
The table below sets forth subscriber numbers as of December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Local telephone |
|
|
156,653 |
|
|
|
163,914 |
|
|
|
174,524 |
|
Annual growth rate |
|
|
-4.4 |
% |
|
|
-6.1 |
% |
|
|
-6.0 |
% |
DSL |
|
|
45,698 |
|
|
|
46,612 |
|
|
|
47,648 |
|
Annual growth rate |
|
|
-2.0 |
% |
|
|
-2.2 |
% |
|
|
0.3 |
% |
Dial up |
|
|
4,262 |
|
|
|
5,565 |
|
|
|
6,741 |
|
Annual growth rate |
|
|
-23.4 |
% |
|
|
-17.4 |
% |
|
|
-26.1 |
% |
Long distance |
|
|
59,166 |
|
|
|
61,469 |
|
|
|
64,252 |
|
Annual growth rate |
|
|
-3.7 |
% |
|
|
-4.3 |
% |
|
|
-1.5 |
% |
Wholesale Business
We generate revenue from wholesale customers primarily from:
|
|
|
providing competitive local service to CLECs on either a wholesale or UNE basis as
prescribed under the Telecommunications Act; |
|
|
|
|
carrier billing and collection services; and |
|
|
|
|
providing carriers with access to space and power at our central office locations. |
The number of telephone lines we serve on a wholesale basis has continued to decline. The rate of
wholesale line loss has generally outpaced the rate of retail line loss and has accelerated since
2005. This accelerated decline is primarily a result of a specific CLEC customer migrating its
customers onto its own cable telephony plant. The table below sets forth subscriber numbers as of
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
UNE and resale local |
|
|
15,780 |
|
|
|
21,625 |
|
|
|
26,844 |
|
Annual growth rate |
|
|
-27.0 |
% |
|
|
-19.4 |
% |
|
|
-34.0 |
% |
33
Network Access Business
Our LECs provide access service to numerous interexchange carriers and may also bill and collect
long distance charges from interexchange carrier customers on behalf of the interexchange carriers.
The amount of access charge revenue associated with a particular interexchange carrier varies
depending on long distance calling patterns and the relative market share of each long distance
carrier. The major sources of network access revenue are:
|
|
|
interstate access charges; |
|
|
|
|
intrastate access charges; |
|
|
|
|
federal USF support; and |
|
|
|
|
wireless carrier access charges. |
Wireless
Our business provides wireless voice, data and other value-added services across our owned and
operated network in Alaska and across the contiguous states, Hawaii and Canada with our roaming
partners. We generate wireless revenue primarily from:
|
|
|
sale of pre-paid and post-paid wireless voice plans to our Alaskan subscribers; |
|
|
|
|
sale of value-added feature services, including data, to our Alaskan subscribers; |
|
|
|
|
equipment sales; |
|
|
|
|
providing the contiguous states and Canadian carriers with roaming access to our
network for their subscribers; and |
|
|
|
|
CETC subsidies. |
While our wireless business had been a principal driver of revenue growth since 2005, with an
increase in competition, higher penetration rates and limited access to data centric devices, we
continue to experience subscriber losses in 2010.
The table below sets forth subscriber numbers as of December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Retail wireless |
|
|
120,178 |
|
|
|
137,072 |
|
|
|
147,793 |
|
Annual growth rate |
|
|
-12.3 |
% |
|
|
-7.3 |
% |
|
|
2.3 |
% |
Wholesale wireless |
|
|
235 |
|
|
|
293 |
|
|
|
346 |
|
Annual growth rate |
|
|
-19.8 |
% |
|
|
-15.3 |
% |
|
|
-82.7 |
% |
34
Results of Operations
The following table summarizes our operations for the years ended December 31, 2010, 2009 and 2008.
Net income for the year ended December 31, 2010 was affected by $29.7 million additional income tax
expense for the effects of the on-going Crest IRS audit, and $13.3 million in extinguishment of
debt expenses arising from the extinguishment of our 2005 credit facility and related interest rate
swaps. Net income for the year ended December 31, 2009 was affected by a $37.3 million
extraordinary gain related to the write-off of jurisdictional assets and liabilities required by
the discontinuance of regulatory accounting while net income for the year ended December 31, 2008
was affected by an impairment charge on goodwill and intangible assets of $29.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise |
|
$ |
48,571 |
|
|
$ |
45,360 |
|
|
$ |
34,187 |
|
Retail |
|
|
82,658 |
|
|
|
85,506 |
|
|
|
89,283 |
|
Wholesale |
|
|
9,441 |
|
|
|
11,485 |
|
|
|
14,369 |
|
Access |
|
|
60,253 |
|
|
|
62,669 |
|
|
|
69,729 |
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
200,923 |
|
|
|
205,020 |
|
|
|
207,568 |
|
Wireless |
|
|
140,601 |
|
|
|
141,020 |
|
|
|
142,114 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
341,524 |
|
|
|
346,040 |
|
|
|
349,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
75,595 |
|
|
|
82,477 |
|
|
|
73,194 |
|
Selling, general and administrative |
|
|
65,527 |
|
|
|
67,373 |
|
|
|
75,409 |
|
Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
55,267 |
|
|
|
53,652 |
|
|
|
58,829 |
|
Selling, general and administrative |
|
|
23,037 |
|
|
|
24,276 |
|
|
|
24,483 |
|
Depreciation and amortization |
|
|
72,078 |
|
|
|
81,358 |
|
|
|
74,002 |
|
Loss on disposal of assets |
|
|
2,846 |
|
|
|
4,327 |
|
|
|
750 |
|
Loss on impairment of goodwill and intangible assets |
|
|
|
|
|
|
|
|
|
|
29,641 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
294,350 |
|
|
|
313,463 |
|
|
|
336,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
47,174 |
|
|
|
32,577 |
|
|
|
13,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,754 |
) |
|
|
(38,411 |
) |
|
|
(34,072 |
) |
Loss on extinguishment of debt |
|
|
(13,339 |
) |
|
|
|
|
|
|
|
|
Interest income |
|
|
83 |
|
|
|
91 |
|
|
|
1,695 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(48,010 |
) |
|
|
(38,320 |
) |
|
|
(32,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit (expense) |
|
|
(836 |
) |
|
|
(5,743 |
) |
|
|
(19,248 |
) |
Income tax benefit (expense) |
|
|
(29,852 |
) |
|
|
2,174 |
|
|
|
7,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item |
|
|
(30,688 |
) |
|
|
(3,569 |
) |
|
|
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extraordinary item, net of taxes |
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(30,688 |
) |
|
$ |
33,777 |
|
|
$ |
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
35
Year ended December 31, 2010 Compared to the Year ended December 31, 2009
Operating Revenues
Wireline
Enterprise: Enterprise revenue increased $3.2 million or 7.1% in 2010, primarily due to an increase
of $6.6 million in data sales which was offset, in part, by a $1.8 million decline in revenue from
an expired capacity swap and a $1.6 million decline in carrier voice revenue. We expect enterprise
revenues to continue to increase as we gain share in the provisioning of IP data services to
carrier, federal and commercial customers and we roll out our Connect/Host/Managesm
solution set.
Retail: Declines in retail switched access lines in service during 2010 were concentrated in the
residential market which we believe continues to be impacted by wireless substitution. Retail
revenue decreased $2.8 million, or 3.3%, year over year primarily due to a $2.1 million decline in
local exchange revenue associated with residential line losses, a $1.0 million decline in long
distance sales and a $1.0 million net decrease in revenue for the release of company liabilities
for commercial developer deposits. These losses were offset, in part, by a $1.3 million increase in
revenue from our existing ISP subscriber base.
Wholesale: Wholesale revenues decreased by $2.0 million, or 17.8%, over the prior year due to
continued decline in line counts. We believe this decline is primarily attributable to the ongoing
migration of lines by our key competitor to its propriety cable telephony plant and the decision of
another competitor, and wholesale customer, to exit the market. We expect wholesale revenue will
continue to decline.
Access: Access revenue declined $2.4 million, or 3.9%, primarily due to higher out of period
settlements in 2009.
Wireless
Wireless revenue decreased slightly to $140.6 million in 2010 as compared to $141.0 in 2009. Voice
revenue decreased $9.3 million consistent with the 12.3% decline in subscribers from 137,365 to
120,413, due in part to limited access to certain data centric handsets. Additionally, equipment
and accessory revenue declined $1.1 million. Offsetting these decreases were increases of $7.3
million in roaming revenue from non-ACS customers, $2.6 million in data revenue due to the rapid
adoption of smart phones and the growing popularity of data rich features.
Operating Expense
Wireline
Wireline operations include local telephone, Internet, interexchange and cable systems operating
costs.
Cost of Services and Sales: Wireline cost of services and sales decreased $6.9 million to $75.6
million in 2010 primarily due to a $6.2 million decrease in labor expense resulting from an overall
reduction in our workforce and lower cash and stock compensation incentive payments. Additionally,
we experienced decreases of $1.4 million in maintenance contracts, $0.7 million in paystation
expenses, $0.5 million in land and building related charges and $0.2 million in ISP access and
leased circuits. These decreases were partially offset by increases of $1.3 million in advanced
network services expense and $0.8 million in long distance COGS.
Selling, General and Administrative Costs: Wireline SG&A expenses decreased $1.8 million to $65.5
million in 2010. These decreases include a $2.1 million reduction in bad debt expense in the
current year driven by a $1.2 million out of period true up to our allowance for uncollectible
accounts in 2009, and improved collection processes in 2010 and a $1.1 million decrease in labor
costs resulting from the overall reduction in our general work force. Additionally, the prior year
was affected by a $1.0 million charge related to the repudiation of a contract commitment from a
bankrupt vendor. Offsetting these decreases were increases of $1.6 million in advertising expense
and $0.6 million in legal and IT consulting in 2010 and the non-recurrence of a $0.4 million
favorable property tax settlement in 2009.
Wireless:
Cost of Services and Sales: Wireless costs of services and sales increased $1.6 million to $55.3
million in 2010 driven primarily by increases of $2.2 million in handset, accessory and data
content expenses partially offset by a $0.9 million decrease in network costs.
36
Selling, General and Administrative: Wireless SG&A expenses decreased $1.2 million in 2010 driven
by a shift in advertising expense from our wireless segment to our wireline segment with more brand
versus product advertising.
Depreciation and Amortization:
Depreciation and amortization expense decreased 11.4% in 2010 to $72.1 million as compared to $81.4
million in 2009. The decrease from the same period in the prior year was primarily due to a number
of pooled asset classes reaching their maximum depreciable lives and a reduction in depreciable
value in the assets purchased from Crest Communications resulting from the reallocation of purchase
price from fixed assets to deferred tax assets under purchase accounting. These declines were
partially offset by the acceleration of depreciation on certain wireless assets and other additions
to our asset base.
Loss on Disposal of Assets
The loss on disposal of certain property was $2.8 million in 2010 and $4.3 million in 2009.
Impairment charges for certain IT projects were the primary driver of expense in both years.
Other Income and Expense:
Other income and expense for 2010 is a net expense which increased to $48.0 million as compared to
a net expense of $38.3 million in 2009. The net increase of $9.7 million in expense over the prior
year is primarily due to the early termination of out-of-the-money interest rate swaps and the
extinguishment of our 2005 senior credit facility which resulted in a $13.3 million loss on
extinguishment of debt. Offsetting this increase was a net decrease in interest expense following
the expiration of certain out-of-the-money swaps.
Income Taxes
Income taxes are currently being calculated using our estimated effective tax rate for the year
ended December 31, 2010 of 33.5% exclusive of the $29.7 million additional income tax expense
recorded in the second quarter for the effects of the on-going Crest IRS audit. PART I, Item 3,
Legal Proceedings for more information on the IRS issue. At December 31, 2010 we had federal NOL
carry forwards of $150.4 million and state NOLs of $147.0 million. Income tax expense will not
involve a significant cash outflow until these NOLs are exhausted.
Extraordinary Item
In 2009, the discontinuance of regulatory accounting required us to write off all previously held
jurisdictional assets and liabilities. As our jurisdictional liability represented the regulatory
equivalent of an asset retirement obligation (ARO), we also assessed our regulatory assets to
determine the ARO required under ASC 410. The impact of extinguishing our jurisdictional liability,
net of the portion of the liability representing the ARO for regulated assets required by ASC 410,
was recorded as an extraordinary gain of $37.3 million, net of taxes.
Net Income (loss)
Our net loss was $30.7 million in 2010 compared to net income of $33.8 million in 2009. The year
over year change from net income to net loss primarily reflects the $29.7 million additional income
tax expense recorded for the effects of the Crest IRS audit in 2010 compared to the $37.3 million
extraordinary gain recognized in 2009 relating to the extinguishment of our jurisdictional
liability.
Year ended December 31, 2009 Compared to the Year ended December 31, 2008
Operating Revenues
Wireline
Enterprise: Enterprise revenue increased $11.2 million, or 32.7%, in 2009, primarily reflecting our
commercial launch of AKORN in April 2009 and our acquisition of Crest in October 2008, which
together positioned ACS to capture a greater share of the carrier customer voice and commercial
data market in the contiguous states. We experienced an increase of $14.1 million in data sales
which was offset, in part, by a $2.1 million decline in wholesale carrier voice revenue and a $1.1
million decline in revenue from an expired capacity exchange agreement with another carrier. We
expect enterprise revenues to increase as we gain share in the provision of IP data services to
carrier, federal and commercial customers.
Retail: Retail revenue decreased by $3.8 million, or 4.2%, to $85.5 million in 2009. Declines in
retail switched access lines in service in 2009 were concentrated in the residential market which
we believe is impacted by
37
wireless substitution. Retail revenue decreased primarily due to $2.4 million declines in local
exchange revenue associated with residential line losses, a $1.5 million decline in CPE sales to
businesses and a $1.4 million decline in long distance sales. These losses were offset, in part, by
a $0.9 million increase in revenue from our existing ISP subscriber base and a $1.2 million release
of company liabilities for deposits made by commercial developers.
Wholesale: Wholesale revenues decreased by $2.9 million, or 20.1%, in 2009. We believe this
decrease is primarily attributable to the on-going migration of lines by our key competitor to its
proprietary cable telephony plant. We expect that wholesale revenue will continue to decline.
Access: Access revenue declined $7.1 million, or 10.1%, primarily reflecting lower levels of
eligible cost recovery, lines in service, traffic sensitive activity levels and reserve
adjustments. We expect access revenues to continue to decline over time.
Wireless
Wireless revenue declined 0.8% to $141.0 million in 2009 as compared to $142.1 in 2008. Voice
revenue declined $7.0 million consistent with the 7.3% decline in subscribers from 148,139 to
137,365, largely due to limited access to data centric handsets. Equipment and accessory revenue
declined $3.0 million and roaming revenue from non-ACS customers decreased $1.2 million. Offsetting
these decreases were increases of $6.4 million in CETC revenue, and $3.7 million in data revenue
due to the adoption of smart phones and the growing popularity of data rich features.
Operating Expense
Wireline
Wireline operations include local telephone, Internet, interexchange and cable systems operating
costs.
Cost of Services and Sales: Wireline cost of services and sales increased $9.3 million to $82.5
million in 2009 primarily reflecting a $2.2 million increase in labor, $2.0 million increase in
service contracts and $1.4 million increase in land and building charges, which were all primarily
related to our new cable operations. Additionally, we experienced an increase of $1.8 million in
ISP access and leased circuits, $0.7 million in DSL COGS, and $0.6 million in legal expenses and a
favorable property tax settlement of $0.4 million.
Selling, General and Administrative Costs: Wireline SG&A expenses decreased $8.0 million to $67.4
million due to $8.0 million in labor expenses, inclusive of a $5.0 decrease in stock compensation
expense, and a $1.7 million decline in advertising expenses. Offsetting these decreases was an
increase in bad debt expense of $0.7 million primarily driven by an out of period true up to our
allowance for uncollectible accounts and a $1.0 million charge related to the repudiation of a
contract commitment from a bankrupt vendor.
Wireless
Cost of Services and Sales: Wireless costs of services and sales decreased $5.2 million to $53.7
million primarily driven by reductions of $3.3 million in handset, accessory and data content
expense and $1.4 million in costs associated with backhaul for our wireless footprint.
Selling, General and Administrative: Wireless SG&A expenses in 2009 were $24.3 million as compared
to $24.5 million in 2008, with a $2.0 million increase in advertising expense offsetting a $1.6
million decrease in labor expenses.
Depreciation and Amortization:
Depreciation and amortization expense increased 9.9% in 2009 to $81.4 million as compared to $74.0
million in 2008. The increase reflects the change in maximum reserve levels on our regulated
subsidiary assets resulting in an increase in expense as depreciation recommenced for residual
values in asset classes that had previously been fully depreciated under regulatory accounting.
Also contributing to the increase in depreciation expense was the increase in our depreciable asset
base due to the addition of AKORN in the second quarter of 2009 and the Crest assets during the
fourth quarter of 2008.
Loss on Disposal of Assets:
The loss on disposal of certain property was $3.6 million higher than the prior year primarily due
to impairment charges for certain IT projects.
38
Loss on Impairment of Goodwill and Intangible Assets:
As a result of our impairment test in the fourth quarter of 2008, we determined that $29.6 million
of goodwill and intangibles were impaired on our wireline segment. The goodwill impairment charge
was primarily driven by adverse equity market conditions, the industry transition from wireline to
wireless products and services, decreases in current market multiples and the decline in our stock
price throughout 2008. This charge reduced goodwill, but does not impact our overall business
operations or cash flows. The tax benefit derived from recording the impairment charge was recorded
as a deferred income tax asset.
Other Income and Expense
Other income and expense for 2009 is a net expense which increased to $38.3 million as
compared to a net expense of $32.6 million in 2008. The $5.7 million net increase compared to 2008
is due to reductions of capitalized interest on fixed assets in the course of construction
following the commercial launch of AKORN in April 2009, higher interest expense on the $125.0
million 5.75% Convertible Notes issued April 8, 2008, and a decline in interest income due to a
reduced amount of excess investible cash. Affecting interest expense on the $125.0 million, 5.75%
Convertible Notes was the adoption of Financial Accounting Standards Board (FASB) FASB Staff
Position (FSP) 14-1, Accounting for Convertible Debt that may be Settled in Cash Upon Conversion
(ASC Topic 470-20, Debt with Conversion and Other Options) on January 1, 2009. The adoption of FASB
FSP 14-1 required us to separate the portion of the debt that is related to the conversion feature
from the portion related to the debt feature. The portion of the debt related to the conversion
feature is considered equity and the principal amount of the debt is discounted by the equity
portion. The discount is amortized over the life of the debt as additional interest expense
resulting in non-cash interest expense of $4.4 million and $2.9 million in 2009 and 2008,
respectively.
Income Taxes
Income taxes are currently being calculated using our estimated effective tax rate for the
year ended December 31, 2009 of 37.6%. At December 31, 2009 we had federal tax NOL carry forwards
of approximately $174.2 million and state NOL carry forwards of $150.8 million. Income tax expense
will not involve a significant cash outflow until these NOLs are exhausted.
Extraordinary Item
The discontinuance of regulatory accounting required us to write off all previously held
jurisdictional assets and liabilities. As our jurisdictional liability represented the regulatory
equivalent of an asset retirement obligation, we also assessed our regulatory assets to determine
the ARO required under ASC 410. The impact of extinguishing our jurisdictional liability, net of
the portion of the liability representing the ARO for regulated assets required by ASC 410, was
recorded as an extraordinary gain of $37.3 million, net of taxes.
Net Income (loss)
Net income was $33.8 million in 2009 compared to a net loss of $11.7 million in 2008. The year
over year change from net loss to net income primarily reflects the $37.3 million extraordinary
gain recognized in 2009 relating to the extinguishment of our jurisdictional liability, compared to
a goodwill impairment charge of $29.6 million assessed against our wireline segment in 2008.
39
Liquidity and Capital Resources
A summary of significant sources and use of funds for the years ended December 31, 2010 and 2009 is
as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
86,367 |
|
|
$ |
96,680 |
|
Net change in funds held in restricted accounts |
|
$ |
931 |
|
|
$ |
14,674 |
|
Investment in construction and capital expenditures |
|
$ |
(38,336 |
) |
|
$ |
(54,209 |
) |
Change in unsettled construction and capital expenditures |
|
$ |
(2,534 |
) |
|
$ |
(7,155 |
) |
Proceeds on sale of assets |
|
$ |
1,085 |
|
|
$ |
|
|
Purchase of equity investment |
|
$ |
(2,060 |
) |
|
$ |
|
|
Acquisitions, net of cash acquired |
|
$ |
|
|
|
$ |
(440 |
) |
Net borrowings (repayments) |
|
$ |
8,978 |
|
|
$ |
(5,882 |
) |
Debt issuance costs |
|
$ |
(7,276 |
) |
|
$ |
|
|
Payment of cash dividend on common stock |
|
$ |
(38,394 |
) |
|
$ |
(38,089 |
) |
Interest paid |
|
$ |
(28,911 |
) |
|
$ |
(35,488 |
) |
Sources
Sources in General
We have satisfied our cash requirements for the year ended December 31, 2010 for operations,
capital expenditures and debt service primarily through internally generated funds and other
financing activities, including use of funds drawn from our revolving credit facility. For the year
ended December 31, 2010, our net cash flows provided by operating activities were $86.4 million
inclusive of $11.1 million in cash charges for the early extinguishment of interest rate swaps
arising from the extinguishment of our 2005 senior credit facility. At December 31, 2010, we had
$15.3 million in cash and cash equivalents and $4.9 million in restricted cash.
On October 21, 2010, we entered into a new $470.0 million senior credit facility which consists of
a drawn term loan of $440.0 million and an undrawn revolving loan of $30.0 million (the
revolver). The 2010 senior credit facility generated net proceeds of approximately $2.4 million
after repaying in full, and retiring, our 2005 senior credit facility and deducting fees and
expenses associated with the debt issuance of $7.3 million. The $440.0 million term loan generally
bears interest at LIBOR plus 4.0% per annum or 5.5%, whichever is greater, has a term of six years
and is be repayable in quarterly installments equal to 0.25% of the original principal amount of
the term loan, with the remainder to be paid on the term maturity date. The revolver has a term of
five years and to the extent it is drawn, also generally bears interest at LIBOR plus 4.0% per
annum or 5.5%, whichever is greater, and, to the extent undrawn, has commitment fees equal to
0.625% per annum. The term loan matures on October 21, 2016 and the revolver matures on October 21,
2015.
In connection with the 2010 senior credit facility, we entered into forward floating-to-fixed
interest rate swaps and a buy back of the 1.5% LIBOR floor as a component of our cash flow hedging
strategy. The notional amounts of the swaps are $192.5 million, $115.5 million and $77.0 million,
respectively, with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a 4.0%
LIBOR spread. The swaps begin on June 30, 2012 and continue through September 30, 2015. In order to
protect against extreme movements in LIBOR prior to the start of the swaps, we also acquired an
interest rate cap at a cost of $0.1 million for the period between January 1, 2011 and June 30,
2012, capping LIBOR at 3.0% on a notional principle amount of $385.0 million.
The net proceeds of the 2010 senior credit facility were used to repay in full, and retire, the
2005 senior credit facility. As a result, we incurred a charge of approximately $2.2 million by of
writing off unamortized debt issuance costs in association with the early extinguishments of debt
during the fourth quarter of 2010.
As of December 31, 2010, total long-term obligations outstanding, including current portion, were
$553.3 million consisting of a $435.7 million draw from our new senior credit facility, net of a
$4.3 debt discount, $112.4 million of convertible notes, net of a $12.6 million debt discount, and
$5.2 million in capital lease obligations. As of December 31, 2010, we had full access to our $30.0
million revolving credit facility. We intend to access the capital markets to raise new debt to pay
down our $125.0 million convertible notes before December 19, 2012, as our 2010 senior secured
credit facility requires us to repay or refinance $100.0 million of these notes before this date.
40
Senior Credit Facility
Our senior credit facility contains a number of restrictive covenants and events of default,
including covenants limiting capital expenditures, incurrence of debt and payment of dividends. The
senior credit facility also requires that we achieve certain financial ratios quarterly including a
total leverage ratio, senior secured leverage ratio and a fixed charge coverage ratio and we are
currently operating comfortably within these restrictions. These measures are defined more
specifically below:
Total Leverage Ratio: Our total leverage ratio may not exceed 5.25 to 1. Total
leverage ratio means, generally, as at the last day of any fiscal quarter, the ratio of our (a)
total debt to (b) Adjusted EBITDA (more specifically defined below) for the period of four of our
consecutive fiscal quarters ended on such date, all determined on a consolidated basis in
accordance with Generally Accepted Accounting Principles. Further, the credit agreement calls for a
suspension of dividends if, for the most recently ended period of four consecutive fiscal quarters,
the total leverage ratio is equal to or greater than 5.00:1.00.
Senior Secured Leverage Ratio: Our senior secured leverage ratio may not exceed 4.40 to 1.
Senior Secured Leverage Ratio means, as of the last day of any fiscal quarter, the ratio of our
(a) senior secured debt to (b) Adjusted EBITDA (more specifically defined below).
Fixed
Charges Coverage Ratio: Our fixed charges coverage
ratio may not be less than 2.75 to 1. The
ratio of (a) Adjusted EBITDA to (b) Fixed Charges is defined specifically in our senior credit
facility, and more generally, below:
Adjusted EBITDA means, consolidated net income, plus the sum of:
|
|
|
consolidated interest expense; |
|
|
|
|
provision for income taxes based on income; |
|
|
|
|
depreciation and amortization expense, |
|
|
|
|
unrealized losses on financial derivatives |
|
|
|
|
non-cash, stock-based compensation expense, |
|
|
|
|
extraordinary, non-recurring or unusual losses; |
|
|
|
|
the cumulative effect of a change in accounting principles; and |
|
|
|
|
all other non-cash charges that represent an accrual for which no cash is expected
to be paid in the next twelve months; |
minus (to the extent included in determining consolidated net income) the sum of:
|
|
|
unrealized gains on financial derivatives; |
|
|
|
|
extraordinary, non-recurring or unusual gains; |
|
|
|
|
gains on sales of assets other than in the ordinary course of business; and |
|
|
|
|
all other non-cash income. |
Fixed charges means (a) cash interest expense plus (b) income tax.
Uses
Our networks require the timely maintenance of plant and infrastructure. Our historical
capital expenditures have been, and continue to be, significant. Cash outflows for capital
expenditures for the year ended December 31, 2010 were $40.9 million inclusive of $2.5 million in
net settlements of capital expenditure payables. New capital acquisition for 2010 totaled $38.3
million inclusive of $1.6 million in capitalized interest.
Future capital requirements may change due to impacts of regulatory decisions that affect our
ability to recover our investments, changes in technology, the effects of competition, changes in
our business strategy and our decision to pursue specific acquisition and investment opportunities.
We intend to fund future capital expenditures with cash on hand and net cash generated from
operations.
On August 31, 2010, for $2.1 million, we completed the purchase of a 49% equity interest in
TekMate, LLC, Alaskas largest privately owned information technology services company. Our
strategy is to combine our business broadband and other communications offerings with our newly
launched data hosting services and the information technology products of TekMate.
41
Cash interest expense, net of cash interest income, for 2010 was $28.9 million. Through a
series of interest rate swap transactions, interest on 87.5% of our new term loan is effectively
fixed at an annual rate of 6.5% for the period June 30, 2012 through September 30, 2015. Our $125.0
million convertible debt has a fixed coupon of 5.75%.
From time to time we may seek to retire, repurchase or exchange our convertible notes in open
market purchases, privately negotiated transactions dependent on market conditions, liquidity and
contractual obligations and other factors. The timing and amount of such purchases, if any, depend
upon cash needs and market conditions, among other things. While under the terms of our term loan
we may also be required to make certain prepayments based on annual gains in our restricted payment
baskets, we were not required and did not make term loan prepayments during 2010.
Since October 28, 2004, we have paid quarterly dividends on our common stock. During 2010 we paid
$38.4 million to common shareholders. Based on current shares outstanding at February 15, 2011 of
approximately 44.7 million shares and our current annual dividend policy of $0.86 per share,
maintenance of our current dividend policy would result in $38.5 million in cash being paid to
common stockholders over the next four quarters. Dividends on our common stock are not cumulative.
We believe that we will have sufficient cash on hand; cash provided by operations and available
borrowing capacity under our revolving credit facility to service our debt, pay our quarterly
dividends and fund our operations, capital expenditures and other obligations over the next twelve
months. Our ability to meet such obligations will be dependent upon our future financial
performance, which is, in turn, subject to future economic conditions and to financial, business,
regulatory and other factors, many of which are beyond our control.
Other Material Obligations and Commitments
Current accounting standards require us to disclose our material obligations and commitments to
make future payments under contracts, such as debt and lease agreements, and other contingent
commitments, such as debt guarantees.
Contractual Obligations
Our contractual obligations as of December 31, 2010, are in the following table. Generally,
long-term liabilities are included in the table based on the year of required payment or an
estimate of the year of payment. Such estimates of payment are based on a review of past trends for
these items as well as a forecast of future activities. Certain items were excluded from the
following table where the year of payment is unknown and could not be reasonably estimated.
Many of our other non-current liabilities have been excluded from the following table due to the
uncertainty of the timing of payments combined with the absence of historical trending to be used
as a predictor of such payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Total |
|
|
2011 |
|
|
2012-2013 |
|
|
2014-2015 |
|
|
Thereafter |
|
Long-term debt |
|
$ |
565,000 |
|
|
$ |
4,400 |
|
|
$ |
133,800 |
|
|
$ |
8,800 |
|
|
$ |
418,000 |
|
Interest on long-term debt |
|
|
157,652 |
|
|
|
32,285 |
|
|
|
57,671 |
|
|
|
48,026 |
|
|
|
19,670 |
|
Capital leases |
|
|
5,194 |
|
|
|
813 |
|
|
|
1,552 |
|
|
|
587 |
|
|
|
2,242 |
|
Operating leases |
|
|
88,999 |
|
|
|
8,619 |
|
|
|
15,200 |
|
|
|
13,729 |
|
|
|
51,451 |
|
Unconditional purchase obligations |
|
|
37,812 |
|
|
|
10,827 |
|
|
|
14,168 |
|
|
|
8,476 |
|
|
|
4,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
854,657 |
|
|
$ |
56,944 |
|
|
$ |
222,391 |
|
|
$ |
79,618 |
|
|
$ |
495,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing,
liquidity or market or credit risk support and we do not engage in leasing, hedging, research and
development services or other relationships that expose us to any material liabilities that are not
reflected on our balance sheet or included in Contractual Obligations above.
42
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements, in conformity with accounting principles
generally accepted in the United States of America, requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
We have identified certain policies and estimates as critical to our business operations and the
understanding of our past or present results of operations. We consider these policies and
estimates critical because they had a material impact, or they have the potential to have a
material impact, on our financial statements and they require significant judgments, assumptions or
estimates.
Regulatory and Intercompany Accounting
Our consolidated financial statements include all majority-owned subsidiaries. Prior to July 1,
2009, our local telephone company subsidiaries charged other subsidiaries based on regulated rates
for telecommunications services. Intercompany revenue between regulated local telephone companies
and all other subsidiaries were not eliminated upon consolidation, in accordance with the
accounting principles prescribed by ASC 980. Other intercompany balances were eliminated upon
consolidation.
As of July 1, 2009, we discontinued using the accounting principles prescribed by ASC 980.
Historically, consistent with the application of ASC 980 and industry practice, intercompany
revenues between our regulated local telephone companies and all other subsidiaries were not
eliminated upon consolidation. With the discontinuance of regulatory accounting we now eliminate
intercompany revenue between our regulated local telephone and all other subsidiaries. Further, we
revised our statement of operations to distinguish our cost of services and sales from our SG&A
expenses. Under ASC 980, we accounted for bad debt expense as a reduction of revenue. We now
account for bad debt expense as SG&A expense.
Revenue Recognition Policies
We recognize revenue for recurring services when earned, which is usually on a month-to-month
basis. We also recognize non-recurring revenues, including activation fees and usage sensitive
charges, when earned. Where we have determined that certain bundled products, including coupled
wireline and wireless services, constitute arrangements with multiple deliverables, we allocate and
measure using units of accounting and our judgment within the arrangement based on relative fair
values.
We recognize access revenue when we earn it. We participate in access revenue pools with other
telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the
FCC within the interstate jurisdiction. Much of the interstate access revenue is initially recorded
based on estimates. These estimates are derived from interim financial statements, available
separations studies and the most recent information available about achieved rates of return. These
estimates are subject to adjustment in future accounting periods as additional operational
information becomes available for us and the other telephone companies. To the extent that disputes
arise over revenue settlements, we defer revenue collected until settlement methodologies are
resolved and finalized. Although we have withdrawn from interstate access pools, we have a
remaining liability for certain periods prior to July 1, 2009.
Income Taxes
We use the asset-liability method of accounting for income taxes and account for income tax
uncertainties using the more-likely-than-not threshold. Under the asset-liability method,
deferred taxes reflect the temporary differences between the financial and tax bases of assets and
liabilities using the enacted tax rates in effect in the years in which the differences are
expected to reverse. In the future, our deferred tax assets may be reduced by a valuation allowance
if management determines it is more likely than not that the value of our deferred tax assets will
not be fully realized.
Derivative Financial Instruments
We recognize all asset or liability derivatives at fair value. The accounting for changes in fair
value is contingent on the intended use of the derivative and its designation as a hedge.
Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a
hedge, depending on the nature of the hedge, changes in fair value either offset the change in fair
value of the hedged assets, liabilities or firm commitments through earnings, or are recognized in
other comprehensive income until the hedged transaction is recognized in earnings. The change in a
derivatives fair value related to the ineffective portion of a hedge, if any, is
43
immediately recognized in earnings. We do not enter into any derivative contracts for speculative
purposes. On the date a derivative contract is entered into, we designate the derivative as either
a fair value or cash flow hedge. We formally assesses, both at the hedges inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of hedged items. If we determine that a
derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge,
we would discontinue hedge accounting prospectively.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13, Revenue
Recognition Multiple-Deliverable Revenue Arrangements a Consensus of the FASB Emerging Issues
Task Force. This statement provides principles for allocation of consideration among the
multiple-elements of the arrangement, allowing more flexibility in identifying and accounting for
separate deliverables. ASU 2009-13 introduces an estimated selling price method for valuing the
elements of a bundled arrangement if vendor-specific objective evidence or third party evidence of
selling price is not available, and significantly expands related disclosure requirements. This
standard is effective on a prospective basis for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this
pronouncement to have a material effect on our financial statements.
In October 2009, the FASB issued ASU No. 2009-14, Software Certain Revenues Arrangements That
Include Software Elements. The update was issued to clarify the accounting for revenue arrangements
that contain tangible products and software and how to segregate the revenue elements if the
software is more than incidental to the product as a whole. This update is effective for fiscal
years beginning on or after June 15, 2010. We do not expect the adoption of this pronouncement to
have a material effect on our financial statements.
44
Item 7A. Quantitative and qualitative disclosures about market risk
As of December 31, 2010, we had our 2010 senior credit facility and 5.75% convertible notes
outstanding. These on-balance sheet financial instruments, to the extent they provide for variable
rates of interest, expose us to interest rate risk, with the primary interest rate risk exposure
resulting from changes in LIBOR or the prime rate, which are used to determine the interest rates
that are applicable to borrowings under our senior credit facility.
The following table provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2010. To the extent that our financial
instruments expose us to interest rate risk, they are presented within each market risk category in
the table below. The table presents principal cash flows and related expected interest rates by
year of maturity for our 2010 senior credit facility, 5.75% convertible notes due in 2013 and
capital leases and other long-term obligations outstanding at December 31, 2010. Weighted average
variable rates for the 2010 senior credit facility are based on implied forward rates in the LIBOR
yield curve as of December 31, 2010. Fair values as of December 31, 2010 included herein have been
determined based on (i) quoted market prices for the 2010 senior credit facility and (ii) quoted
market prices for the 5.75% convertible notes. Our consolidated financial statements contain
descriptions of the 2010 senior credit facility, 5.75% convertible notes and capital leases and
other long-term obligations and should be read in conjunction with the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
($ in thousands) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Value |
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 bank credit
facility |
|
$ |
4,400 |
|
|
$ |
4,400 |
|
|
$ |
4,400 |
|
|
$ |
4,400 |
|
|
$ |
4,400 |
|
|
$ |
418,000 |
|
|
$ |
440,000 |
|
|
$ |
440,100 |
|
Weighted average
interest rate
(var) |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
6.21 |
% |
|
|
7.08 |
% |
|
|
7.90 |
% |
|
|
8.42 |
% |
|
|
6.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.75% convertible
notes due 2013 |
|
$ |
|
|
|
$ |
125,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
125,000 |
|
|
$ |
117,710 |
|
Average interest
rate (fixed) |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Captial lease and
other long-term |
|
$ |
813 |
|
|
$ |
905 |
|
|
$ |
647 |
|
|
$ |
266 |
|
|
$ |
321 |
|
|
$ |
2,242 |
|
|
$ |
5,194 |
|
|
$ |
5,194 |
|
Average interest
rate (fixed) |
|
|
9.90 |
% |
|
|
9.95 |
% |
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
9.97 |
% |
|
|
|
|
Total fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
563,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to fixed
interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
192,500 |
|
|
$ |
|
|
|
$ |
192,500 |
|
|
$ |
3,412 |
|
Fixed rate payable |
|
|
|
|
|
|
2.46 |
% |
|
|
2.46 |
% |
|
|
2.46 |
% |
|
|
2.46 |
% |
|
|
|
|
|
|
2.46 |
% |
|
|
|
|
Weighted average
variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable
(payable) |
|
|
|
|
|
|
3.97 |
% |
|
|
4.67 |
% |
|
|
5.55 |
% |
|
|
6.27 |
% |
|
|
|
|
|
|
5.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
115,500 |
|
|
$ |
|
|
|
$ |
115,500 |
|
|
$ |
1,918 |
|
Fixed rate payable |
|
|
|
|
|
|
2.47 |
% |
|
|
2.47 |
% |
|
|
2.47 |
% |
|
|
2.47 |
% |
|
|
|
|
|
|
2.47 |
% |
|
|
|
|
Weighted average
variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable
(payable) |
|
|
|
|
|
|
3.98 |
% |
|
|
4.68 |
% |
|
|
5.55 |
% |
|
|
6.28 |
% |
|
|
|
|
|
|
5.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
77,000 |
|
|
$ |
|
|
|
$ |
77,000 |
|
|
$ |
1,538 |
|
Fixed rate payable |
|
|
|
|
|
|
2.48 |
% |
|
|
2.48 |
% |
|
|
2.48 |
% |
|
|
2.48 |
% |
|
|
|
|
|
|
2.48 |
% |
|
|
|
|
Weighted average
variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable
(payable) |
|
|
|
|
|
|
3.98 |
% |
|
|
4.68 |
% |
|
|
5.56 |
% |
|
|
6.28 |
% |
|
|
|
|
|
|
5.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
|
|
|
$ |
385,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
385,000 |
|
|
$ |
138 |
|
Total fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,006 |
|
Liquidity Risk
We currently hold a $0.6 million portfolio of auction rate securities. These investments are not
currently liquid and in the event we need to access these funds, we will not be able to do so
without a loss of principal, unless a future auction on these investments is successful. During
2008, we concluded that these investments were other-than-temporarily impaired and an impairment
charge was taken to the income statement of $0.2 million. Quarterly reviews in 2010 and 2009
resulted in no further impairment. We may need to access these funds for operational purposes
during the time that these investments are expected to remain illiquid.
45
Our substantial debt, specifically its term and maturity, could have a material adverse effect on
our available liquidity. See the matters described in Item 1A Risk Factors Risks Related to
Our Debt.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of Alaska Communications Systems Group, Inc. and Subsidiaries are
submitted as a separate section of this Form 10-K. See Index to Consolidated Financial
Statements, which appears on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an
evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934, as amended. Based on the evaluation, our Chief Executive Officer and our Chief Financial
Officer believe that, as of the end of the period covered by this Annual Report on Form 10-K, our
disclosure controls and procedures were effective at ensuring that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and (ii) accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required
financial disclosure.
Managements Report on Internal Control over Financial Reporting.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not
expect that our disclosure controls and internal control over financial reporting will prevent all
error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of a simple error or mistake. Additionally, controls may be
circumvented by the individual acts of some persons, by collusion of two or more people or by
management override of the controls.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time, a control may become inadequate
because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that occurred in the fourth
quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
Not applicable.
46
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated into this 10-K by reference to our Proxy
Statement for our 2011 Annual Meeting of Stockholders.
Item 11. Executive Compensation Summary Compensation Table
Information on compensation of our directors and executive officers is incorporated into this 10-K
by reference to our Proxy Statement for our 2011 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information with respect to security ownership of certain beneficial owners and management is
incorporated into this 10-K by reference to our Proxy Statement for our 2011 Annual Meeting of
Stockholders.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2010, the number of securities remaining available for future issuance under
equity compensation plans includes 3,051,048 shares under the Alaska Communications Systems Group,
Inc. 1999 Stock Incentive Plan, 176,438 shares under the Alaska Communications Systems Group, Inc.
1999 Non-Employee Director Stock Compensation Plan and 121,783 shares under the Alaska
Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan. All shares reserved under the
non-qualified stock option agreement between Liane Pelletier and Alaska Communications Systems
Group, Inc. have been awarded through stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of securities |
|
|
|
securities to be |
|
|
|
|
|
|
remaining available for |
|
|
|
issued upon |
|
|
|
|
|
|
future issuance under |
|
|
|
exercise of |
|
|
|
|
|
|
equity compensation |
|
|
|
outstanding |
|
|
Weighted-average exercise |
|
|
plans (excluding |
|
|
|
options, warrants |
|
|
price of outstanding options, |
|
|
securities reflected in |
|
|
|
and rights |
|
|
warrants and rights |
|
|
column (a)) |
|
Equity compensation plans |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,605,049 |
|
|
$ |
10.16 |
|
|
|
|
|
Restricted stock |
|
|
1,680,598 |
|
|
$ |
|
|
|
|
3,349,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
200,000 |
|
|
$ |
4.50 |
|
|
|
|
|
Item 13. Certain Relationships and Related Transactions
Information with respect to such contractual relationships is incorporated into this 10-K by
reference to our Proxy Statement for our 2011 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
Information on our audit committees pre-approval policy for audit services and information on our
principal accountant fees and services is incorporated into this 10-K by reference to our Proxy Statement for
our 2011 Annual Meeting of Stockholders.
47
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Our consolidated financial statements are submitted as a separate section of this Form 10-K. See
Index to Consolidated Financial Statements which appears on page F-1.
2. Financial Statement Schedule
Our financial statement schedules for the Company and its subsidiaries are submitted as a separate
section of this Form 10-K. See Index to Consolidated Financial Statements that appears on page
F-1 hereof.
(b) Exhibits. The exhibits to this report are listed below. Other than exhibits that are filed
herewith, all exhibits listed below are exhibits of the Registrant and are incorporated herein by
reference as exhibits thereto.
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
Where Located |
|
2.1**
|
|
Stock Purchase Agreement, dated April 1,
2008, by and among the Registrant, Crest
Communications Corporations Group, Inc., and
the selling stockholders specified therein
|
|
Exhibit 2.1 to Form
8-K (filed
8/07/2008) |
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of
Incorporation of the Registrant
|
|
Exhibit to Form
S-1/A File No.
333-888753 (filed
11/17/1999) |
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
Exhibit 3.1 to Form
8-K (filed
12/29/2010) |
|
|
|
|
|
4.1
|
|
Specimen of Common Stock Certificate
|
|
Exhibit to Form
S-1/A File No.
333-888753 (filed
11/17/1999) |
|
|
|
|
|
4.2
|
|
Indenture, dated April 8, 2008, by and among
the Registrant, the guarantors named
therein, and The Bank of New York Trust
Company, N.A., as trustee, with respect to
the Registrants 5.75% Convertible Notes due
2013
|
|
Exhibit 4.1 to Form
8-K (filed
4/14/2008) |
|
|
|
|
|
4.3
|
|
Registration Rights Agreement dated April 8,
2008 by and among the Registrant, the
guarantors named therein, and the Initial
Purchasers named therein
|
|
Exhibit 4.2 to Form
8-K (filed
4/14/2008) |
|
|
|
|
|
10.1*
|
|
ALEC Holdings, Inc. 1999 Stock Incentive Plan
|
|
Exhibit 10.10 to
Form S-4 File No.
333-82361 (filed
7/7/1999) |
|
|
|
|
|
10.2*
|
|
Alaska Communications Systems Group, Inc.
1999 Stock Incentive Plan
|
|
Exhibit to Form
S-1/A File No.
333-888753 (filed
11/17/1999) |
|
|
|
|
|
10.3*
|
|
Form of Restricted Stock Agreement between
the Registrant and certain participants in
the Registrants 1999 Stock Incentive Plan.
|
|
Exhibit 10.1 to
Form 10-Q (filed
8/3/2007) |
|
|
|
|
|
10.4*
|
|
Form of Performance Share Unit Agreement
between the Registrant and certain
participants in the Registrants 1999 Stock
Incentive Plan
|
|
Exhibit 99.1 to
Form 8-K/A (filed
6/12/2008) |
|
|
|
|
|
10.5*
|
|
Amendment to Alaska Communications Systems
Group, Inc. 1999 Stock Incentive Plan
|
|
Exhibit 10.5 to
Form 10-K (filed
3/9/2010) |
|
|
|
|
|
10.6*
|
|
Alaska Communications Systems Group, Inc.
1999 Non-Employee Director Compensation
Plan.
|
|
Exhibit to Form
S-1/A File No.
333-888753 (filed
11/17/1999) |
48
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
Where Located |
10.7*
|
|
Amendment to Alaska Communications Systems
Group, Inc. 1999 Non-Employee Director
Compensation Plan.
|
|
Exhibit 10.7 to
Form 10-K (filed
3/9/2010) |
|
|
|
|
|
10.8*
|
|
Alaska Communications Systems Group, Inc.
1999 Employee Stock Purchase Plan.
|
|
Exhibit to Form
S-1/A File No.
333-888753 (filed
11/17/1999) |
|
|
|
|
|
10.9*
|
|
Amendment to Alaska Communications Systems
Group, Inc. 1999 Employee Stock Purchase
Plan.
|
|
Exhibit 10.9 to
Form 10-K (filed
3/9/2010) |
|
|
|
|
|
10.10*
|
|
Amended and Restated Employment Agreement,
dated as of September 22, 2008, between
Alaska Communications Systems Group, Inc.
and Liane Pelletier.
|
|
Exhibit 10.1 to
Form 8-K (filed
9/26/2008) |
|
|
|
|
|
10.11
|
|
Letter of Amendment to Employment Agreement
for Liane Pelletier, dated December 1, 2010,
between Alaska Communications Systems Group,
Inc. and Liane Pelletier
|
|
Exhibit 10.1 to
Form 8-K (filed
12/03/2010) |
|
|
|
|
|
10.12*
|
|
Amended and Restated Employment Agreement,
dated as of January 5, 2009 between Alaska
Communications Systems Group, Inc. and David
Wilson.
|
|
Exhibit 10.1 to
Form 8-K (filed
01/09/2009) |
|
|
|
|
|
10.13
|
|
Credit Agreement, dated February 1, 2005,
among the Registrant, Alaska Communications
Systems Holdings, Inc., the lenders party
thereto, and Canadian Imperial Bank of
Commerce, as Administrative Agent.
|
|
Exhibit 10.1 to
Form 8-K (filed
2/2/2005) |
|
|
|
|
|
10.14
|
|
Consent and Amendment No. 1, dated July 15,
2005, among the Registrant, Alaska
Communications Systems Holdings, Inc., the
lenders party thereto, and Canadian Imperial
Bank of Commerce as Administrative Agent
|
|
Exhibit 1.1 to Form
8-K (filed
7/21/2005) |
|
|
|
|
|
10.15
|
|
Consent and Amendment No. 2, dated February
22, 2006, among the Registrant, Alaska
Communications Systems Holdings, Inc., the
lenders party thereto, and Canadian Imperial
Bank of Commerce as Administrative Agent.
|
|
Exhibit 10.2 to
Form 8-K (filed
2/27/2006) |
|
|
|
|
|
10.16
|
|
Master Agreement, dated November 7, 1999, by
and between Alaska Communications Systems
Holdings, Inc. and the International
Brotherhood of Electrical Workers, Local
Union 1547.
|
|
Exhibit 99.3 to
Form 8-K (filed
3/7/2005) |
|
|
|
|
|
10.17
|
|
Letter Agreement, dated March 1, 2005, by
and between Alaska Communications Systems
Holdings, Inc. and the International
Brotherhood of Electrical Workers, Local
Union 1547.
|
|
Exhibit 99.4 to
Form 8-K (filed
3/7/2005) |
|
10.18*
|
|
2006 Officer Severance Program
|
|
Exhibit 99.1 to
Form 8-K (filed
7/17/2006) |
|
|
|
|
|
10.19*
|
|
2008 Officer Severance Policy
|
|
Exhibit 10.2 to
Form 8-K (filed
12/24/2008) |
|
|
|
|
|
10.20
|
|
2010 Officer Severance Policy
|
|
Exhibit 10.1 to
Form 8-K (filed
11/04/2010) |
|
|
|
|
|
10.21**
|
|
Supply and Construction Contract, dated
October 23, 2007, between ACS Cable Systems,
Inc. and Tyco Telecommunications (US), Inc.
|
|
Exhibit 10.23 to
Form 10-K (filed
3/20/2008) |
|
|
|
|
|
10.22*
|
|
Executive Employment Agreement, dated as of
November 7, 2007 between Alaska
Communications Systems Group, Inc. and
Leonard Steinberg
|
|
Exhibit 10.24 to
Form 10-K (filed
3/20/2008) |
|
|
|
|
|
10.23
|
|
Purchase Agreement, dated April 2, 2008, by
and among Alaska Communications Systems
Group, Inc., the guarantors listed therein
and the Initial Purchasers, regarding the
Registrants 5.75% Convertible Notes due
2013
|
|
Exhibit 10.1 to
Form 8-K (filed
4/14/2008) |
49
|
|
|
|
|
Exhibit No. |
|
Exhibit |
|
Where Located |
10.24
|
|
Confirmations of Convertible Bond Hedges by
and between Alaska Communications Systems
Group, Inc. and certain affiliates of the
Initial Purchasers
|
|
Exhibit 10.2 to
Form 8-K (filed
4/14/2008) |
|
|
|
|
|
10.25
|
|
Confirmations of Warrant Transactions by and
between Alaska Communications Systems Group,
Inc. and certain affiliates of the Initial
Purchasers
|
|
Exhibit 10.3 to
Form 8-K (filed
4/14/2008) |
|
|
|
|
|
10.26*
|
|
Executive Employment Agreement, dated as of
December 19, 2008 between the Registrant and
Anand Vadapalli
|
|
Exhibit 10.1 to
Form 8-K (filed
12/24/2008) |
|
|
|
|
|
10.27*
|
|
Amendment to Amended and Restated Employment
Agreement, dated February 8, 2010 between
the Registrant and Anand Vadapalli
|
|
Exhibit 10.1 to
Form 8-K (filed
2/12/2010) |
|
|
|
|
|
21.1
|
|
Subsidiaries of the Registrant
|
|
Filed herewith |
|
|
|
|
|
23.1
|
|
Consent of KPMG LLP relating to the audited
financial statements of Alaska
Communications Systems Group, Inc.
|
|
Filed herewith |
|
|
|
|
|
31.1
|
|
Certification of Liane Pelletier, Chief
Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
31.2
|
|
Certification of David Wilson, Chief
Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
32.1
|
|
Certification of Liane Pelletier, Chief
Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
|
|
32.2
|
|
Certification of David Wilson, Chief
Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of
The Sarbanes-Oxley Act of 2002
|
|
Filed herewith |
|
|
|
* |
|
Management contract or compensatory plan or arrangement required to be filed as an exhibit to
this form. |
|
** |
|
Confidential treatment of certain portions of this exhibit has been requested pursuant to a
request for confidential treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission. |
50
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
Date: February 28, 2011 |
Alaska Communications Systems Group, Inc.
|
|
|
By: |
/s/ Anand Vadapalli
|
|
|
|
Anand Vadapalli |
|
|
|
Chief Executive Officer, President |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Anand Vadapalli
Anand Vadapalli
|
|
Chief Executive Officer and President
(Principal Executive
Officer)
|
|
February 28, 2011 |
|
|
|
|
|
/s/ David Wilson
David Wilson
|
|
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
|
|
February 28, 2011 |
|
|
|
|
|
/s/ Liane Pelletier
Liane Pelletier
|
|
Chairman of the Board
|
|
February 28, 2011 |
|
|
|
|
|
/s/ Annette M. Jacobs
Annette M. Jacobs
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ Brian Rogers
Brian Rogers
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
s/ John N. Wanamaker
John N. Wanamaker
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ Gary R. Donahee
Gary R. Donahee
|
|
Director
|
|
February 28, 2011 |
|
|
|
|
|
/s/ Edward J. Hayes, Jr.
Edward J. Hayes, Jr.
|
|
Director
|
|
February 28, 2011 |
51
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alaska Communications Systems Group, Inc.:
We have audited the accompanying consolidated balance sheets of Alaska Communications Systems
Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity (deficit) and comprehensive income (loss), and cash flows for
each of the years in the three-year period ended December 31, 2010. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Alaska Communications Systems Group, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Alaska Communications Systems Group, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Anchorage, Alaska
February 28, 2011
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alaska Communications Systems Group, Inc.:
We have audited Alaska Communications Systems Group, Inc.s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Alaska Communications Systems Group, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements Report on Internal
Control Over Financial Reporting (Item 9A.(B)). Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Alaska Communications Systems Group, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Alaska Communications Systems Group, Inc.
and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders equity (deficit) and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2010, and our report dated February 28, 2010
expressed an unqualified opinion on those consolidated financial statements.
Anchorage, Alaska
February 28, 2011
F-3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
December 31, 2010 and 2009
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,316 |
|
|
$ |
6,271 |
|
Restricted cash |
|
|
4,912 |
|
|
|
5,843 |
|
Accounts receivable-trade, net of allowance of $6,616 and $6,066 |
|
|
36,985 |
|
|
|
35,414 |
|
Materials and supplies |
|
|
6,533 |
|
|
|
7,109 |
|
Prepayments and other current assets |
|
|
3,999 |
|
|
|
4,489 |
|
Deferred income taxes |
|
|
10,949 |
|
|
|
13,814 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
78,694 |
|
|
|
72,940 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,416,718 |
|
|
|
1,413,758 |
|
Less: accumulated depreciation and amortization |
|
|
(1,005,736 |
) |
|
|
(965,470 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
410,982 |
|
|
|
448,288 |
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
|
355 |
|
|
|
855 |
|
Goodwill |
|
|
8,850 |
|
|
|
8,850 |
|
Intangible assets, net |
|
|
24,118 |
|
|
|
24,118 |
|
Debt issuance costs |
|
|
8,584 |
|
|
|
5,960 |
|
Deferred income taxes |
|
|
76,813 |
|
|
|
113,994 |
|
Equity method investment |
|
|
2,060 |
|
|
|
|
|
Other assets |
|
|
10,159 |
|
|
|
293 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
620,615 |
|
|
$ |
675,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
5,213 |
|
|
$ |
793 |
|
Accounts payable, accrued and other current liabilities |
|
|
62,539 |
|
|
|
68,651 |
|
Advance billings and customer deposits |
|
|
9,568 |
|
|
|
9,351 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
77,320 |
|
|
|
78,795 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
|
548,096 |
|
|
|
538,557 |
|
Other long-term liabilities |
|
|
15,688 |
|
|
|
27,906 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
641,104 |
|
|
|
645,258 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 145,000 authorized, 44,704 and
44,484 issued and outstanding, respectively |
|
|
447 |
|
|
|
445 |
|
Additional paid in capital |
|
|
166,259 |
|
|
|
198,979 |
|
Accumulated deficit |
|
|
(188,160 |
) |
|
|
(157,472 |
) |
Accumulated other comprehensive income (loss) |
|
|
965 |
|
|
|
(11,912 |
) |
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(20,489 |
) |
|
|
30,040 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
620,615 |
|
|
$ |
675,298 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
Years ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Operating revenues |
|
$ |
341,524 |
|
|
$ |
346,040 |
|
|
$ |
349,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
130,862 |
|
|
|
136,129 |
|
|
|
132,023 |
|
Selling, general and administrative |
|
|
88,564 |
|
|
|
91,649 |
|
|
|
99,892 |
|
Depreciation and amortization |
|
|
72,078 |
|
|
|
81,358 |
|
|
|
74,002 |
|
Loss on disposal of assets |
|
|
2,846 |
|
|
|
4,327 |
|
|
|
750 |
|
Loss on impairment of goodwill and intangible assets |
|
|
|
|
|
|
|
|
|
|
29,641 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
294,350 |
|
|
|
313,463 |
|
|
|
336,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
47,174 |
|
|
|
32,577 |
|
|
|
13,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(34,754 |
) |
|
|
(38,411 |
) |
|
|
(34,072 |
) |
Loss on extinguishment of debt |
|
|
(13,339 |
) |
|
|
|
|
|
|
|
|
Interest income |
|
|
83 |
|
|
|
91 |
|
|
|
1,695 |
|
Other |
|
|
|
|
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(48,010 |
) |
|
|
(38,320 |
) |
|
|
(32,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax benefit (expense) |
|
|
(836 |
) |
|
|
(5,743 |
) |
|
|
(19,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
(29,852 |
) |
|
|
2,174 |
|
|
|
7,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item |
|
|
(30,688 |
) |
|
|
(3,569 |
) |
|
|
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extraordinary item, net of taxes |
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(30,688 |
) |
|
$ |
33,777 |
|
|
$ |
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on continuing operations |
|
$ |
(0.69 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.27 |
) |
Gain on extraordinary item |
|
|
|
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.69 |
) |
|
$ |
0.77 |
|
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
44,589 |
|
|
|
44,177 |
|
|
|
43,391 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
and Comprehensive Income (Loss)
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional Paid |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Stock |
|
|
in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity (Deficit) |
|
Balance, January 1, 2008 |
|
|
42,883 |
|
|
$ |
429 |
|
|
$ |
257,982 |
|
|
$ |
(179,575 |
) |
|
$ |
(7,087 |
) |
|
$ |
71,749 |
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,674 |
) |
|
|
(10,943 |
) |
|
|
(22,617 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(37,523 |
) |
|
|
|
|
|
|
|
|
|
|
(37,523 |
) |
Stock compensation |
|
|
|
|
|
|
|
|
|
|
8,770 |
|
|
|
|
|
|
|
|
|
|
|
8,770 |
|
Purchase of covertible bond call options
net of tax benefits of $1,056 |
|
|
|
|
|
|
|
|
|
|
(19,375 |
) |
|
|
|
|
|
|
|
|
|
|
(19,375 |
) |
Sale of common stock warrants |
|
|
|
|
|
|
|
|
|
|
9,852 |
|
|
|
|
|
|
|
|
|
|
|
9,852 |
|
Debt discount, net of tax |
|
|
|
|
|
|
|
|
|
|
14,583 |
|
|
|
|
|
|
|
|
|
|
|
14,583 |
|
Debt issuance, net of tax |
|
|
|
|
|
|
|
|
|
|
(510 |
) |
|
|
|
|
|
|
|
|
|
|
(510 |
) |
Surrender of 273 shares to cover withholding
on stock based compensation |
|
|
|
|
|
|
|
|
|
|
(3,383 |
) |
|
|
|
|
|
|
|
|
|
|
(3,383 |
) |
Issuance of common stock,
pursuant to stock plans, $.01 par |
|
|
836 |
|
|
|
8 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
43,719 |
|
|
|
437 |
|
|
|
231,813 |
|
|
|
(191,249 |
) |
|
|
(18,030 |
) |
|
|
22,971 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,777 |
|
|
|
6,118 |
|
|
|
39,895 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(38,216 |
) |
|
|
|
|
|
|
|
|
|
|
(38,216 |
) |
Stock compensation |
|
|
|
|
|
|
|
|
|
|
4,466 |
|
|
|
|
|
|
|
|
|
|
|
4,466 |
|
Tax benefit of convertible bond call options |
|
|
|
|
|
|
|
|
|
|
1,458 |
|
|
|
|
|
|
|
|
|
|
|
1,458 |
|
Surrender of 265 shares to cover withholding
taxes on stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(1,868 |
) |
|
|
|
|
|
|
|
|
|
|
(1,868 |
) |
Issuance of common stock,
pursuant to stock plans, $.01 par |
|
|
765 |
|
|
|
8 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
|
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
44,484 |
|
|
|
445 |
|
|
|
198,979 |
|
|
|
(157,472 |
) |
|
|
(11,912 |
) |
|
|
30,040 |
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,688 |
) |
|
|
12,877 |
|
|
|
(17,811 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(38,446 |
) |
|
|
|
|
|
|
|
|
|
|
(38,446 |
) |
Stock compensation |
|
|
|
|
|
|
|
|
|
|
3,989 |
|
|
|
|
|
|
|
|
|
|
|
3,989 |
|
Tax benefit of convertible bond call options |
|
|
|
|
|
|
|
|
|
|
1,575 |
|
|
|
|
|
|
|
|
|
|
|
1,575 |
|
Surrender of 45 shares to cover withholding
taxes on stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(392 |
) |
|
|
|
|
|
|
|
|
|
|
(392 |
) |
Issuance of common stock,
pursuant to stock plans, $.01 par |
|
|
220 |
|
|
|
2 |
|
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010 |
|
|
44,704 |
|
|
$ |
447 |
|
|
$ |
166,259 |
|
|
$ |
(188,160 |
) |
|
$ |
965 |
|
|
$ |
(20,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(30,688 |
) |
|
$ |
33,777 |
|
|
$ |
(11,674 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
72,078 |
|
|
|
81,358 |
|
|
|
74,002 |
|
Loss on impairment of goodwill and intangible assets |
|
|
|
|
|
|
|
|
|
|
29,641 |
|
Gain on extraordinary item, net of tax |
|
|
|
|
|
|
(37,346 |
) |
|
|
|
|
Amortization of debt issuance costs and debt discount |
|
|
9,674 |
|
|
|
6,968 |
|
|
|
5,290 |
|
Stock-based compensation |
|
|
3,989 |
|
|
|
4,273 |
|
|
|
9,477 |
|
Deferred income tax (benefit) expense |
|
|
32,634 |
|
|
|
(2,174 |
) |
|
|
(7,517 |
) |
Provision for uncollectible accounts |
|
|
2,863 |
|
|
|
6,258 |
|
|
|
4,753 |
|
Other non-cash expenses |
|
|
3,595 |
|
|
|
5,377 |
|
|
|
1,134 |
|
Changes in operating assets and liabilities |
|
|
(7,778 |
) |
|
|
(1,811 |
) |
|
|
(8,929 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
86,367 |
|
|
|
96,680 |
|
|
|
96,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(38,336 |
) |
|
|
(54,209 |
) |
|
|
(127,311 |
) |
Change in unsettled construction and capital expenditures |
|
|
(2,534 |
) |
|
|
(7,155 |
) |
|
|
6,056 |
|
Investment in intangible assets |
|
|
|
|
|
|
|
|
|
|
(2,601 |
) |
Proceeds on sale of assets |
|
|
1,085 |
|
|
|
|
|
|
|
|
|
Purchase of equity investment |
|
|
(2,060 |
) |
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
|
|
|
|
|
(440 |
) |
|
|
(64,960 |
) |
Change in unsettled acquisition costs |
|
|
(380 |
) |
|
|
(250 |
) |
|
|
4,169 |
|
Net change in short-term investments |
|
|
|
|
|
|
|
|
|
|
790 |
|
Net change in non-current investments |
|
|
500 |
|
|
|
150 |
|
|
|
(1,250 |
) |
Net change in restricted accounts |
|
|
931 |
|
|
|
14,674 |
|
|
|
(17,928 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(40,794 |
) |
|
|
(47,230 |
) |
|
|
(203,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(438,622 |
) |
|
|
(32,382 |
) |
|
|
(7,832 |
) |
Proceeds from the issuance of long-term debt |
|
|
447,600 |
|
|
|
26,500 |
|
|
|
135,000 |
|
Purchase of call options |
|
|
|
|
|
|
|
|
|
|
(20,431 |
) |
Sale of common stock warrants |
|
|
|
|
|
|
|
|
|
|
9,852 |
|
Debt issuance costs |
|
|
(7,276 |
) |
|
|
|
|
|
|
(4,368 |
) |
Payment of cash dividend on common stock |
|
|
(38,394 |
) |
|
|
(38,089 |
) |
|
|
(37,287 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(392 |
) |
|
|
(1,868 |
) |
|
|
(3,383 |
) |
Proceeds from the issuance of common stock |
|
|
556 |
|
|
|
1,334 |
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(36,528 |
) |
|
|
(44,505 |
) |
|
|
72,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
9,045 |
|
|
|
4,945 |
|
|
|
(33,882 |
) |
Cash and cash equivalents, beginning of period |
|
|
6,271 |
|
|
|
1,326 |
|
|
|
35,208 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
15,316 |
|
|
$ |
6,271 |
|
|
$ |
1,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
28,911 |
|
|
$ |
35,488 |
|
|
$ |
31,175 |
|
Loss on extinguishment of hedging instruments |
|
$ |
11,145 |
|
|
$ |
|
|
|
$ |
|
|
Income taxes paid, net of refund |
|
|
34 |
|
|
|
(884 |
) |
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
1,295 |
|
|
$ |
1,850 |
|
|
|
1,359 |
|
Dividend declared, but not paid |
|
|
9,628 |
|
|
|
9,576 |
|
|
|
9,449 |
|
Additions to ARO asset |
|
|
88 |
|
|
|
1,242 |
|
|
|
119 |
|
See Notes to Consolidated Financial Statements
F-7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2010, 2009 and 2008
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Group, Inc. and Subsidiaries (the Company or ACS Group), a
Delaware corporation, provides wireline, wireless and other telecommunications and network services
to consumer, business, and enterprise customers in the State of Alaska and beyond using its
statewide and interstate telecommunications network. The Company was formed in October of 1998 for
the purpose of acquiring and operating telecommunications properties.
The accompanying consolidated financial statements for the Company are as of December 31, 2010 and
2009 and for the years ended December 31, 2010, 2009 and 2008. They represent the consolidated
financial position, results of operations and cash flows of ACS Group and the following wholly
owned subsidiaries:
|
|
|
Alaska Communications Systems Holdings, Inc. (ACS Holdings) |
|
|
|
|
ACS of Alaska, Inc. (ACSAK) |
|
|
|
|
ACS of the Northland, Inc. (ACSN) |
|
|
|
|
ACS of Fairbanks, Inc. (ACSF) |
|
|
|
|
ACS of Anchorage, Inc. (ACSA) |
|
|
|
|
ACS Wireless, Inc. (ACSW) |
|
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
|
ACS Messaging, Inc. (ACSM) |
|
|
|
|
ACS Cable Systems, Inc. (ACSC) |
|
|
|
|
Crest Communications Corporation (Crest) |
|
|
|
|
WCI Cable, Inc. |
|
|
|
|
WCIC Hillsboro, LLC. |
|
|
|
|
Alaska Northstar Communications, LLC. |
|
|
|
|
WCI Lightpoint, LLC. |
|
|
|
|
Worldnet Communications, Inc. |
|
|
|
|
Alaska Fiber Star, LLC. |
In addition to the wholly owned subsidiaries, the Company has a 49% interest in TekMate, LLC
(TekMate) which is represented in the Companys consolidated financial statements as an equity
method investment.
A summary of significant accounting policies followed by the Company is set forth below:
Basis of Presentation
The consolidated financial statements include all subsidiaries of the Company. All significant
intercompany accounts have been eliminated. In the opinion of management, the financial statements
contain all normal, recurring adjustments necessary to present fairly the consolidated financial
position, results of operations and cash flows for all periods presented.
Significant Changes in Accounting Practice, Reclassifications and Adjustments
As previously reported in the Companys quarterly filing for the three months ended March 31, 2010,
the Company identified a cumulative adjustment which reduced wireline revenue by $5,764 and
wireline income tax expense of $2,369 over a five year period beginning January 1, 2005. The
adjustment was determined to be an immaterial error in the calculation of a regulatory liability
payable to the Universal Service Administration Company (USAC) for high cost loop support, and
the related income tax expense. The Company concluded that these errors were not material to any of
its prior period financial statements under the guidance of SEC Staff Accounting Bulletin (SAB)
No. 99 Materiality. Although the errors were and continue to be immaterial to prior periods,
because of the significance of the out-of-period correction in the first quarter of 2010, the
Company applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in the Current Year Financial Statements, and revised its prior
period financial statements.
In addition to an increase of $3,119 in the Companys accumulated deficit on December 31, 2008, the
schedules that follow recast the immaterial error to reflect the balances as if they had been
recorded in the proper periods.
F-8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The following schedule presents a reconciliation of the effects of the adjustments made to the
Companys
previously reported balance sheet line items for December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Noncurrent deferred income taxes |
|
$ |
111,625 |
|
|
$ |
2,369 |
|
|
$ |
113,994 |
|
Total assets |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
Accounts payable, accrued and
other current liabilities |
|
|
62,887 |
|
|
|
5,764 |
|
|
|
68,651 |
|
Total current liabilities |
|
|
73,031 |
|
|
|
5,764 |
|
|
|
78,795 |
|
Total liabilities |
|
|
639,494 |
|
|
|
5,764 |
|
|
|
645,258 |
|
Accumulated deficit |
|
|
(154,077 |
) |
|
|
(3,395 |
) |
|
|
(157,472 |
) |
Total stockholders equity |
|
|
33,435 |
|
|
|
(3,395 |
) |
|
|
30,040 |
|
Total liabilities and stockholders equity |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
The following schedule presents a reconciliation of the effects of the adjustments made to the
Companys previously reported annual consolidated statements of operations for the twelve months
ended December 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Operating revenues |
|
$ |
346,508 |
|
|
$ |
(468 |
) |
|
$ |
346,040 |
|
|
$ |
351,138 |
|
|
$ |
(1,456 |
) |
|
$ |
349,682 |
|
Operating income |
|
|
33,045 |
|
|
|
(468 |
) |
|
|
32,577 |
|
|
|
14,830 |
|
|
|
(1,456 |
) |
|
|
13,374 |
|
Income (loss) before income
tax (benefit) expense |
|
|
(5,275 |
) |
|
|
(468 |
) |
|
|
(5,743 |
) |
|
|
(17,792 |
) |
|
|
(1,456 |
) |
|
|
(19,248 |
) |
Income tax benefit (expense) |
|
|
1,982 |
|
|
|
192 |
|
|
|
2,174 |
|
|
|
6,975 |
|
|
|
599 |
|
|
|
7,574 |
|
Income (loss) before extraordinary
item, net of taxes |
|
|
(3,293 |
) |
|
|
(276 |
) |
|
|
(3,569 |
) |
|
|
(10,817 |
) |
|
|
(857 |
) |
|
|
(11,674 |
) |
Net income (loss) |
|
|
34,053 |
|
|
|
(276 |
) |
|
|
33,777 |
|
|
|
(10,817 |
) |
|
|
(857 |
) |
|
|
(11,674 |
) |
The following schedule presents a reconciliation of the effects of the adjustments made to the
Companys previously reported consolidated statements of cash flows for the twelve months ended
December 31, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Net income |
|
$ |
34,053 |
|
|
$ |
(276 |
) |
|
$ |
33,777 |
|
|
$ |
(10,817 |
) |
|
$ |
(857 |
) |
|
$ |
(11,674 |
) |
Deferred income taxes |
|
|
(1,982 |
) |
|
|
(192 |
) |
|
|
(2,174 |
) |
|
|
(6,918 |
) |
|
|
(599 |
) |
|
|
(7,517 |
) |
Changes in operating assets
and liabilities |
|
|
(2,279 |
) |
|
|
468 |
|
|
|
(1,811 |
) |
|
|
(10,385 |
) |
|
|
1,456 |
|
|
|
(8,929 |
) |
Additionally, certain reclassifications have been made to the 2009 and 2008 financial
statements to conform to the current reporting format and include the Companys discontinuance of
regulatory accounting under Accounting Standards Codification (ASC) Topic 980 Regulated
Operations (ASC 980). As a result of the approval of a petition submitted to the Federal
Communications Commission (FCC) to be re-characterized from a rate-of-return carrier to a
price-cap carrier and other factors, the Company ceased application of
F-9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
regulatory accounting effective July 1, 2009. See Note 2 Discontinuance of Regulatory
Accounting for a
complete discussion of these changes.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Among the significant estimates affecting the financial statements are those related to the
realizable value of accounts receivable, long-lived assets, goodwill and intangible assets, legal
contingencies, stock-based compensation and income taxes. These estimates and assumptions are based
on managements best estimates and judgment. Management evaluates its estimates and assumptions on
an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes is reasonable under the circumstances. Assumptions are
adjusted as facts and circumstances dictate. Illiquid credit markets, volatile equity and energy
markets, and declines in consumer spending have combined to increase the uncertainty in such
estimates and assumptions. As future events and their effects cannot be determined with precision,
actual results may differ significantly from those estimates. Changes in those estimates resulting
from continuing changes in the economic environment will be reflected in the financial statements
of future periods.
Cash and Cash Equivalents
For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, the
Company generally considers all highly liquid investments with a maturity at acquisition of three
months or less to be cash equivalents.
Restricted Cash
In the twelve months ended December 31, 2010, the Company released $931 from restricted cash
primarily representing funds released from escrow related to claims against the Crest
Communications Corporation former stockholders (Selling Stockholders). These funds were applied
toward the settlement of a capital project funded by the Crest selling shareholders and for costs
incurred in connection with the current IRS audit. See Note 5 Crest Communication Acquisition
for more information on the audit. As of December 31, 2010, $3,646 remains in escrow for the
indemnification of the Company pending resolution of the audit.
The remaining balance of $1,266 is held in certificates of deposit as required under the terms of
certain contracts to which the Company is a party. When the restrictions are lifted, the Company
will transfer these funds back into its operating accounts.
Bad Debt Reserves
The Company establishes estimated bad debt reserves against uncollectible receivables incurred
during the period. These estimates are derived through a monthly analysis of account aging profiles
and a review of historical recovery experience. Receivables are charged off against the allowance
when management believes the uncollectability of the receivable is confirmed. Subsequent
recoveries, if any, are credited to the allowance. The Company records bad debt expense as a
component of Selling general and administrative expense on the Consolidated Statements of
Operations. The Allowance for doubtful accounts at December 31, 2010, 2009 and 2008 was $6,616,
$6,066 and $5,912, respectively. The Provision for uncollectable accounts for the year ended
December 31, 2010, 2009 and 2008 was $2,863, $6,258 and $4,753, respectively.
Materials and Supplies
Materials and supplies are carried in inventory at the lower of weighted average cost or market.
Cash flows related to the sale of inventory, primarily wireless devices and accessories, are
included in operating activities in the Companys Consolidated Statements of Cash Flows.
F-10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment
Telephone property, plant and equipment is stated at historical cost of construction including
certain capitalized overhead and interest charges. Renewals and betterments of telephone plant are
capitalized while repairs, as
well as renewals of minor items, are charged to cost of sales and services as incurred. The Company
uses a group composite depreciation method in accordance with industry practice. Under this method,
telephone plant retired in the ordinary course of business, less salvage, is charged to accumulated
depreciation with no gain or loss recognized. The composite annualized rate of depreciation for all
classes of telephone property, plant, and equipment was 5.2%, 5.5% and 4.8% for 2010, 2009, and
2008, respectively. Non-telephone plant is stated at historical cost including certain capitalized
overhead and interest charges, and when sold or retired a gain or loss is recognized. Depreciation
of property is provided on the straight-line method over estimated service lives ranging from 2 to
50 years.
The Company is the lessee of equipment and buildings under capital leases expiring in various years
through 2025. The assets and liabilities under capital leases are initially recorded at the lower
of the present value of the minimum lease payments or the fair value of the assets at the inception
of the lease. The assets are amortized over the lower of their related lease terms or the estimated
productive lives. Amortization of assets under capital leases is included in depreciation and
amortization expense.
The Company is also the lessee of various land, building and personal property under operating
lease agreements for which expense is recognized on a monthly basis. Increases in rental rates are
recorded as incurred which approximates the straight-line method.
Capitalized Interest
The Company capitalizes interest charges associated with construction in progress based on a
weighted average interest cost calculated on the Companys outstanding debt. Interest expense for
the years ended December 31, 2010, 2009 and 2008 was $34,754, $38,411 and $34,072, net of
capitalized interest of $1,639, $3,607 and $4,984, respectively.
Asset retirement obligations
The Company records liabilities for obligations related to the retirement and removal of long-lived
assets. The Company records, as liabilities, the fair value of asset retirement obligations on a
discounted basis when they are incurred, which is typically at the time the asset is installed or
acquired. Amounts recorded for the related assets are increased by the amount of these obligations.
Over time, the liabilities increase due to the change in their present value, and the initial
capitalized costs are depreciated over the useful life of the related assets. The liabilities are
eventually extinguished when the asset is taken out of service.
Non-current Investments
The Companys non-current investment balance is made up of auction rate securities (ARS).
Beginning February 13, 2008, the Company experienced failed auctions for ARS issues and at that
time, ceased to purchase auction rate securities. The Company believes that the current lack of
liquidity relating to ARS investments will have no impact on the ability to fund ongoing operations
and growth initiatives.
Equity Method of Accounting
The Company accounts for investments greater than 20% in affiliates, which are not under Company
control, by the equity method of accounting. Under this method, our equity investments are carried
at acquisition cost, increased by the Companys proportionate share of the investees net income,
and decreased by the proportionate share of the investees net losses and by dividends received.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are assessed for impairment
on at least an annual basis. Intangible assets with estimable useful lives are amortized over their
respective estimated useful lives to their residual values and reviewed for impairment in
accordance with the provisions of ASC Topic 350-20-35, Intangibles Goodwill and Other, Subsequent
measurement (ASC 350).
F-11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Debt Issuance Costs
Underwriting and certain other costs associated with the issuance of the Companys senior credit
facility and senior unsecured notes are being amortized using the straight line method which
approximates the effective interest method over the term of the related instruments. In the fourth
quarter of 2010, the Company capitalized $7,276 in debt issuance costs incurred in obtaining its
2010 Senior Secured Credit Facility and, during 2008, the Company capitalized $4,368 of debt
issuance costs of incurred in the course of its convertible debt offering. Amortization of debt
issuance costs in the Consolidated Statements of Cash Flows for 2010, 2009 and 2008, was $4,651
(inclusive of a write off of $2,182 in debt issuance costs on the 2005 Senior Secured Credit
Facility), $2,594 and $2,410, respectively.
Debt Discounts
The Companys 2010 Senior Secured Credit Facility was issued at a 1.0% discount and the Companys
5.75% Convertible Notes have an equity portion that is attributable to their conversion feature.
These debt discounts are accreted to interest expense using the effective interest method.
Accretion of debt discounts, in the Consolidated Statements of Cash Flows for 2010, 2009 and
2008, were $5,023, $4,374 and $2,880, respectively.
Preferred Stock
The Company has 5,000, no par, shares authorized, none of which were issued or outstanding at
December 31, 2010 and 2009.
Revenue Recognition
Substantially all recurring non-usage sensitive service revenues are billed one month in advance
and are deferred until earned. Non-recurring and usage sensitive revenues are billed in arrears and
are recognized when earned. Certain of the Companys bundled products and services, primarily in
wireless, have been determined to be revenue arrangements with multiple deliverables. Total
consideration received in these arrangements is allocated and measured using units of accounting
within the arrangement based on relative fair values. Wireless offerings include wireless phones
and service contracts sold together in the Companys stores. The handset and accessories associated
with these direct channel sales is recognized at the time the related wireless phone is sold and is
classified as equipment sales. Monthly service revenue is recognized as services are rendered.
Prior to the Companys conversion to price caps effective July 1, 2009, the Company participated in
interstate access revenue pools with other telephone companies. These pools were funded by toll
revenue and access charges regulated by the FCC within the interstate jurisdiction. Much of the
interstate access revenue was initially recorded based on estimates which were derived from interim
financial information, available separations studies and the most recent information available
about achieved rates of return. These estimates are subject to adjustment in future accounting
periods as additional operational information becomes available for the Company and the other
telephone companies. To the extent that disputes arise over revenue settlements, the Companys
policy is to defer the recognition of revenue until settlement methodologies are resolved and
finalized. At December 31, 2010 the Companys deferred revenue was $7,234 as compared to $3,255 at
December 31, 2009. This increase primarily reflects a $5,896 reserve recorded in 2010 pending the
settlement of a prior period amended filing for high cost loop support with National Exchange
Carriers Association (NECA), offset partially by cost study true-ups from settlement of
interstate access pools.
Concentrations of Risk
Cash is maintained with several financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon
demand. The Company has not experienced any losses on such deposits.
The Company performs credit evaluations of its suppliers and customers. The Companys customers do
not, individually, represent a material concentration of risk. During 2010, 2009 and 2008, no
customer accounted for 10% or more of consolidated revenues.
F-12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company also depends on a limited number of suppliers and vendors for equipment and services
for its network, and in the case of the Companys wireless segment, billing processes. The
Companys subscriber growth and operating results could be adversely affected if these suppliers
experience financial or credit difficulties, service interruptions, patent litigation, or other
problems.
At December 31, 2010, approximately 74% of the Companys employees are represented by the
International Brotherhood of Electrical Workers, Local 1547 (IBEW). The Master Collective
Bargaining Agreement between the Company and the IBEW expires on December 31, 2012. This agreement
governed the terms and conditions of employment for all IBEW represented employees working for the
Company in the state of Alaska. The Company considers employee relations to be good however any
deterioration in that relationship could have a negative impact on the Companys operations.
The Company provides voice, data and wireless telecommunication services to its customers
throughout Alaska. Accordingly, the Companys financial performance is directly influenced by the
competitive environment in Alaska, including the risk of additional entrants such as, potentially,
Verizon, and by economic factors specifically in Alaska. The most significant factor is the level
of Alaskan oil production since the state is almost entirely dependent on this resource for its
general operating revenue. Other factors influencing the Alaskan economy include the level of
tourism, government spending, and the movement of United States military personnel. Any
deterioration in these markets would likely have a negative impact on the Companys performance.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense totaled $7,570, $7,360 and
$7,074 in 2010, 2009 and 2008, respectively and is included in Selling, general and administrative
expense in the Companys Consolidated Statements of Operations.
Income Taxes
The Company utilizes the asset-liability method of accounting for income taxes. Under the
asset-liability method, deferred taxes reflect the temporary differences between the financial and
tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to
the extent that management believes it is more likely than not that such deferred tax assets will
not be realized. The Company evaluates tax positions taken or expected to be taken in the course of
preparing its financial statements to determine whether the tax positions are more likely than
not of being sustained by the applicable tax authority. The Company records interest and penalties
for underpayment of income taxes as income tax expense.
Taxes Collected from Customers and Remitted to Government Authorities
The Company excludes taxes collected from customers and payable to government authorities from
revenue. Taxes payable to government authorities are presented as a liability on the Consolidated
Balance Sheets.
Regulatory Accounting and Regulation
The local telephone exchange activities of the Company are subject to rate regulation by the FCC
for interstate telecommunication service and the Regulatory Commission of Alaska (RCA) for
intrastate and local exchange telecommunication service. The Company, as required by the FCC,
accounts for such activity separately. Long distance services of the Company are subject to
regulation as a non-dominant interexchange carrier by the FCC for interstate telecommunication
services and the RCA for intrastate telecommunication services. Wireless, Internet and other
non-common carrier services are not subject to rate regulation.
Non-Operating Expense
The Company periodically evaluates the fair value of its investments and other non-operating assets
against their carrying value whenever market conditions indicate a change in that fair value. Any
changes relating to declines in the fair value of non-operating assets are charged to non-operating
expense under the caption Other in the Consolidated Statements of Operations.
F-13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative Financial Instruments
The Company recognizes all asset or liability derivatives at fair value. The accounting for changes
in fair value is contingent on the intended use of the derivative and its designation as a hedge.
Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a
hedge, depending on the nature of the hedge, changes in fair value either offset the change in fair
value of the hedged assets, liabilities or firm commitments through earnings, or are recognized in
other comprehensive income until the hedged transaction is recognized in earnings. The change in a
derivatives fair value related to the ineffective portion of a hedge, if any, is immediately
recognized in earnings. The Company does not enter into any derivative contracts for speculative
purposes. On the date a derivative contract is entered into, the Company designates the derivative
as either a fair value or cash flow hedge. The Company formally assesses, both at the hedges
inception and on an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of hedged items. If the
Company determines that a derivative is not highly effective as a hedge or that it has ceased to be
a highly effective hedge, the Company would discontinue hedge accounting prospectively.
Dividend Policy
The Companys Board of Directors has established a dividend policy of $0.86 per share of the
Companys common stock on an annualized basis, subject to the continued performance and liquidity
needs of the Company. In 2010, 2009 and 2008, the Companys Board of Directors declared quarterly
cash dividends of $0.215 per share. Dividends on the Companys common stock are not cumulative.
Share-Based Payments
Stock options. The fair value for each stock option granted was estimated at the date of grant
using a Black-Scholes option pricing model. Expected volatilities are based on historical
volatilities of the Companys common stock; the expected life represents the weighted average
period of time that options granted are expected to be outstanding giving consideration to vesting
schedules and the Companys historical exercise patterns; the dividend yield is based on dividend
yield of the option strike price at grant date; and the risk free interest rate on the grant date,
for which the Company uses the lowest then effective Federal Funds interest rate stated by the
Board of Governors of the Federal Reserve System.
Restricted stock. The Company determines the fair value of restricted stock based on the number of
shares granted and the quoted market price of the Companys common stock on the date of grant,
discounted for estimated dividend payments that do not accrue to the employee during the vesting
period.
Performance share units (PSUs). The Company re-measures the fair value of each PSU at each
reporting period and records adjusted expense attributable to such period based on changes to the
expected performance period or fair value of the Companys common stock or if the PSUs otherwise
vest, expire, or are determined by the Compensation Committee to be unlikely to vest prior to
expiration. Compensation expense is recorded over the expected performance period, which is
estimated by the Compensation Committee of the Companys Board of Directors.
Stock-settled stock appreciation rights (SSARs). The Company computes the fair value of each
SSAR at the date of grant using the same Black-Scholes pricing methodology that its uses to compute
the fair value of a stock option on the Companys common stock.
Restricted stock unit equivalents (RSUEs). The Companys outstanding RSUEs were settled in
shares of the Companys common stock on a one-for-one basis on July 31, 2009. Prior to settlement,
compensation expense was recorded upon award and was adjusted at the close of each reporting period
based upon the fair value of the Companys common stock.
Tax treatment. Stock-based compensation is treated as a temporary difference for income tax
purposes and increases deferred tax assets until the compensation is realized for income tax
purposes. To the extent that realized tax benefits exceed the book based compensation, the excess
tax benefit is credited to additional paid in capital.
F-14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Pensions The Company recognizes the over-funded or under-funded status of its
defined benefit post-retirement plan as an asset or liability on its balance sheet, and it
recognizes changes in that funded status in the year in which the changes occur. The ACS Retirement
Plan, which is the Companys sole single-employer defined benefit plan, is frozen. The ACS
Retirement Plans accumulated benefit obligation is the actuarial present value, as of the
Companys December 31, 2010 measurement date, of all benefits attributed by the pension benefit
formula.
The amount of benefit to be paid depends on a number of future events incorporated into the pension
benefit formula, including estimates of the average life of employees or survivors and average
years of service rendered. It is measured based on assumptions concerning future interest rates and
future employee compensation levels. The accumulated benefit obligation for the Companys pension
plans was $14,976 and $14,129 at December 31, 2010 and December 31, 2009, respectively.
Unrecognized prior service credits and costs and net actuarial gains and losses are recognized as a
component of other comprehensive income, net of tax, the actuarial gains and losses and the prior
service costs and credits that arise during the period. The estimated net loss and prior service
cost for pension benefits that will be amortized from comprehensive income into net periodic
benefit cost in 2011 is $733.
Earnings per Share
The Company computes earnings per share based on the weighted number of shares of common stock and
dilutive potential common share equivalents outstanding.
2. DISCONTINUANCE OF REGULATORY ACCOUNTING
Prior to July 1, 2009, the Companys incumbent local exchange carrier (ILEC) operations followed
the accounting for regulated enterprises prescribed by ASC 980. This accounting recognizes the
economic effects of rate-making actions of regulatory bodies in the financial statements of the
Companys ILEC operations.
On April 17, 2009 the FCC granted the Companys petition for waiver of certain rules to
facilitate the conversion of the Companys ILECs to price-cap regulation, under which ILECs may
fix interstate rates at any level less than or equal to certain specified amounts. To establish
pricing in accordance with these rules, the Companys ILECs have withdrawn from certain tariffs and
revenue pools administered by the NECA and jointly filed with the FCC a new tariff effective as of
July 1, 2009. These ILECs also continue to receive interstate common line support from the
universal service fund at the disaggregated per line levels each received in 2008.
The Company expects average traffic sensitive rates to decrease over time until they are less than
or equal to the cap applicable to such rates. The Companys local and intrastate rates continue to
be subject to a form of rate-of-return regulation enforced by the RCA.
Finally, the Company experienced continuous and substantial change in the mix of customer and
revenue base away from services generated by regulated rates. The Company does not expect this
trend to reverse in favor of regulated revenues. Therefore, as of July 1, 2009, management
determined that it was no longer appropriate to continue to apply regulatory accounting under ASC
980.
Effect of Discontinuance
Discontinuance of regulatory accounting required the Company to extinguish all of its previously
established jurisdictional assets and liabilities. The Companys jurisdictional assets accounted
for the disparity between State and Federal depreciation rates. Extinguishing these assets did not
affect the Companys Consolidated Statements of Operations as the blended rates used to calculate
the assets were determined to approximate the estimated useful lives of the assets. The Companys
jurisdictional liability represented the regulatory equivalent of an asset retirement obligation
(ARO), therefore management assessed its regulated assets to determine the ARO required under ASC
Topic 410 Asset Retirement and Environmental Obligations (ASC 410) and retained an ARO
liability of $1,285. The impact of extinguishing the Companys jurisdictional liability net of the
ARO determined in accordance with ASC 410, of $63,417 or $37,346 net of tax, was recorded as an
extraordinary gain in the Companys Consolidated Statement of Operations on July 1, 2009. In
evaluating the Companys discontinuance of regulatory accounting, fixed asset lives and salvage
values were reviewed. Upon
F-15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
2. DISCONTINUANCE OF REGULATORY ACCOUNTING (Continued)
completion of this review, it was determined that asset lives were still appropriate, however,
changes in the industry and current technology indicated the historical salvage values were no
longer appropriate and the original cost of these pools should be fully depreciated. The
corresponding change resulted in an increase in depreciation expense for asset pools that had
previously been fully depreciated. Additionally, management reviewed long-lived assets for evidence
of impairment concluding no impairment existed.
As a result of the discontinuance of regulatory accounting, the Company has made certain
reclassifications and adjustments to previously reported 2009 and 2008 financial statements to
conform to current presentation. The effect of these reclassifications and adjustments, are as
follows:
|
|
|
eliminated $21,096 and $41,598 of intercompany revenue and expense previously
not eliminated during the six months ended June 30, 2009, and the year ended December 31,
2008, respectively; |
|
|
|
|
reclassified $1,143 and $3,139, of bad debt expense from contra revenue to
Selling, general & administrative (SG&A) expense in the six months ended June 30, 2009
and the year ended December 31, 2008, respectively; and |
|
|
|
|
classified certain other operating expenses as cost of services and sales or
SG&A expense, as appropriate. |
The reclassifications had no affect on the Companys previously reported operating cash flow,
income before taxes, or net income.
3. COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net Income (loss) |
|
$ |
(30,688 |
) |
|
$ |
33,777 |
|
|
$ |
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
202 |
|
|
|
1,269 |
|
|
|
(3,845 |
) |
Tax effect of pension liability |
|
|
(83 |
) |
|
|
(521 |
) |
|
|
1,580 |
|
Interest rate swap marked to fair value |
|
|
10,519 |
|
|
|
9,121 |
|
|
|
(14,738 |
) |
Tax effect of interest rate swap |
|
|
(4,324 |
) |
|
|
(3,751 |
) |
|
|
6,060 |
|
Reclassification of loss on ineffective hedge |
|
|
11,145 |
|
|
|
|
|
|
|
|
|
Tax effect of loss on ineffective hedge |
|
|
(4,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
12,877 |
|
|
|
6,118 |
|
|
|
(10,943 |
) |
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(17,811 |
) |
|
$ |
39,895 |
|
|
$ |
(22,617 |
) |
|
|
|
|
|
|
|
|
|
|
4. EQUITY METHOD INVESTMENT
On August 31, 2010, the Company completed the purchase of a 49% interest in TekMate, LLC, for a
purchase price of $2,060. The price paid to acquire the Companys share of the net assets of
TekMate differs from the underlying book value of such net assets. This premium of $1,641 is
accounted for as equity method goodwill and is included within the Equity method investment on the
balance sheet. The purchase agreement included a preferred distribution to the sellers of $698
which is payable from future earnings. When the subsequent earnings of TekMate exceed $698, the
Company will begin to realize its share of TekMates earnings in Revenue on the statement of
operations. As of December 31, 2010, earnings have not exceeded the preferred distribution and no
revenue has been recognized by the Company. The investment represents the Companys maximum
exposure to loss as a result of the Companys ownership interest.
F-16
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
4. EQUITY METHOD INVESTMENT (Continued)
The investment in TekMate is accounted for under the equity method, and consisted of the
following at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Percent owned |
|
|
Investment |
|
TekMate, LLC |
|
|
49 |
% |
|
$ |
2,060 |
|
5. CREST COMMUNICATIONS ACQUISITION
Effective October 30, 2008, the Company closed its purchase of 100% of the outstanding stock of
Crest Communications Corporation. The results of Crests operations have been included in the
Companys consolidated financial statements and further in the wireline segment in the business
segment footnote, since that date. Crests operations include the operation of an undersea fiber
system of approximately 1,900 miles with cable landing facilities in Whittier, Juneau, and Valdez,
Alaska and Nedonna Beach, Oregon. The system also includes terrestrial transport components linking
Nedonna Beach, Oregon to the Network Operations Control Center in Hillsboro, Oregon and collocation
facilities in Portland, Oregon and Seattle, Washington.
On the date of purchase, a valuation of the business enterprise and acquired assets and liabilities
was performed resulting in a determination that the fair value of the business enterprise was
greater than the total acquisition price. The major asset acquired was the Northstar fiber network
connecting Alaska with the Lower 48, which was valued based on replacement cost. Accordingly, the
total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed
based on a pro-rata reduction of their estimated fair value at the date of acquisition.
On October 30, 2009, during the finalization of purchase accounting, the aggregate purchase price
was adjusted from $64,960 to $65,400, net of $1,072 in cash acquired and inclusive of $4,169 cash
consideration that was placed in an escrow account to be used for the settlement of any potential
claims of misrepresentations, breach of warranties or covenants or for other indemnifications. At
December 31, 2010 $3,646 remained in the escrow account to be used for the settlement of expenses
related to the current IRS audit discussed below. All other escrow issues have been resolved.
The final adjustments to the preliminary allocation, primarily reflects the reallocation of
property, plant and equipment to deferred tax assets as the result of the final evaluation of the
expected utilization of Crests net operating loss carry forwards. The following table summarizes
the fair value of the assets acquired and liabilities assumed on both a preliminary and final
basis.
|
|
|
|
|
|
|
|
|
|
|
Preliminary Allocation |
|
|
Final Allocation |
|
|
|
October 30, 2008 |
|
|
October 30, 2009 |
|
Current assets |
|
$ |
5,434 |
|
|
$ |
5,403 |
|
Property and equipment |
|
|
61,685 |
|
|
|
36,441 |
|
Other assets |
|
|
10 |
|
|
|
10 |
|
Deferred tax asset |
|
|
3,393 |
|
|
|
29,108 |
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
70,522 |
|
|
|
70,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
2,007 |
|
|
|
2,007 |
|
Long-term liabilities |
|
|
2,483 |
|
|
|
2,483 |
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
4,490 |
|
|
|
4,490 |
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
66,032 |
|
|
$ |
66,472 |
|
|
|
|
|
|
|
|
On April 19, 2010, the Internal Revenue Service (the Service) issued a Notice of Proposed
Adjustment (NOPA) with respect to the 2006, 2007 and 2008 taxable years of Crest, which was
acquired by the Company on October 30, 2008. Crest had acquired certain entities out of bankruptcy
in 2002. The original majority stockholder of these entities, an Australian insurance company, AMP,
had
made certain advances to the entities. These entities entered into bankruptcy in 2001 and the
bankruptcy court approved a plan which
F-17
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
5. CREST COMMUNICATIONS ACQUISITION (Continued)
effectively subordinated these advances to all other creditors. Upon acquiring the entities in
2002, Crest characterized the advances as equity for tax purposes. The Service is asserting that
characterization of the AMP advances as equity was incorrect and that Crest had additional taxable
income due to the cancellation of debt.
On November 2, 2010, the Internal Revenue Service reissued their original NOPA and issued four
additional NOPAs which restate their original position on debt versus equity and assess the Company
for accuracy related penalties and for adjustments to the tax treatment of optical cables, fibers
and related conduit. The cancellation of indebtedness income at the amounts set out in the combined
NOPAs could result in a charge to income tax expense of approximately $89,843, $50,353 of which
would be a result of additional taxes payable and $39,490 of which would be a result of the
reduction in recognized deferred tax assets.
The Company believes there are errors within the adjustments asserted by the Service. If the
Service accepts the corrections the Company believes are appropriate, but prevails on the
underlying debt versus equity issue, the result is expected to be a receivable from the IRS for the
overpayment of alternative minimum tax of $2,781, a charge to income tax expense of approximately
$29,678, and a net reduction in recognized deferred tax assets. The Company believes it is more
likely than not that it will prevail on the factual errors included in the NOPAs; however, it is
unable to conclude it is more likely than not it will prevail on the underlying debt versus equity
issue. Therefore, in accordance with the guidance in ASC Topic 740 -Income Taxes (ASC 740), the
Company recorded $29,678 in additional income tax expense and a $2,781 receivable in the second
quarter of 2010, pending resolution with the Service.
The additional income tax expense is made up of two components: the first representing $11,018 for
the tax effect of losing NOLs while the remaining $18,660 represents a deferred tax liability for
the difference in outside basis in certain Crest subsidiaries. ASC 740 requires recognition of a
deferred tax liability for outside basis differences. An outside basis difference represents the
amount by which the book basis of an investment in a domestic subsidiary for financial reporting
purposes exceeds the tax basis in such subsidiary. For certain Crest subsidiaries, the cancellation
of debt created a difference in outside basis that the Company cannot recover in a tax-free manner
and as such, a deferred tax liability was established. Through enforcing indemnification rights,
preserving the corporate structure of the Crest subsidiaries and other proactive steps, it is
possible to mitigate most or all of the cash impact of the $18,660 deferred tax liability for as
long as the Company remains a going concern.
The Stock Purchase Agreement (SPA) underlying the Companys acquisition of Crest provides for
indemnification for the Company by the former stockholders (Selling Stockholders) of Crest.
This indemnity was entered into with the intent to mitigate the impact on the Company of
potential tax exposure items such as those raised by the NOPAs. The Company and the selling
stockholders intend to contest all issues raised by the NOPAs through various avenues of
appeal. However, should the appeals process fail to overturn the NOPAs, should the Company be
unable to preserve the corporate structure of the Crest subsidiaries and should the Company
prove unable to effectively enforce the indemnification provisions in the SPA, this could have
a material adverse effect on the Companys consolidated financial position, results of
operations and cash flows.
6. FAIR VALUE MEASUREMENTS
The Company has developed valuation techniques based upon observable and unobservable inputs to
calculate the fair value of long-term monetary assets and liabilities. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect internal market
assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets; |
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and model-derived
valuations whose inputs are observable or whose significant value drivers are observable;
and |
|
|
|
|
Level 3 Significant inputs to the valuation model are unobservable. |
F-18
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
6. FAIR VALUE MEASUREMENTS (Continued)
The fair values of cash and cash equivalents, net accounts receivable, and payable, other
short-term monetary assets and liabilities and capital leases approximate carrying values due to
their nature. The fair value of the Companys 2010 senior credit facility, convertible notes and
other long-term obligations of $563,004 at December 31, 2010, were estimated based on dealer quoted
prices. The carrying values of these liabilities were $553,309 at December 31, 2010.
Fair Value Measurements on a Recurring Basis
Financial assets and liabilities are classified in the fair value hierarchy in their entirety based
on the lowest level of input that is significant to the fair value measurements. The Companys
assessment of the significance of a particular input to the fair value measurements requires
judgment and may affect the valuation of the assets and liabilities being measured and their level
within the fair value hierarchy.
The following table presents the balances of assets and liabilities measured at fair value on a
recurring basis as of December 31, 2010 and 2009 at each hierarchical level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
$ |
355 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
355 |
|
|
$ |
855 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
855 |
|
Interest rate swaps |
|
$ |
6,868 |
|
|
$ |
|
|
|
$ |
6,868 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(14,796 |
) |
|
$ |
|
|
|
$ |
(14,796 |
) |
|
$ |
|
|
The following table presents the reconciliation disclosures about fair value measurements at
December 31, 2010, 2009 and 2008 using significant unobservable inputs (Level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Balance, January 1 |
|
$ |
855 |
|
|
$ |
1,005 |
|
|
$ |
|
|
Total gains or losses (realized / unrealized)
included in earnings |
|
|
|
|
|
|
|
|
|
|
(245 |
) |
Purchases |
|
|
|
|
|
|
|
|
|
|
1,725 |
|
Sales |
|
|
(500 |
) |
|
|
(150 |
) |
|
|
(475 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
$ |
355 |
|
|
$ |
855 |
|
|
$ |
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at December 31 |
|
$ |
|
|
|
$ |
|
|
|
$ |
245 |
|
|
|
|
|
|
|
|
|
|
|
Non-current investments consist of auction rate securities that have maturity dates greater
than one year from December 31, 2010. The investments in ARS are included in Level 3 as no active
market or significant other observable inputs exist. The Company assigned a value to its ARS
portfolio by reviewing the value assigned to similar securities by brokerages, relative yields and
assessing credit risk. An assessment was performed in which management determined that the
securities were other-than-temporarily impaired, and in 2008, a charge of $245 was recognized in
the statement of operations. The fair value of ARS held by the Company at December 31, 2010
decreased by $650 from the value at December 31, 2008 due to the redemption by issuers, at face
value of $500 and $150, in the years ended December 31, 2010 and 2009, respectively. The Company
F-19
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
6. FAIR VALUE MEASUREMENTS (Continued)
continued to experience redemptions thus no further impairment was recorded in 2010 or 2009. The
securities are interest bearing with an average yield of 0.78% and 0.48% in 2010 and 2009,
respectively.
Derivative contracts, included in other long-term assets and other long term liabilities, comprised
of out-of-the-money interest rate swaps that are valued using models based on readily observable market
parameters for all substantial terms of the derivative contracts and thus, are classified within
Level 2.
Fair Value Measurements on a Nonrecurring Basis
Beginning January 1, 2009, the Company adopted the fair value measurement requirements related to
non-financial assets and non-financial liabilities that are not required or permitted to be
measured at fair value on a recurring basis. Those include assets measured at fair value in
goodwill impairment testing, indefinite-lived intangible assets measured at fair value for
impairment assessment, non-financial long-lived assets measured at fair value for impairment
assessment and those initially measured at fair value in a business combination. The adoption of
these requirements had no material impact on the consolidated financial statements. During the
fourth quarter of 2009, using level three inputs, the Company performed an impairment assessment of
certain long lived assets; primarily IT system software with a carrying value of $10,899. The
Company determined the fair value of these assets, held in the wireline segment, to be $7,173 as of
December 31, 2009. Accordingly the Company recorded an impairment charge of $3,726. During the
fourth quarter of 2010, the Company recorded an additional impairment charge of $2,285 when it was
determined that certain assets were abandoned.
7. ACCOUNTS RECEIVABLE
Accounts receivable trade consists of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Customers |
|
$ |
27,669 |
|
|
$ |
25,416 |
|
Connecting companies |
|
|
5,668 |
|
|
|
5,018 |
|
Other |
|
|
10,264 |
|
|
|
11,046 |
|
|
|
|
|
|
|
|
|
|
|
43,601 |
|
|
|
41,480 |
|
Less: allowance for doubtful accounts |
|
|
(6,616 |
) |
|
|
(6,066 |
) |
|
|
|
|
|
|
|
Accounts receivable trade, net |
|
$ |
36,985 |
|
|
$ |
35,414 |
|
|
|
|
|
|
|
|
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Useful Lives |
|
Land, buildings and support assets* |
|
$ |
247,568 |
|
|
$ |
246,518 |
|
|
|
3-42 |
|
Central office switching and transmission |
|
|
366,154 |
|
|
|
361,784 |
|
|
|
3-12 |
|
Outside plant cable and wire facilities |
|
|
678,178 |
|
|
|
669,572 |
|
|
|
6-50 |
|
Wireless switching and transmission |
|
|
100,352 |
|
|
|
104,536 |
|
|
|
3-38 |
|
Other |
|
|
4,026 |
|
|
|
3,991 |
|
|
|
2-5 |
|
Construction work in progress |
|
|
20,440 |
|
|
|
27,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,416,718 |
|
|
|
1,413,758 |
|
|
|
|
|
Less: accumulated depreciation and amortization |
|
|
(1,005,736 |
) |
|
|
(965,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
410,982 |
|
|
$ |
448,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
No depreciation charges are recorded for land. |
F-20
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
8. PROPERTY PLANT AND EQUIPMENT (Continued)
The following is a summary of property held under capital leases included in the above
property, plant and equipment at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Land, buildings and support assets |
|
$ |
18,083 |
|
|
$ |
17,010 |
|
Outside plant cable and wire facilities |
|
|
|
|
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
18,083 |
|
|
|
19,125 |
|
Less: accumulated depreciation and amortization |
|
|
(7,926 |
) |
|
|
(8,539 |
) |
|
|
|
|
|
|
|
Property held under capital leases, net |
|
$ |
10,157 |
|
|
$ |
10,586 |
|
|
|
|
|
|
|
|
Amortization of assets under capital leases included in depreciation expense for the year
ended December 31, 2010, 2009, and 2008 was $1,211, $1,087 and $938, respectively. Future minimum
payments, including interest, under these leases for the next five years and thereafter are as
follows:
|
|
|
|
|
2011 |
|
$ |
1,291 |
|
2012 |
|
|
1,299 |
|
2013 |
|
|
955 |
|
2014 |
|
|
537 |
|
2015 |
|
|
563 |
|
Thereafter |
|
|
3,129 |
|
|
|
|
|
|
|
|
7,774 |
|
Interest |
|
|
(2,580 |
) |
|
|
|
|
|
|
$ |
5,194 |
|
|
|
|
|
The Company leases various land, buildings, right-of-ways and personal property under
operating lease agreements. Rental expense under operating leases for the year ended December 31,
2010, 2009 and 2008 was $9,629, $8,247 and $7,559, respectively.
Future minimum payments under these leases for the next five years and thereafter are as follows:
|
|
|
|
|
2011 |
|
$ |
8,619 |
|
2012 |
|
|
7,768 |
|
2013 |
|
|
7,432 |
|
2014 |
|
|
7,054 |
|
2015 |
|
|
6,675 |
|
Thereafter |
|
|
51,451 |
|
|
|
|
|
|
|
$ |
88,999 |
|
|
|
|
|
9. ASSET RETIREMENT OBLIGATIONS
The Company accounts for asset retirement obligations in accordance with ASC 410 which requires the
Company to recognize asset retirement obligations that are conditional on future events.
Uncertainty about the timing or settlement of the obligation is factored into the measurement of
the liability.
Historically, the Company followed ASC 980 for asset retirement obligations associated with
its ILEC plant. However, the Companys discontinuance of regulatory accounting, effective July 1,
2009, required the Company to extinguish all of its previously established jurisdictional assets
and liabilities. One of the Companys jurisdictional liabilities, required to be eliminated in
2009, represented the regulatory equivalent of an ARO, therefore management assessed its regulatory
assets to determine the ARO required under ASC 410 and retained a liability of $1,285 rather than
fully eliminating the balance.
F-21
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
9. ASSET RETIREMENT OBLIGATIONS (Continued)
The Companys current retirement obligation of $5,838 represents the estimated obligation related
to the removal of certain cell sites at the end of their operating lease term, adjusted for
accretion and depreciation over the life of the lease, as well as the removal and disposal of
certain equipment and batteries in both leased and owned properties.
The following table outlines the changes in the accumulated retirement obligation liability:
|
|
|
|
|
Balance, January 1, 2009 |
|
$ |
1,969 |
|
Asset retirement obligation |
|
|
2,249 |
|
Accretion expense |
|
|
1,267 |
|
Settlement of lease obligations |
|
|
(48 |
) |
|
|
|
|
Balance, December 31, 2009 |
|
$ |
5,437 |
|
Asset retirement obligation |
|
|
88 |
|
Accretion expense |
|
|
398 |
|
Settlement of lease obligations |
|
|
(85 |
) |
|
|
|
|
Balance, December 31, 2010 |
|
$ |
5,838 |
|
|
|
|
|
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company performs its annual impairment test as of the beginning of the fourth quarter or more
frequently if events or changes in circumstance indicate possible impairment. The Company
determines the fair value of each reporting unit for purposes of this test primarily by using a
discounted cash flow valuation technique corroborated by comparative market multiples to determine
the fair value of its businesses for comparison to their corresponding book values. Significant
estimates used in the valuation include estimates of future cash flows, both future short-term and
long-term growth rates and estimated cost of capital for purposes of arriving at a discount factor.
If the book value exceeds the estimated fair value for a reporting unit, a potential impairment is
indicated and ASC 350 prescribes the approach for determining the impairment amount, if any.
The testing conducted by the Company of its goodwill balance in the fourth quarter of 2010 and 2009
indicated no impairment existed. In 2008, the Company determined that goodwill attributable to its
wireline operating segment was impaired resulting in an aggregate goodwill impairment charge of
$29,553 that was recognized in the fourth quarter of 2008. The goodwill impairment recognized in
2008 was primarily driven by adverse equity market conditions, the industry and companys
transition from wireline to wireless products and services, decreases in current market multiples
and the decline in the Companys stock price. This impairment charge reduced goodwill but did not
impact the Companys overall business operations or cash flows. The tax benefit derived from
recording the impairment charge was recorded as a deferred income tax benefit and included in the
deferred tax assets as part of the net operating loss carry forwards.
Additionally, the
Company annually reassesses previously recognized indefinite lived intangible assets. Cellular and
PCS licenses have terms of ten years, but are renewable indefinitely through a routine process
involving a nominal fee. These fees are expensed as incurred. The Company has determined that no
legal, regulatory, contractual, competitive, economic or other factors currently exist that limit
the useful life of its Cellular and PCS licenses. Therefore, the Company is not amortizing its
Cellular and PCS licenses based on the determination that these assets have indefinite lives. The
Company evaluates its determination of indefinite useful lives for its Cellular and PCS licenses
each reporting period. Indefinite lived intangible assets are tested for impairment at least
annually by comparing the fair value of the assets to their carrying amount. In 2008, the Company
determined that the gross carrying value of $88 for domain and trade names associated with the
Companys wireline segment was impaired and recorded an impairment charge of $88. At December 31,
2010 and 2009, the Companys indefinite lived intangible asset balance consisted of $24,118 in
wireless licenses.
F-22
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
10. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
Wireless |
|
|
Total |
|
Goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
Original carrying value |
|
$ |
29,553 |
|
|
$ |
8,850 |
|
|
$ |
38,403 |
|
Accumulated impairment |
|
|
(29,553 |
) |
|
|
|
|
|
|
(29,553 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2008, December
31, 2009 and
December 31, 2010 |
|
$ |
|
|
|
$ |
8,850 |
|
|
$ |
8,850 |
|
|
|
|
|
|
|
|
|
|
|
11. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES
Accounts payable, accrued and other current liabilities consist of the following at December 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Accrued payroll, benefits, and related liabilities |
|
$ |
14,422 |
|
|
$ |
13,706 |
|
Accounts payable trade |
|
|
12,130 |
|
|
|
15,555 |
|
Access revenue subject to refund |
|
|
9,892 |
|
|
|
9,056 |
|
Dividend payable |
|
|
9,628 |
|
|
|
9,576 |
|
Unsettled acquisition costs |
|
|
3,646 |
|
|
|
4,020 |
|
Other |
|
|
12,821 |
|
|
|
16,738 |
|
|
|
|
|
|
|
|
|
|
$ |
62,539 |
|
|
$ |
68,651 |
|
|
|
|
|
|
|
|
12. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
2010 senior credit facility term loan due 2016 |
|
$ |
440,000 |
|
|
$ |
|
|
Debt discount - 2010 senior credit facility term loan due 2016 |
|
|
(4,257 |
) |
|
|
|
|
2005 senior credit facility term loan due 2012 |
|
|
|
|
|
|
425,889 |
|
5.75% convertible notes due 2013 |
|
|
125,000 |
|
|
|
125,000 |
|
Debt discount - 5.75% convertible notes due 2013 |
|
|
(12,628 |
) |
|
|
(17,508 |
) |
Capital leases and other long-term obligations |
|
|
5,194 |
|
|
|
5,969 |
|
|
|
|
|
|
|
|
|
|
|
553,309 |
|
|
|
539,350 |
|
Less current portion |
|
|
(5,213 |
) |
|
|
(793 |
) |
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
$ |
548,096 |
|
|
$ |
538,557 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term obligations for each of the next five years and
thereafter, at December 31, 2010, are as follows:
|
|
|
|
|
2011 |
|
$ |
5,213 |
|
2012 |
|
|
130,305 |
|
2013 |
|
|
5,047 |
|
2014 |
|
|
4,666 |
|
2015 |
|
|
4,721 |
|
Thereafter |
|
|
420,242 |
|
|
|
|
|
|
|
$ |
570,194 |
|
|
|
|
|
2010 Senior Secured Credit Facility
In the fourth quarter of 2010, the Company completed a transaction whereby it entered into a new
$470,000 senior secured credit facility (the 2010 Senior Credit Facility) and used $440,000 of
term loan borrowings
F-23
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
12. LONG-TERM OBLIGATIONS (Continued)
under that facility, together with available cash on hand, to repay in full
and redeem the $425,889 of outstanding principal under the Companys 2005 senior credit facility,
together with interest accrued thereon, to unwind three interest rate swap agreements associated
with the 2005 senior credit facility at a cost of $11,145 and pay underwriters discounts and
transaction fees and expenses associated with the refinancing transaction. Accordingly, the Company
recorded a $13,339 loss on the extinguishment of debt and capitalized deferred financing costs of
$7,276 related to the 2010 senior secured credit facility. The new term loan outstanding under the
2010 senior secured credit facility generally bears interest at LIBOR plus 4.0% per annum or 5.5%,
whichever is greater, with quarterly principal payments equal to 0.25% of the original principal
balance due beginning with first quarter of 2011. The $440,000 term portion of the facility was
recorded net of a 1.0% discount, or $4,400, of the debt issuance.
Additionally, as part of the 2010 senior credit facility, the Company has a $30,000 revolving
credit agreement, which was undrawn as of December 31, 2010. To the extent drawn, the revolving
credit agreement generally bears interest at a rate of annual LIBOR plus 4.0% per annum or 5.5%,
whichever is greater. To the extent the $30,000 revolving credit facility is not drawn, the Company
will pay an annual commitment fee of 0.625% of the average daily undrawn principal amount over its
term.
The Term Facility matures on October 21, 2016 and the Revolving Facility matures on October 21,
2015 unless accelerated pursuant to an event of default or as described below. The Revolver
Facility shall be available on a revolving basis during the period commencing on October 21, 2010
and ending five (5) years after the closing date, unless otherwise agreed by the required Lenders
and as described below.
The maturity date on the Credit Facilities may be accelerated to December 19, 2012 in the event
that (a) the Companys 5.75% convertible notes due in 2013 are not refinanced, purchased or
defeased such that no more than $25,000 of principal amount of such Convertible Notes are
outstanding prior that date and (b) the Borrowers Senior Secured Leverage Ratio as of December 19,
2012 is greater than or equal to 2.75 to 1.00. The Credit Facilities also provide for events of
default customary for credit facilities of this type, including non-payment, defaults on other
debt, misrepresentation, breach of covenants, representations and warranties, and insolvency and
bankruptcy. After the occurrence of an event of default and for so long as it continues, the
Administrative Agent or the Requisite Lenders, as defined in the Credit Agreement, may increase the
interest rate then in effect on all outstanding obligations by 2.0%. Upon an event of default
relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Credit
Facilities will become immediately due and payable and the lender commitments will be automatically
terminated. Upon the occurrence and continuation of any other event of default, the Administrative
Agent and/or the Requisite Lenders may accelerate payment of all obligations and terminate the
Lenders commitments under the Credit Facilities.
In connection with the 2010 Senior Credit Facility, the Company entered into forward
floating-to-fixed interest rate swaps and a buy back of the 1.5% LIBOR floor, as a component of its
cash flow hedging strategy. The notional amounts of the swaps are $192,500, $115,500 and $77,000
with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a 4.0% LIBOR spread.
The swaps begin on June 30, 2012 and continue through September 30, 2015. In order to protect
against extreme movements in LIBOR prior to the start of the swaps, the Company has acquired an
interest rate cap at a cost of $119 for the period between December 31, 2010 and June 30, 2012,
capping LIBOR at 3.0% on a notional principal amount of $385,000.
At September 30, 2010, due to the expected extinguishment of debt coincident with the new debt
transaction, three interest rate swaps with a total notional balance of $207,900 ceased to be
highly effective, and as such, the Company discontinued prospective hedge accounting and concluded
it was appropriate to reclassify amounts previously recorded in Accumulated other comprehensive
income related to the affected derivatives. The amount reclassified in the third quarter of 2010
from Other comprehensive income to the Interest expense line of the Consolidated Statements of
Operations, as a result of the hedges becoming ineffective, was $11,258. The Company ultimately
settled these swaps for $11,145 with cash on hand during the fourth quarter of 2010.
The 2010 senior secured credit facility contains a number of restrictive covenants and events of
default, including covenants limiting capital expenditures, incurrence of debt and payment of
dividends. The 2010 senior credit facility also requires that the Company achieve certain financial
ratios quarterly.
F-24
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
12. LONG-TERM OBLIGATIONS (Continued)
5.75% Convertible Notes due 2013
On April 8, 2008 the Company closed the sale of $125,000 aggregate principal 5.75% Convertible
Notes due March 1, 2013. The notes were sold in a private placement pursuant to Rule 144A under the
Securities Act of 1933. The Company received net proceeds from the offering of $110,053 after
underwriter fees, the convertible note hedge, proceeds from the warrant and other associated costs.
The notes are unsecured obligations of the Company, subordinate to its obligations under its 2010
senior credit facility, pay interest semi-annually in arrears on March 1 and September 1 of each
year and will be convertible upon satisfaction of certain conditions. Upon conversion, holders will
receive an amount in cash, shares of the Companys common stock or a combination of both. The notes
are guaranteed by substantially all of the Companys existing subsidiaries. Holders of the notes
will have the right to require the Company to repurchase all or some of their notes at 100% of
their principal, plus any accrued interest, upon the occurrence of certain events.
Concurrent with the issuance of the notes, the Company entered into convertible note hedge
transactions with an affiliate of one of the initial purchasers and certain other financial
institutions for the purpose of reducing the potential dilution to common stockholders. If the
Company is required to issue shares of its common stock upon conversion of the notes, the Company
has the option of receiving up to 9,266 shares of its common stock when the price is between $12.90
and $16.42 per share upon conversion. The Company entered into warrant transactions with the same
counterparties whereby the financial institutions have the option of receiving up to the same
number of shares of the Companys common stock when the price exceeds $16.42 per share upon
conversion. The convertible note hedge had a cost of $20,431 and has been accounted for as an
equity transaction in accordance with ASC Topic 815-40, Derivatives and Hedging Contracts in
Entitys Own Equity (ASC 815-40). Tax benefits of $1,056 were recorded for the year ended
December 31, 2008, as an offset to the hedge. All future tax benefits from the deduction related to
the purchase of the call option, as part of the convertible note hedge transaction, will be
recorded to additional paid in capital over the term of the hedge transaction. The Company received
proceeds of $9,852 related to the sale of the warrants, which has been classified as equity because
they meet all of the equity classification criteria within ASC 815-40.
The call options purchased and warrants sold contemporaneously with the sale of the convertible
notes are equity contracts that meet the paragraph 15(74) scope exception of ASC Topic 815-10,
Derivatives and Hedging, and hence do not need to be marked-to-market through earnings. In
addition, since the call option and warrant transactions are accounted for as equity transactions,
the payment associated with the purchase of the call options and the proceeds received from the
issuance of the warrants were recorded in Additional paid in capital in stockholders equity as
separate equity transactions.
Each $1,000 principal of the notes are convertible into 77.5014 shares of the Companys common
stock, which is the equivalent of $12.90 per share, subject to adjustment upon the occurrence of
specified events set forth under the terms of the note. Upon conversion, subject to certain
covenants under its existing credit facility, the Company intends to pay the holders the cash value
of the applicable number of shares of its common stock, up to the principal amount of the note.
Amounts in excess of the principal balance may be paid in cash or in stock at the Companys option.
Holders may convert their notes, at their option, at any time prior to the close of business on the
business day immediately preceding the maturity date for the notes under the following
circumstances:
|
|
|
during any fiscal quarter after the fiscal quarter ended June 30, 2008 (and only
during any such fiscal quarter), if the last reported sale price of the Companys
common stock for at least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the immediately preceding fiscal quarter is
equal to or more than 130.0% of the conversion price of the notes on the applicable
trading day; |
|
|
|
|
during the five scheduled trading day period after any five consecutive
trading-day period (the measurement period) in which the trading price per $1,000
principal amount of the notes for each day of the measurement period was less than
the 98.0% of the product of the last reported sale price of the Companys common
stock and the conversion rate of the notes on each such day; or |
F-25
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
12. LONG-TERM OBLIGATIONS (Continued)
|
|
|
upon the occurrence of specified corporate transactions described in the
indenture governing
the notes. |
In addition, holders may also convert their notes at their option at any time beginning on November
1, 2012 and ending at the close of business on the second scheduled trading day immediately
preceding the maturity date for the notes, without regard to the foregoing circumstances.
Holders who convert their notes in connection with a change of control may be entitled to a
make-whole premium in the form of an increase in the conversion rate. In addition, upon a change in
control, liquidation, dissolution or de-listing, the holders of the notes may require the Company
to repurchase for cash all or any portion of their notes for 100% of the principal amount plus
accrued and unpaid interest. As of December 31, 2010, none of the conditions allowing holders of
the notes to convert, or requiring the Company to repurchase the notes, had been met. The Company
may not redeem the notes prior to maturity.
While it is the Companys intent to settle the principal portion of this debt in cash, under the
provisions of, ASC Topic 260-10, Earnings per Share (ASC 260-10), the Company must use the if
converted method in calculating the diluted earnings per share effect of the assumed conversion of
the Companys contingently convertible debt. Under the if converted method, the after tax effect
of interest expense related to the convertible securities is added back to net income and the
convertible debt is assumed to have been converted into common stock at the earlier of the debt
issuance date or the beginning of the period. The Companys convertible debt was anti-dilutive for
the twelve month periods ended December 31, 2010, 2009 and 2008.
Also in accordance with ASC 260-10, the warrants sold in connection with the hedge transaction will
have no impact on earnings per share until the Companys share price exceeds $16.42. Prior to
exercise, the Company will include the effect of additional shares that may be issued using the
treasury stock method. The call options purchased as part of the hedging transaction were
anti-dilutive as of December 31, 2010 and, therefore, had no effect on earnings per share.
In May 2008, FASB required that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be accounted for by bifurcating the liability and
equity components of the instruments in a manner that reflects the entitys non-convertible debt
borrowing rate when interest cost is recognized in subsequent periods. This requirement was
effective as of the beginning of an entitys first fiscal year beginning after December 15, 2008
and adoption was required to be applied retrospectively to all periods presented. Early adoption
was prohibited. The Company retrospectively applied this to the $125,000, 5.75% Convertible Notes
issued on April 8, 2008, bifurcating the notes into the liability portion and the equity portion
attributable to the conversion feature of the notes. In doing so, the Company used the discounted
cash flow approach to value the debt portion of the notes. The cash flow stream from the coupon
interest payments and the final principal payment were discounted at 11% to arrive at the
valuations. The Company used 11% as the appropriate discount rate after examining the interest
rates for similar instruments issued in the same time frame for similar companies without the
conversion feature.
The following table includes selected data regarding the convertible notes as of December 31, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Net carrying amount of the equity component |
|
$ |
14,076 |
|
|
$ |
14,073 |
|
Principal amount of the convertible notes |
|
$ |
125,000 |
|
|
$ |
125,000 |
|
Unamortized debt discount |
|
$ |
12,628 |
|
|
$ |
17,508 |
|
Amortization period remaining |
|
26 months |
|
38 months |
Net carrying amount of the convertible notes |
|
$ |
112,372 |
|
|
$ |
107,492 |
|
F-26
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
12. LONG-TERM OBLIGATIONS (Continued)
The following table details the interest components of the convertible notes contained in the
Companys Consolidated Statements of Operations for the years ended December 31, 2010 and 2009,
respectively:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Coupon interest expense |
|
$ |
7,188 |
|
|
$ |
7,187 |
|
Amortization of the debt discount |
|
|
4,880 |
|
|
|
4,374 |
|
|
|
|
|
|
|
|
Total included in interest expense |
|
$ |
12,068 |
|
|
$ |
11,561 |
|
|
|
|
|
|
|
|
Capital Leases and Other Long-term Obligations
The Company is a lessee under various capital leases and other financing agreements totaling $5,194
and $5,969 with a weighted average interest rate of 9.87% and 10.19% at December 31, 2010 and 2009,
respectively.
13. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Asset retirement obligation |
|
$ |
5,838 |
|
|
$ |
5,437 |
|
Other liabilities |
|
|
4,928 |
|
|
|
3,142 |
|
Pension liability |
|
|
3,885 |
|
|
|
3,342 |
|
Refundable aid to construction |
|
|
1,037 |
|
|
|
1,189 |
|
Interest rate swaps |
|
|
|
|
|
|
14,796 |
|
|
|
|
|
|
|
|
|
|
$ |
15,688 |
|
|
$ |
27,906 |
|
|
|
|
|
|
|
|
14. INCOME TAXES
The following table includes a reconciliation of federal statutory tax at 35% to the recorded tax
benefit, for each year ended December 31, 2010, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Computed federal income taxes at the statutory rate (Expense) benefit in tax resulting from: |
|
$ |
293 |
|
|
$ |
(20,186 |
) |
|
$ |
6,738 |
|
State income taxes (net of federal benefit) |
|
|
(4,937 |
) |
|
|
(3,524 |
) |
|
|
1,176 |
|
Other |
|
|
(515 |
) |
|
|
(90 |
) |
|
|
145 |
|
Rate change |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
(52 |
) |
|
|
(97 |
) |
|
|
(485 |
) |
Extraordinary gain |
|
|
|
|
|
|
26,071 |
|
|
|
|
|
Federal portion of uncertain tax position |
|
|
(24,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
(29,852 |
) |
|
$ |
2,174 |
|
|
$ |
7,574 |
|
|
|
|
|
|
|
|
|
|
|
F-27
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
14. INCOME TAX (Continued)
The income tax provision for the years ended December 31, 2010 and 2009 comprised of the
following charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax |
|
$ |
2,743 |
|
|
$ |
|
|
|
$ |
48 |
|
State income tax |
|
|
38 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Total current benefit |
|
|
2,781 |
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax |
|
|
(27,323 |
) |
|
|
(18,438 |
) |
|
|
5,800 |
|
State income tax |
|
|
(5,310 |
) |
|
|
(5,459 |
) |
|
|
1,717 |
|
Extraordinary gain |
|
|
|
|
|
|
26,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred benefit (expense) |
|
|
(32,633 |
) |
|
|
2,174 |
|
|
|
7,517 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
(29,852 |
) |
|
$ |
2,174 |
|
|
$ |
7,574 |
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for income taxes under the asset-liability method. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets and liabilities are recorded at a
combined federal and state effective rate of 41.20% and 40.75% as of December 31, 2010 and 2009,
respectively, are as follows:
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities): |
|
2010 |
|
|
2009 |
|
Current: |
|
|
|
|
|
|
|
|
Accrued compensation |
|
$ |
2,932 |
|
|
$ |
2,623 |
|
Allowance for doubtful accounts |
|
|
2,719 |
|
|
|
2,494 |
|
Net operating loss carry forwards |
|
|
401 |
|
|
|
151 |
|
Fair value on interest rate swaps |
|
|
|
|
|
|
6,082 |
|
Pension liability |
|
|
301 |
|
|
|
409 |
|
Specific reserves |
|
|
1,107 |
|
|
|
1,028 |
|
Self insurance accruals |
|
|
812 |
|
|
|
755 |
|
USAC payable |
|
|
2,423 |
|
|
|
|
|
Other |
|
|
254 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
10,949 |
|
|
|
13,814 |
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
|
60,252 |
|
|
|
69,379 |
|
Alternative minimum tax carry forward |
|
|
2,372 |
|
|
|
5,215 |
|
Intangibles and goodwill |
|
|
13,315 |
|
|
|
20,318 |
|
Deferred revenue |
|
|
1,565 |
|
|
|
787 |
|
Pension liability |
|
|
1,848 |
|
|
|
1,824 |
|
Property, plant and equipment |
|
|
19,672 |
|
|
|
17,912 |
|
Stock-based compensation |
|
|
3,398 |
|
|
|
2,577 |
|
Debt issuance costs |
|
|
(5,033 |
) |
|
|
(6,968 |
) |
USAC payable |
|
|
|
|
|
|
2,369 |
|
Fair value on interest rate swaps |
|
|
(2,823 |
) |
|
|
|
|
Crest outside tax basis difference |
|
|
(18,660 |
) |
|
|
|
|
Other |
|
|
907 |
|
|
|
581 |
|
|
|
|
|
|
|
|
|
|
|
76,813 |
|
|
|
113,994 |
|
|
|
|
|
|
|
|
Total deferred tax assets, net |
|
$ |
87,762 |
|
|
$ |
127,808 |
|
|
|
|
|
|
|
|
F-28
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
14. INCOME TAX (Continued)
In the year ended December 31, 2010, the Company generated a taxable loss which was offset by a
tax benefit related to NOLs. Additionally, as discussed below, during the second quarter of 2010
the Company recorded a $29,678 deferred tax expense arising from the Internal Revenue service audit
of Crests income tax returns for 2006 through 2008. In the year ended December 31, 2009, the
Company generated a taxable loss. Offsetting the loss in 2009, the Company recorded a tax benefit
related to NOLs generated in 2009.
The Company files consolidated income tax returns with all if its subsidiaries for U.S. Federal
purposes and with the States of Alaska and Oregon. The Company is no longer subject to examination
for years prior to 2007. With the exception of the Crest audit, the Company is not currently being
audited, nor has it been notified of any pending audits. Except as described below, the Company is
not aware of any controversial or unsupported positions taken on its tax returns that have not
either been resolved in prior audits, by amending prior returns or by adjusting NOL carry forwards
to rectify its filings. The Company has a $162 and $126 current income tax receivable at December
31, 2010 and 2009, respectively. The Company has a long term income tax receivable of $2,781 and $0
at December 31, 2010 and 2009, respectively.
The Company accounts for income tax uncertainties using a threshold of more-likely-than-not in
accordance with the provisions of ASC 740. The Company has reviewed all of its tax filings and
positions taken on its returns and has not identified any material current or future effect on its
consolidated results of operations, cash flows or financial position, other than the Crest audit
issue described below.
In 2008, the Company acquired Crest Communications Corporation. In June 2009, the Internal Revenue
Service commenced an audit of Crests tax returns for the years ended December 31, 2006, December
31, 2007 and October 30, 2008. In April and November of 2010, the Internal Revenue Service issued
Notices of Proposed Adjustment with respect to the 2006, 2007 and 2008 taxable years of Crest. The
NOPAs assess the Company for additional taxable income on cancellation of debt and related
attribute reduction, for accuracy related penalties and for adjustments to the tax treatment of
optical cables, fibers and related conduit. The Company has responded to the Service and believes
it is more likely than not that it will prevail on the factual errors included in the NOPAs;
however it is unable to conclude it is more likely than not it will prevail on the underlying debt
versus equity issue. Therefore, in accordance with the guidance in ASC 740 in the second quarter of
2010, the Company recorded $29,678 in additional income tax expense and $2,781 receivable pending
resolution of the matter. The Company did not recognize any interest or penalties on the deferred
tax liability. See Note 5 Crest Acquisition for more information. The eventual outcome of the
audit is unknown, however the Crest purchase agreement provides for an indemnification of the
Company by the previous owners which could mitigate the impact of adjustments, if any, resulting
from the audits.
In connection with the provisions of ASC Topic 718, Compensation Stock Compensation, the Company
elected to calculate the pool of excess tax benefits under the modified retrospective method, but
only to prior interim periods in the year of initial adoption. Future tax benefits increased $821
and decreased $548 in 2010 and 2009, respectively.
F-29
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
14. INCOME TAX (Continued)
The Company has available at December 31, 2010, unused acquired and operating loss carry
forwards of $150,400 for federal tax purposes and $146,973 for state tax purposes that may be
applied against future taxable income as shown below:
|
|
|
|
|
|
|
|
|
|
|
Total Unused Operating Loss |
|
|
|
Carry forwards |
|
Year of |
|
|
|
|
|
|
Expiration |
|
Federal |
|
|
State |
|
2020 |
|
$ |
2,209 |
|
|
$ |
|
|
2021 |
|
|
34,034 |
|
|
|
30,719 |
|
2022 |
|
|
17,983 |
|
|
|
17,499 |
|
2023 |
|
|
623 |
|
|
|
7,402 |
|
2024 |
|
|
48,703 |
|
|
|
48,205 |
|
2025 |
|
|
24,344 |
|
|
|
23,414 |
|
2026 |
|
|
1,445 |
|
|
|
1,224 |
|
2027 |
|
|
1,201 |
|
|
|
73 |
|
2028 |
|
|
4,565 |
|
|
|
3,654 |
|
2029 |
|
|
8,369 |
|
|
|
8,131 |
|
2030 |
|
|
6,924 |
|
|
|
6,652 |
|
|
|
|
|
|
|
|
|
|
$ |
150,400 |
|
|
$ |
146,973 |
|
|
|
|
|
|
|
|
Acquired unused operating loss carry forwards associated with the Companys acquisition of
Internet Alaska in June 2000 and Crest in October of 2008 are limited by Section 382 of the
Internal Revenue Code. Internet Alaska is limited to $216 and Crest is limited to $2,227 per year.
To the extent that these limits are not used they can be carried forward to subsequent years
thereby effectively increasing that years limitation.
Section 382 of the Internal Revenue Code imposes an annual limit on the ability of loss
corporations that undergo an ownership change. This limitation restricts the amount of operating
losses that can be used to reduce its future taxable income. On December 7, 2005, the Company
underwent an ownership change thereby subjecting it to the Section 382 loss limitation rules. The
corrected overall annual limitation at date of ownership change was $14,874 per year annually
increased by unrealized built-in gains of $10,794. The increase in limitation is in effect through
the year 2010. The taxable loss generated in 2005 after the change in ownership from December 7,
2005 through the end of the year was $1,489 and has no limitations.
15. EARNINGS PER SHARE
Earnings per share are based on weighted average number of shares of common stock and dilutive
potential common shares equivalents outstanding. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the potential dilution
of securities that could share in the earnings of an entity. The Company includes dilutive stock
options based on the treasury stock method. Due to the Companys reported net losses before
extraordinary items for the years ended December 31, 2010, 2009 and 2008 respectively, 3,563, 3,342
and 2,763 potential common share equivalents outstanding, which consisted of options, restricted
stock and stock-settled stock appreciation rights granted to employees and deferred shares granted
to directors, were anti-dilutive. Also excluded from the calculation were shares related to the
Companys convertible debt which were anti-dilutive for the twelve month periods ended December 31,
2010,
2009 and 2008.
F-30
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
15. EARNINGS PER SHARE (Continued)
The following table sets forth the computation of basic and diluted earnings per share for the
years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Loss before extraordinary item |
|
$ |
(30,688 |
) |
|
$ |
(3,569 |
) |
|
$ |
(11,674 |
) |
Gain on extraordinary item, net of taxes |
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
applicable to common
shares |
|
$ |
(30,688 |
) |
|
$ |
33,777 |
|
|
$ |
(11,674 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares
outstanding |
|
|
44,589 |
|
|
|
44,177 |
|
|
|
43,391 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before extraordinary item |
|
$ |
(0.69 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.27 |
) |
Gain on extraordinary item, net of taxes |
|
|
|
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.69 |
) |
|
$ |
0.77 |
|
|
$ |
(0.27 |
) |
|
|
|
|
|
|
|
|
|
|
16. STOCK INCENTIVE PLANS
Under the Companys stock incentive plans, ACS Group, through the Compensation and Personnel
Committee of its Board of Directors, may grant stock options, restricted stock, stock appreciation
rights and other awards to officers, employees and non-employee directors. Since inception, ACS
Group reserved 14,710 shares of authorized common stock for issuance under its stock incentive
plans. In general, instruments issued under the plans vest ratably over three, four or five years
and the plans terminate in 2012. After the plans terminate, all shares granted under the plan,
prior to termination, continue to vest under the terms of the grant when awarded.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
In July 2009, ACS shareholders approved the Alaska Communications Systems Group, Inc. 1999 Stock
Incentive Plan, as amended (1999 SIP), which permits the granting of stock options, restricted
stock, stock appreciation rights and other awards to officers and employees. The Company reserved
12,160 shares under this plan. At December 31, 2010, 13,284 equity instruments were granted, 4,042
were forfeited, and 5,957 were exercised. A total of 133 shares that were surrendered for payroll
taxes or exercise price may be reissued under the plan and 3,051 shares are available for grant
under the plan.
The Company began granting restricted stock in 2005 in lieu of stock options as the
primary equity based incentive for executive and non-union represented employees. The time based
restricted stock awards have vesting terms that range from three to five years with equal annual
vesting amounts. The performance based restricted stock awards cliff vest in five years and have
accelerated vesting terms of one third per year if certain profitability and capital expenditure
criteria are met. A long-term incentive program (LTIP) also exists for executive management. LTIP
awards are awarded annually and cliff vest in five years with accelerated vesting in three years if
cumulative three year profitability criteria are met.
The Company granted performance share units (PSUs) in June 2008 to certain executives under the
1999 SIP. PSUs were awarded on the condition that the participant remains employed or in the
service of the Company from the date of the Agreement through the time of vesting. Compensation
expense associated with outstanding performance share units were recorded over the estimated
performance period which would likely result in the vesting of the awards. The amount of expense
recorded each period was dependent upon an estimate of the number of shares that would ultimately
be issued. As the payout of these awards was subject to the approval of the compensation committee,
the awards were re-measured at each reporting period end until such time as they vested or
cancelled. In March 2009, the Compensation and Personnel Committee determined that 50% of the units
vested based upon completion of certain goals. In June 2009, the Committee
determined approximately 80% of the remaining units had vested based upon individual achievement of
the remaining goals and the balance of unvested units were cancelled.
The Company granted SSARs under the 1999 SIP to Liane Pelletier, the Companys Chief Executive
Officer and two other named executive officers in 2008 and 2009. The SSARs have a term of five
years and include
F-31
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
16. STOCK INCENTIVE PLANS (Continued)
ratable vesting through April 2011.
2003 Options for Officer Inducement Grant
During 2003, the Companys Board of Directors awarded 1,000 options as an inducement grant in
hiring the Companys Chief Executive Officer. As of December 31, 2010, 800 options have been
exercised/converted and 200 are currently outstanding.
2008 Restricted Stock Unit Equivalents for Officer Inducement Grant
In September 2008, the Company entered into an amended and restated employment agreement with Liane
Pelletier, the Companys Chief Executive Officer. Under the agreement, the Company granted the
executive 100 fully vested restricted stock unit equivalents (RSUEs). These RSUEs were settled in
shares of the Companys common stock, reserved under the 1999 SIP, on a one-for-one basis on July
31, 2009. The Company also paid cash equal to dividends declared on shares of the Companys common
stock from September 1, 2008 through July 31, 2009. The Company accounted for these RSUEs as a
liability, re-measured at each reporting period, until July 31, 2009.
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan, as amended, was approved by ACS shareholders in July 2009
and will expire in December 2012. The Company reserved 1,050 shares under this plan. At December
31, 2010, 122 shares are available for issuance and sale. All ACS Group employees and all of the
employees of designated subsidiaries generally will be eligible to participate in the purchase
plan, other than employees whose customary employment is 20 hours or less per week, is not more
than five months in a calendar year or who are ineligible to participate due to restrictions under
the Internal Revenue Code.
A participant in the purchase plan may authorize regular salary deductions up to of a maximum of
15% and a minimum of 1% of base compensation. The number shares which may be purchased by any
employee during any calendar year may not exceed the lessor of 10 shares per offering period or a
fair market value of $25. The amounts so deducted and contributed are applied to the purchase of
shares of common stock at 85% of the lesser of the fair market value of such shares on the offering
date or the purchase date for such offering period. There are two six month purchase periods in
each calendar year; the offering dates are January 1 and July 1 and the purchase dates are June 30
and December 31. The first offering period under the plan commenced on January 1, 2000. Shares are
purchased on the open market or issued from authorized but un-issued shares on behalf of
participating employees on the purchase date and each such participant has the rights of a
stockholder with respect to such shares. During the year ended December 31, 2010, approximately 18%
of eligible employees elected to participate in the plan.
ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
The non-employee director stock compensation plan, as amended was approved by ACS shareholders in
July 2009. The Company reserved 500 shares under this plan. At December 31, 2010, 324 shares were
awarded and 176 shares are available for grant under the plan. In 2007, the Companys policy
required directors to receive not less than 50% of their annual retainer in the form of ACS Groups
stock. Directors were permitted to elect up to 100% of their annual retainer in the form of ACS
Groups stock. Beginning January 1, 2008, the Companys policy was revised to require that
Directors receive a portion of their annual retainer in the form of ACS Groups stock. Once a year,
the Directors elect the method by which they receive their stock (issued or deferred). During the
year ended December 31, 2010, 39 shares under the plan were awarded to directors, of which 22 were
deferred until termination of service.
Stock Compensation Expense
Total compensation cost for share-based payments was $3,989, $4,273 and $9,477 for the twelve
months ended December 31, 2010, 2009 and 2008, respectively.
The Company purchases, from shares reserved under the 1999 SIP, sufficient vested shares to cover
employee payroll tax withholding requirements upon the vesting of restricted stock. From time to
time the Company also purchases sufficient vested shares to cover employee payroll tax withholding
requirements at the aggregate
F-32
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
16. STOCK INCENTIVE PLANS (Continued)
exercise price upon exercise of options. Shares repurchased by the Company for this purpose are
reallocated to the share reserve with a value deemed to be the fair market value of the shares on
the date of surrender and are set aside for future grants under the plan. The Company expects to
repurchase approximately 222 shares in 2011. This amount is based upon an estimation of the number
of shares of restricted stock awards expected to vest and options expected to be exercised during
2011.
Valuation Assumptions
Assumptions used for valuation of equity instruments awarded during the twelve months ended
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
2008 |
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
n/a |
|
|
|
0.25 |
% |
|
|
0.25% - 2.00 |
% |
Dividend yield |
|
|
n/a |
|
|
|
9.27 |
% |
|
|
7.59 |
% |
Expected volatility factor |
|
|
n/a |
|
|
|
36.27 |
% |
|
|
33.88 |
% |
Expected option life (years) |
|
|
n/a |
|
|
|
3.24 |
|
|
|
3.22 |
|
Restricted stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0% - 0.25 |
% |
|
|
0% - 0.25 |
% |
|
|
0.25% - 2.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected, per annum,
forfeiture rate |
|
|
0% - 6.47 |
% |
|
|
0% - 5.47 |
% |
|
|
0% - 4.47 |
% |
Equity Instruments Outstanding
Stock Options and Stock Settled Stock Appreciation Rights
Stock options were not granted for the twelve months ended December 31, 2010, 2009 and 2008. There
were no SSARs granted for the twelve months ended December 31, 2010. There were 775 SSARs granted
for each of the twelve months ended December 31, 2009 and 2008.
Proceeds from the exercise of stock options for the year ended December 31, 2010 were $159.
Information on outstanding options under the plan for the year ended December 31, 2010 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
Outstanding, January 1, 2010 |
|
|
2,011 |
|
|
$ |
9.33 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(133 |
) |
|
|
4.67 |
|
|
|
|
|
|
|
|
|
Canceled or expired |
|
|
(73 |
) |
|
|
12.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2010 |
|
|
1,805 |
|
|
|
9.53 |
|
|
|
2.90 |
|
|
$ |
3,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
1,452 |
|
|
$ |
9.60 |
|
|
|
2.89 |
|
|
|
2,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units and Performance Share Units
There were 801, 845 and 846 restricted stock grants for the twelve months ended December 31, 2010,
2009 and 2008, respectively. No RSUEs were converted and no PSUs were granted in the twelve months
ended December 31, 2010. However, in the years ended December 31, 2009 100 RSUEs were converted to
common stock and in 2008 263 PSUs were granted.
F-33
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
16. STOCK INCENTIVE PLANS (Continued)
Restricted stock grants outstanding, all of which are un-vested at December 31, 2010, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Fair |
|
|
|
Shares |
|
|
Value |
|
Outstanding at January 1, 2010 |
|
|
1,276 |
|
|
$ |
7.69 |
|
Granted |
|
|
801 |
|
|
|
7.42 |
|
Vested |
|
|
(107 |
) |
|
|
11.96 |
|
Canceled or expired |
|
|
(289 |
) |
|
|
7.74 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010 |
|
|
1,681 |
|
|
$ |
7.28 |
|
|
|
|
|
|
|
|
|
Selected Information on Equity Instruments
Select information on equity instruments under the plan for the years ended December 31, 2010, 2009
and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Weighted-average grant-date fair value of equity
instruments granted |
|
$ |
7.42 |
|
|
$ |
3.27 |
|
|
$ |
5.87 |
|
Total fair value of shares vested during the period |
|
$ |
1,356 |
|
|
$ |
7,300 |
|
|
$ |
8,403 |
|
Total intrinsic value of options exercised |
|
$ |
602 |
|
|
$ |
391 |
|
|
$ |
4,260 |
|
Unamortized stock-based payment and the weighted average expense period at December 31, 2010,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Period |
|
|
|
Unamortized |
|
|
to Expense |
|
|
|
Expense |
|
|
(years) |
|
Stock options and SARs |
|
$ |
32 |
|
|
|
0.3 |
|
Restricted stock and PSUs |
|
|
5,342 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
5,374 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
17. RETIREMENT PLANS
Pension benefits for substantially all of the Companys Alaska-based employees are provided through
the Alaska Electrical Pension Fund (AEPF). The Company pays a contractual hourly amount based on
employee classification or base compensation. As a multi-employer defined benefit plan, the
accumulated benefits and plan assets are not determined for, or allocated separately to, the
individual employer. During 2009, the Company received a notice of Zone Freezing Election from the
Joint Board of Trustees of the AEPF. The election was a onetime event allowable under the Worker,
Retiree and Employer Recovery Act of 2008 which freezes the plans zone status for the 2008 plan
year at January 1, 2008 values. The notice certified that the plan was in the Green or Safe Zone
for the upcoming plan year. During 2010, the Company received
notice that the plan remained in the green zone for the upcoming plan year. The Company can not
accurately project any change in the plan status in future years given the uncertainty of economic
conditions or the effect of actuarial valuations versus actual performance in the market. As a
multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined
for or allocated separately to an individual employer. The Companys portion of the plans pension
cost for 2010, 2009 and 2008 was $9,643, $10,799 and $11,548, respectively.
F-34
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
17. RETIREMENT PLANS (Continued)
The Company also provides a 401(k) retirement savings plan covering substantially all of its
employees. The plan allows for discretionary contributions as determined by the Board of Directors,
subject to Internal Revenue Code limitations. There was a $101, $81 and $18 matching contribution
for 2010, 2009 and 2008 respectively.
The Company also has a separate defined benefit plan that covers certain employees previously
employed by Century Telephone Enterprise, Inc. (CenturyTel Plan). This plan was transferred to
the Company in connection with the acquisition of CenturyTels Alaska properties. Existing plan
assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan on
September 3, 1999. Accrued benefits under the ACS Retirement Plan were determined in accordance
with the provisions of the CenturyTel Plan. Upon completion of the transfer to the Company, covered
employees ceased to accrue benefits under the plan. On November 1, 2000, the ACS Retirement Plan
was amended to conform early retirement reduction factors and various other terms to those provided
by the AEPF. As a result of this amendment, prior service cost of $1,992 was recorded and is being
amortized over the expected service life of the plan participants at the date of the amendment. The
Company uses the traditional unit credit method for the determination of pension cost for financial
reporting and funding purposes and complies with the funding requirements under the Employee
Retirement Income Security Act of 1974 (ERISA). With the down turn in the economy over the past
few years, the plan is not adequately funded under ERISA at December 31, 2010. Management is
currently assessing the timing and amount of a contribution the Company will make during 2011 to
maintain required funding levels. Management is also estimating what additional contributions the
Company may be required to make in subsequent years in the event the value of the plans assets
remains volatile or continue to decline. The Company did not contribute to the fund in 2010 for the
2009 tax year nor did it contribute to the fund in 2008 for the 2007 tax year. The Company did make
a $35 contribution in 2009 for the 2008 tax year. The Company uses a December 31 measurement date
for the plan.
The following is a calculation of the funded status of the ACS Retirement Plan using beginning and
ending balances for 2010 and 2009 for the projected benefit obligation and the plan assets:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
14,129 |
|
|
$ |
13,094 |
|
Interest cost |
|
|
806 |
|
|
|
838 |
|
Actuarial gain |
|
|
897 |
|
|
|
971 |
|
Benefits paid |
|
|
(856 |
) |
|
|
(774 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
14,976 |
|
|
|
14,129 |
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
10,787 |
|
|
|
9,538 |
|
Actual return on plan assets |
|
|
1,160 |
|
|
|
1,988 |
|
Employer contribution |
|
|
|
|
|
|
35 |
|
Benefits paid |
|
|
(856 |
) |
|
|
(774 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
11,091 |
|
|
|
10,787 |
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(3,885 |
) |
|
$ |
(3,342 |
) |
|
|
|
|
|
|
|
The plans projected benefit obligation equals its accumulated benefit obligation. The 2010
and 2009 liability balance of $3,885 and $3,342 respectively, is recorded on the balance sheet in
other long-term liabilities.
F-35
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
17. RETIREMENT PLANS (Continued)
The following table represents the net periodic pension expense for the ACS Retirement Plan for
2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest cost |
|
$ |
806 |
|
|
$ |
838 |
|
|
$ |
810 |
|
Expected return on plan assets |
|
|
(827 |
) |
|
|
(730 |
) |
|
|
(1,031 |
) |
Amortization of loss |
|
|
637 |
|
|
|
778 |
|
|
|
157 |
|
Amortization of prior service cost |
|
|
129 |
|
|
|
203 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
745 |
|
|
$ |
1,089 |
|
|
$ |
139 |
|
|
|
|
|
|
|
|
|
|
|
In 2011, the Company expects amortization of net gains and losses of $733.
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Components of other comprehensive (income) loss: |
|
|
|
|
|
|
|
|
Prior service cost |
|
$ |
|
|
|
$ |
129 |
|
Net loss |
|
|
5,230 |
|
|
|
5,302 |
|
|
|
|
|
|
|
|
|
|
$ |
5,230 |
|
|
$ |
5,431 |
|
|
|
|
|
|
|
|
The assumptions used to account for the plan as of December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Discount rate for benefit obligation |
|
|
5.16 |
% |
|
|
5.89 |
% |
Discount rate for pension expense |
|
|
5.89 |
% |
|
|
6.63 |
% |
Expected long-term rate of return on assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
0.00 |
% |
|
|
0.00 |
% |
The discount rates were calculated using a proprietary yield curve based on the top 30% of the
universe of bonds included in the bond pool. The expected long-term rate of return on assets rate
is the best estimate of
future expected return for the asset pool, given the expected returns and allocation targets for
the various classes of assets.
Based on risk and return history for capital markets along with asset allocation risk and return
projections, the following asset allocation guidelines were developed for the plan:
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Maximum |
|
Equity securities |
|
|
40 |
% |
|
|
100 |
% |
Fixed income |
|
|
20 |
% |
|
|
60 |
% |
Cash equivalents |
|
|
0 |
% |
|
|
10 |
% |
The plans asset allocations at December 31, 2010 and 2009 by asset category are as follows:
|
|
|
|
|
|
|
|
|
Asset Category |
|
2010 |
|
|
2009 |
|
Equity securities* |
|
|
61 |
% |
|
|
60 |
% |
Debt securities* |
|
|
39 |
% |
|
|
39 |
% |
Other/Cash |
|
|
0 |
% |
|
|
1 |
% |
|
|
|
* |
|
May include mutual funds comprised of both stocks and bonds. |
The following table reflects major categories of plan assets as of December 31, 2010, inputs and
valuation techniques used to measure the fair value of plan assets regarding the ACS Retirement
Plan:
F-36
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
17. RETIREMENT PLANS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Asset Category |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Money market |
|
$ |
105 |
|
|
$ |
105 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities (Investment Funds)* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Growth |
|
|
1,522 |
|
|
|
1,522 |
|
|
|
|
|
|
|
|
|
U.S. Small CAP |
|
|
548 |
|
|
|
548 |
|
|
|
|
|
|
|
|
|
U.S. Large CAP |
|
|
4,571 |
|
|
|
4,571 |
|
|
|
|
|
|
|
|
|
Debt Securities (Investment Funds)* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIMCO Total Return Fund |
|
|
4,345 |
|
|
|
4,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,091 |
|
|
$ |
11,091 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
May include mutual funds comprised of both stocks and bonds. |
The fundamental investment objective of the plan is to generate a consistent total investment
return sufficient to pay plan benefits to retired employees while minimizing the long-term cost to
the Company. The long-term (10 year and beyond) plan asset growth objective is to achieve a rate of
return that exceeds the actuarial interest assumption after fees and expenses.
Because of the Companys long-term investment objectives, the Plan administrator is directed to
resist being reactive to short-term capital market developments and to maintain an asset mix that
is continuously rebalanced to adhere to the plan investment mix guidelines. The Plans investment
goal is to protect the assets long-term purchasing power. The Plans assets are managed in a
manner that emphasizes a higher exposure to equity markets versus other asset classes. It is
expected that such a strategy will provide a higher probability of meeting the plans actuarial
rate of return assumption over time.
The benefits expected to be paid in each of the next five years and in the aggregate for the five
fiscal years thereafter are as follows:
|
|
|
|
|
2011 |
|
$ |
903 |
|
2012 |
|
|
930 |
|
2013 |
|
|
942 |
|
2014 |
|
|
938 |
|
2015 |
|
|
997 |
|
2016-2020 |
|
|
5,319 |
|
The Company also has a separate executive post-retirement health benefit plan. The Alaska
Communications Systems Executive Retiree Health Benefit Plan (The ACS Health Plan) was adopted by
the Company in November 2001 and amended in October 2002. The ACS Health Plan covers a select group
of former management employees and provides a graded subsidy for medical, dental and vision
coverage. The Compensation and Personnel Committee of the Board of Directors decided to terminate
The ACS Health Plan in January 2004. Two people qualified under the plan are eligible for future
benefits and the plan is closed to future participants.
The Company uses the projected unit credit method for the determination of post-retirement health
cost for financial reporting and funding purposes and complies with the funding requirements under
ERISA. No contribution was made to The ACS Health Plan for 2010, 2009 or 2008, and no contribution
is expected in 2011. The Company uses a December 31 measurement date for the plan.
F-37
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
17. RETIREMENT PLANS (Continued)
The fundamental investment objective of the plan is to realize an annual total investment return
consistent with the conservative risk tolerance plan dictated by the Company. The investment
profile of the plan emphasizes liquidity and income, some capital stock investment and some
fluctuation of investment return. It is anticipated that the investment manager will achieve this
objective by investing the accounts assets in mutual funds. The portfolio may hold common stock,
fixed income securities, money market instruments and U.S. Treasury obligations. On December 31,
2010, the plan was overfunded by $75 with plan assets of $213. The net periodic post-retirement
cost for 2010 was $0.
18. BUSINESS SEGMENTS
The Companys segments and their principal activities consist of the following:
|
|
|
Wireline Wireline provides communication services including voice, broadband and
data, next generation IP network services, network access, long distance and other services
to consumers, carriers, business and government customers. |
|
|
|
|
Wireless Wireless products and services include voice and data products and other
value added services and equipment sales. |
The Company also incurs interest expense, interest income and other operating and non-operating
income and expense at the corporate level, which are not allocated to the business segments nor are
they evaluated by management in analyzing the performance of the business segments. These
non-operating income and expense items are provided in the accompanying table under the caption
All Other in order to assist the users of these financial statements in reconciling the operating
results and total assets of the business segments to the consolidated financial statements. Common
use assets are held at ACS Holdings and are allocated to the business segments based on operating
revenue. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
The following table illustrates selected financial data for
each segment as of and for the year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
255,973 |
|
|
$ |
142,161 |
|
|
$ |
6,562 |
|
|
$ |
(63,172 |
) |
|
$ |
341,524 |
|
Intersegment revenue |
|
|
55,050 |
|
|
|
1,560 |
|
|
|
6,562 |
|
|
|
|
|
|
|
63,172 |
|
Depreciation and amortization |
|
|
58,650 |
|
|
|
11,440 |
|
|
|
1,988 |
|
|
|
|
|
|
|
72,078 |
|
Operating income |
|
|
6,202 |
|
|
|
39,350 |
|
|
|
1,622 |
|
|
|
|
|
|
|
47,174 |
|
Interest expense |
|
|
436 |
|
|
|
317 |
|
|
|
(35,507 |
) |
|
|
|
|
|
|
(34,754 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(13,339 |
) |
|
|
|
|
|
|
(13,339 |
) |
Interest income |
|
|
42 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
83 |
|
Income (loss) before income tax |
|
|
6,680 |
|
|
|
39,667 |
|
|
|
(47,183 |
) |
|
|
|
|
|
|
(836 |
) |
Income tax expense |
|
|
(1,059 |
) |
|
|
(16,309 |
) |
|
|
(12,484 |
) |
|
|
|
|
|
|
(29,852 |
) |
Net income (loss) |
|
|
5,621 |
|
|
|
23,358 |
|
|
|
(59,667 |
) |
|
|
|
|
|
|
(30,688 |
) |
Total assets |
|
|
442,136 |
|
|
|
175,771 |
|
|
|
2,708 |
|
|
|
|
|
|
|
620,615 |
|
Capital expenditures |
|
|
27,302 |
|
|
|
8,082 |
|
|
|
2,952 |
|
|
|
|
|
|
|
38,336 |
|
F-38
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
18. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the year
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
260,061 |
|
|
$ |
143,500 |
|
|
$ |
10,926 |
|
|
$ |
(68,447 |
) |
|
$ |
346,040 |
|
Intersegment revenue |
|
|
55,041 |
|
|
|
2,480 |
|
|
|
10,926 |
|
|
|
|
|
|
|
68,447 |
|
Depreciation and amortization |
|
|
66,986 |
|
|
|
8,963 |
|
|
|
5,409 |
|
|
|
|
|
|
|
81,358 |
|
Operating income (loss) |
|
|
(12,892 |
) |
|
|
45,632 |
|
|
|
(163 |
) |
|
|
|
|
|
|
32,577 |
|
Interest expense |
|
|
2,479 |
|
|
|
703 |
|
|
|
(41,593 |
) |
|
|
|
|
|
|
(38,411 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
91 |
|
Income (loss) before income tax |
|
|
(10,413 |
) |
|
|
46,335 |
|
|
|
(41,665 |
) |
|
|
|
|
|
|
(5,743 |
) |
Income tax (expense) benefit |
|
|
(23,609 |
) |
|
|
(19,008 |
) |
|
|
44,791 |
|
|
|
|
|
|
|
2,174 |
|
Extraordinary item, net of tax |
|
|
37,442 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
37,346 |
|
Net income |
|
|
3,420 |
|
|
|
27,231 |
|
|
|
3,126 |
|
|
|
|
|
|
|
33,777 |
|
Total assets |
|
|
486,123 |
|
|
|
183,995 |
|
|
|
5,180 |
|
|
|
|
|
|
|
675,298 |
|
Capital expenditures |
|
|
32,953 |
|
|
|
13,575 |
|
|
|
7,681 |
|
|
|
|
|
|
|
54,209 |
|
With the discontinuance of regulatory accounting as of July 1, 2009, the Company recorded the
elimination of its regulatory assets and liabilities resulting in an extraordinary gain in 2009.
Additionally, the Company retrospectively reclassified certain items in the financial statements to
conform to the current presentation. See Note 2 Discontinuance of Regulatory Accounting for a
detailed description of these changes. The reclassifications had no affect on the Companys
previously reported operating cash flow, income before taxes or net income.
The following table illustrates selected financial data for each segment as of and for the year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
261,979 |
|
|
$ |
144,843 |
|
|
$ |
19,391 |
|
|
$ |
(76,531 |
) |
|
$ |
349,682 |
|
Intersegment revenue |
|
|
54,411 |
|
|
|
2,729 |
|
|
|
19,391 |
|
|
|
|
|
|
|
76,531 |
|
Depreciation and amortization |
|
|
52,159 |
|
|
|
8,223 |
|
|
|
13,620 |
|
|
|
|
|
|
|
74,002 |
|
Loss on impairment of goodwill
and intangible assets |
|
|
29,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,641 |
|
Operating income (loss) |
|
|
(33,850 |
) |
|
|
42,409 |
|
|
|
4,815 |
|
|
|
|
|
|
|
13,374 |
|
Interest expense |
|
|
3,665 |
|
|
|
504 |
|
|
|
(38,241 |
) |
|
|
|
|
|
|
(34,072 |
) |
Interest income |
|
|
1 |
|
|
|
|
|
|
|
1,694 |
|
|
|
|
|
|
|
1,695 |
|
Income (loss) before income tax |
|
|
(30,184 |
) |
|
|
42,913 |
|
|
|
(31,977 |
) |
|
|
|
|
|
|
(19,248 |
) |
Income tax (expense) benefit |
|
|
4,006 |
|
|
|
(17,949 |
) |
|
|
21,517 |
|
|
|
|
|
|
|
7,574 |
|
Net income (loss) |
|
|
(26,178 |
) |
|
|
24,964 |
|
|
|
(10,460 |
) |
|
|
|
|
|
|
(11,674 |
) |
Total assets |
|
|
557,720 |
|
|
|
186,281 |
|
|
|
10,243 |
|
|
|
(3,216 |
) |
|
|
751,028 |
|
Capital expenditures |
|
|
109,462 |
|
|
|
12,032 |
|
|
|
5,817 |
|
|
|
|
|
|
|
127,311 |
|
19. COMMITMENTS AND CONTINGENCIES
The Company enters into purchase commitments with vendors in the ordinary course of business. The
Company also has long-term purchase contracts with vendors to support the ongoing needs of its
business. These purchase commitments and contracts have varying terms and in certain cases may
require the Company to buy goods and services in the future at predetermined volumes and at fixed
prices.
As a result of the NOPAs and Revised NOPAs issued in connection with the IRS audit of Crest, the
Company recorded $29,678 in additional income tax expense and a $2,781 receivable based on its
assessment of the more likely than not outcome of the matter. Additionally, the Company is involved
in various claims, legal actions
F-39
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Amounts)
19. COMMITMENTS AND CONTINGENCIES (Continued)
and regulatory proceedings arising in the ordinary course of business and has recorded litigation
reserves of $1,020 as of December 31, 2010 against certain current claims and legal actions. The
Company believes that the disposition of these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations or cash flows. However, with
respect to the Crest Audit, should the appeals process fail to overturn the NOPA, should the
Company be unable to preserve the corporate structure of the Crest subsidiaries, and should the
Company prove unable to effectively enforce the indemnification provisions in the purchase
agreement pursuant to which it acquired Crest, the matter could have a material effect on the
Companys consolidated financial position, results of operations and cash flows. It is the
Companys policy to expense cost associated with loss contingencies as they are incurred.
The Company pledges substantially all property, assets and revenue as collateral on its outstanding
debt instruments.
20. SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data |
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
82,447 |
|
|
$ |
84,532 |
|
|
$ |
89,768 |
|
|
$ |
84,777 |
|
Operating income |
|
|
11,005 |
|
|
|
11,806 |
|
|
|
14,796 |
|
|
|
9,567 |
|
Net income (loss) |
|
|
1,270 |
|
|
|
(27,673 |
) |
|
|
(3,018 |
) |
|
|
(1,267 |
) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.03 |
|
|
|
(0.62 |
) |
|
|
(0.07 |
) |
|
|
(0.03 |
) |
Diluted |
|
|
0.03 |
|
|
|
(0.62 |
) |
|
|
(0.07 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
86,041 |
|
|
$ |
85,902 |
|
|
$ |
91,145 |
|
|
$ |
82,952 |
|
Operating income (loss) |
|
|
12,158 |
|
|
|
12,206 |
|
|
|
10,208 |
|
|
|
(1,995 |
) |
Net income (loss) |
|
|
2,150 |
|
|
|
1,089 |
|
|
|
37,602 |
|
|
|
(7,064 |
) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.05 |
|
|
|
0.02 |
|
|
|
0.85 |
|
|
|
(0.16 |
) |
Diluted |
|
|
0.05 |
|
|
|
0.02 |
|
|
|
0.83 |
|
|
|
(0.16 |
) |
F-40