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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, 2008
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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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52-2126573 |
| (State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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| 600 Telephone Avenue |
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| Anchorage, Alaska
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99503-6091 |
| (Address of principal executive offices)
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(Zip Code) |
(907) 297-3000
(Registrant’s telephone number, including area code)
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 |
| 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 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
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer o
(Do not check if a smaller reporting company) | Smaller reporting company o |
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, 2008 was approximately $516 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 20, 2009 there were outstanding 43,726,399 shares of Common Stock, $.01 par
value, of the registrant.
Documents Incorporated by Reference
Portions of Registrant’s definitive proxy statement for its annual stockholders’ meeting to be held on June 12, 2009 are incorporated by reference in Part III of this
Form 10-K
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
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PART I
Item 1. Business
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 “ACS Group”) 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 in these provisions. 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 and 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
1A—Risk Factors” and “Item 7—Management’s 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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our ability to complete, manage, integrate, market, maintain and attract sufficient
customers to our Northstar and Alaska-Oregon Network (“AKORN”) long-haul fiber
facilities and our ability to develop attractive integrated products and services
making use of the facility; |
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the continued availability of financing in the amounts, at the terms, and subject to
the conditions necessary, to support our future business; |
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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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rapid technological developments and changes in the telecommunications industries; |
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changes in revenue resulting from regulatory actions affecting inter-carrier
compensation; |
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regulatory limitations on our ability to change our pricing for communications
services; |
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possible widespread or lengthy failures of our system or network cables,
particularly our non-redundant systems, including our primary fiber-link connecting
Alaska and the lower 48 states, which would cause significant delays or interruptions
of service and/or loss of customers; |
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other 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 revenue from Universal Service Funds (“USFs”); |
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the possible unavailability, beginning during the fiscal year 2009, of Statement of
Financial Accounting Standard (SFAS) No. 71, Accounting for the Effects of Certain
Types of Regulation, to our wireline subsidiaries or other changes in accounting
policies or practices adopted voluntarily or as required by accounting principles
generally accepted in the United States; |
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changes in the demand for our products and services; |
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changes in general industry and market conditions and growth rates; |
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changes in interest rates or other general national, regional or local economic
conditions; |
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governmental and public policy changes; |
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the success of any future acquisitions; and |
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the matters described under “Item 1A—Risk Factors”. |
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
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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 “ACS” refer to Alaska Communications Systems Group, Inc. and its
consolidated subsidiaries.
About ACS
We believe we provide Alaska’s leading integrated communications services. We provide both
wireline and wireless communications services throughout Alaska and we connect our networks to the
lower 48 states via high-speed fiber optic cables. Our wireline business comprises one of the most
expansive networks in Alaska. Our wireless business includes the largest third generation (“3G”)
wireless network operating in Alaska today. Both segments rely on our highly skilled workforce of
approximately 1,000 employees.
ACS 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 CenturyTel’s
Alaska assets.
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, which conduct the
following principal activities:
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Wireline: We provide communications services including voice, data, broadband,
multi-protocol label switching (“MPLS”) services, network access, long distance and
other services to consumers, carriers, businesses and government customers throughout
Alaska and to and from Alaska. |
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Wireless: We provide wireless voice and data service and products and other
value-added services and equipment sales across Alaska. |
For a detailed review of our financial performance and results of operations by business
segment, see Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” — and Note 17—“Business Segments of our Consolidated Financial
Statements”, each of which are incorporated herein by reference.
Wireline
We provide voice, data, broadband, network access, long distance, and other advanced IP
network services to consumers, carriers, businesses and government customers throughout Alaska
and to and from Alaska. We provide telephone and high-speed Internet services to consumers in
our wireline footprint. Our high-speed data network relies on advanced packet-based MPLS
technology. Our MPLS network provides the framework for our “Metro Ethernet” service, which we
market to medium and large 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.
Interstate and Enterprise Products and Services
During 2008, we acquired Crest Communications Corporation (“Crest”), and its extensive
high-speed fiber optic cable system, which includes, Northstar, an undersea fiber system of
approximately 1,900 miles with cable landing facilities in Whittier, Juneau, and Valdez,
Alaska, and Nedonna Beach, Oregon. Crest’s system also includes terrestrial transport
components linking Nedonna Beach, Oregon to the Network Operations Control Center (“NOCC”) in
Hillsboro, Oregon and collocation facilities in Portland, Oregon and Seattle, Washington.
We also have nearly completed construction of AKORN, a new state-of-the-art undersea fiber
optic cable also connecting Alaska with the lower 48 states along a diverse path. We expect to
commercially deploy AKORN in 2009.
Lastly, we deployed redundant NOCCs in Alaska and the lower 48. We believe that these
investments will allow us to offer enterprise customers virtually limitless bandwidth as well
as collapsible ring protection designed to serve their
most sensitive interstate data traffic requirements.
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In-State Products and Services
We provide a broad array of robust in-state wireline communications services to our
residential, business and enterprise customers, including voice, broadband data, network
access, long distance and other communications products and services.
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Voice services we offer include our local exchange, local private line, wire
maintenance, voice messaging and value-added services. Value-added services include
caller ID, call waiting, return call and other enhanced telephony features. |
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Broadband, data and Internet services we offer include MPLS, Metro Ethernet, high-speed
and scalable DSL. |
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Network access services are provided primarily to long distance and other competing
carriers who use our local exchange facilities to provide usage services to their
customers. |
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Long distance services we offer include intrastate toll and interstate long distance
voice and data services. |
Operations
Our wireline segment comprises four lines of business which operate across our subsidiaries
and focus on specific customer markets. We are not dependent on any single customer. Our retail
line of business provides communications and information services to residential customers and
businesses. These services include local and long distance telephone services, including voicemail,
caller ID and call forwarding. We also offer retail broadband and Internet services. Our wholesale
line of business serves competitive local exchange carriers (“CLECs”) by offering, for resale, our
local exchange network, including unbundled network elements (“UNEs”). We also offer traditional
data services in specific markets, such as private line, frame relay and ATM services, as well as
MPLS services. Our network access line of business provides voice and data termination services
through our local telephone facilities.
Our enterprise line of business integrates the very best of our voice, data and Internet
communications services and targets these combined services to medium and large business customers,
multi-national corporations, municipal, state and federal governments, and other telecommunications
carriers. Our enterprise line of business relies heavily on our ability to provide redundant high
bandwidth data connections throughout Alaska and to the lower 48 states. We seek to provide these
customers comprehensive, value-added services that make communications more secure, reliable and
efficient.
Competition
The telecommunications industry is highly competitive. Factors contributing to the industry’s
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 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. Current and potential competitors in
telecommunication services include cable companies, wireless service providers, long distance
companies, other local telephone companies, foreign telecommunications providers, electric
utilities, Internet service providers (“ISPs”), Internet information providers and other companies
that offer network services. Many of these companies have a strong market presence, including
national and international presences, brand recognition and existing customer relationships, all of
which contribute to intensifying competition and may affect our future revenue growth. For more
information associated with the risks of our competitive environment, see “Item 1A—Risk Factors”.
Local Exchange Services
The ability to offer local exchange services has historically been subject to regulation by
state regulatory commissions. Applications from competitors to provide and resell local exchange
services have been approved in most of our service territory.
We are required to permit competitors to purchase our services for resale, or access
components of our network on an unbundled basis at a prescribed cost, and we expect intense
competition in our local exchange markets to continue indefinitely. Our telephone operations
generally have been required to sell their services to CLECs at significant discounts from the
prices we charge our retail customers. The scope of these obligations and the rates we receive are
subject to ongoing review and revision by the Federal Communications Commission (“FCC”) and the
Regulatory Commission of Alaska (“RCA”). For further information, see the section “Regulation”
below.
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Long Distance Services
We offer intrastate toll and interstate long distance services throughout Alaska. The RCA has
jurisdiction over intrastate long distance services and the FCC has jurisdiction over interstate
long distance services. For further information, see the section “Regulation” below. A number of
our major competitors in the long distance business have strong brand recognition and existing
customer relationships, making for a very competitive environment. For further information on our
competitive environment, see “Item 1A—Risk Factors”.
Network
We serve approximately 201,000 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 Alaska’s urban areas and connects the primary areas of Anchorage, Fairbanks and Juneau with
each other and the lower 48 states, offers us the opportunity to provide our customers with
improved network reliability and speed for voice and data applications. We own and operate the most
expansive IP networks in Alaska using MPLS technology. We provide voice, data, and Internet service
to all of the major population centers in Alaska.
Following our 2008 acquisition of Crest, we own and operate an undersea fiber system of
approximately 1,900 miles with cable landing facilities in Whittier, Juneau, and Valdez, Alaska,
and Nedonna Beach, Oregon. Crest’s 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. Further, we expect to invest in the
technology and services needed to provide the full range of managed services that enterprise
customers expect. In addition, we have nearly completed construction of AKORN, a new
state-of-the-art undersea fiber optic cable connecting Alaska with the lower 48 along a diverse
path. We expect to commercially deploy AKORN in 2009.
Wireless
Our wireless segment provides facilities-based voice and data services statewide. We operate
the largest 3G wireless network in Alaska.
Operations
We provide wireless voice and data services across an extensive statewide 1xRTT CDMA and EVDO
Rev A wireless network. In addition, through roaming agreements with major U.S. and Canadian
carriers we provide our customers a range of services and coverage throughout the lower 48 states,
Hawaii and Canada.
Competition
We face strong competition in our wireless market. Other wireless providers, including other
cellular and PCS operators and resellers, serve each of the markets in which we operate. We compete
primarily against three other facilities-based wireless service providers: at&t, Inc. (formerly
Dobson), General Communications, Inc. (“GCI”) and Alaska Digitel. During 2008, GCI, our primary
wireline competitor and owner of Alaska Digitel, aggressively built out its 3G in-state wireless
network. We expect at&t to deploy 3G equipment in Alaska during 2009. GCI also provides GSM based
wireless services under its own brand name.
Our pricing structure is competitive with at&t. However, Alaska Digitel and GCI compete
heavily on price. Alaska Digitel 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, the availability of
additional spectrum, both licensed and unlicensed 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. Additionally, 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 for increased leverage and/or opportunities to compete for wireless data revenues.
We believe that the following are the most important competitive factors in our industry:
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Network reliability, capacity and coverage: Lower prices, improved service quality and
new service offerings have led to increased network usage. As a result, the ability to keep
pace with network capacity needs and offer highly reliable coverage through one’s own
network is important. We have an extensive network, but we continue to look for
opportunities to enhance our network and improve coverage and network quality. Our
competitors are doing the same. |
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Pricing: Service and equipment pricing is an important area in which wireless carriers
compete. Strong competition has resulted in the marketing of minutes-sharing plans, free
mobile-to-mobile calling, and offerings of larger bundles of included minutes or unlimited
minutes at fixed price points, with no roaming or long distance charges. We seek to compete
in this area by offering our customers services based on the specific needs of Alaskans. |
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Customer service: Quality customer service is essential to ensure that we can obtain
new customers and retain existing customers. We believe that the quality of our customer
service is a key factor in retaining our customers and in attracting both new to
wireless customers and those customers of other carriers who want to switch their
wireless service. Our competitors also recognize the importance of customer service and
are focusing on improving the customer experience. |
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Product Differentiation: As wireless technologies develop and wireless broadband
networks proliferate, continued customer and revenue growth will be increasingly
dependent on the development of new and differentiated products and services. We are
committed to providing customer solutions through the development and rapid deployment of
new and innovative products and services. |
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Sales and Distribution: Key to achieving sales success in the wireless industry is the
reach and quality of sales channels and distribution points. We believe that the optimal
mix of direct and indirect distribution channels is an important ingredient in achieving
industry leading profitability. A goal of our distribution strategy is to increase sales
through our company operated stores and our business sales team, as well as through
telemarketing and web-based sales and fulfillment capabilities. Supplementing this is an
indirect distribution network of retail outlets and prepaid replenishment locations. |
Our success will depend on our ability to anticipate and respond to various factors affecting
the industry, including the factors described above, as well as new technologies, new business
models, changes in customer preferences, regulatory changes, demographic trends, economic
conditions, and pricing strategies of competitors. For additional information on these factors, see
“Item 1A—Risk Factors”.
Network
A key part of our business strategy is to provide high network reliability. We believe that
network reliability is a key differentiator in our market and a driver of customer satisfaction.
Consistent with this strategy, we continue to strategically expand and upgrade our network in an
effort to provide sufficient capacity and seamless and superior coverage and reliability throughout
our licensed area. We conduct systematic “drive tests” of our network to assess the number of
blocked and dropped calls as compared to our competitors, and we market those results. Our network
is among the most extensive in Alaska with our network covering approximately 84% of Alaska’s
population and supporting approximately 150,000 subscribers, as of December 31, 2008. We aim to
provide our customers consistent features and high quality service, regardless of location.
Network Technology
Our primary network technology platform, 1xRTT code division multiple access (“CDMA”), a
wireless technology developed by Qualcomm as part of its family of technologies known as CDMA2000,
is presently deployed in virtually all of our cell sites. 1xRTT increases the voice traffic
capacity available to us and provides increased data speeds. Further, 1xRTT is a modular
infrastructure upgrade that has proven to be cost-efficient and practical for rapid deployment. In
addition to 1xRTT, in 2004 we began deploying evolution data optimized (“EVDO”), a 3G, packet-based
technology that follows the CDMA2000 technology path. As with 1xRTT, we have been able to implement
EVDO, including, most recently, EVDO, Rev. A, by changing and/or adding modular components and
software in our network. EVDO and EVDO, Rev. A service, which we brand and market as “Mobile
Broadband”, is available in our major markets and in Alaska’s North Slope, which is home to
Alaska’s largest oil fields. Our competitors are also building out their 3G networks.
Spectrum
We have licenses to provide mobile wireless services on the 800-900 MHz and 1800-1900 MHz
portions of the radio spectrum. Collectively, these licenses cover virtually all of Alaska. The
800-900 MHz portion is used to provide digital cellular voice and data services, while our
1800-1900 MHz portion provides all-digital PCS voice and data services. During 2008, we also
acquired a license for Advanced Wireless Spectrum in the 1710-1755/2110-2115 MHZ band from AWS
Wireless, Inc.
Services
We believe that increasing the value, features and functionality of our wireless service will
help us to retain our existing customers, attract new customers and increase customer usage.
Through this approach, we seek to drive further revenue growth in our wireless segment.
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We design and market service packages around key customer groups, from the young adult market
to enterprise business accounts. We tailor our wireless services, which include both voice and data
offerings, and postpaid and prepaid pricing options, to the needs of these customers.
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Voice services: We offer a variety of packages for voice services predominantly
offered on a postpaid basis with a contract term. Specifically, we offer plans which
provide a choice in amounts of bundled minutes or unlimited minutes together with no
roaming or long distance charges for calls on our network and the networks of our
roaming partners in the rest of the U.S. and Canada; family/small group and shared
minute plans for multiple-user households and small businesses; and plans targeted to
larger business accounts. We also offer bundled minutes or unlimited minutes plans that
target customers needing Alaskan coverage only. Generally, our competitors do the same.
In addition, we offer a prepaid product that enables individuals to obtain wireless
voice services without a long-term contract by paying in advance. |
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Data services: We continue to expand our 3G wireless data, messaging and
multi-media offerings for both consumer and business customers. |
Devices
We offer wireless devices by a number of manufacturers that complement our focus on high
quality service and an optimal user experience. Most of the wireless devices that we offer are
EVDO-enabled, and all of them are compatible with our 1xRTT network. In addition, the handsets that
we offer are headphone/earphone compatible and, all of them, through GPS functionality, are
compliant with the FCC’s Enhanced 911 (“E-911”) requirements.
Marketing
Our marketing strategy targets customers’ needs, promotes our brand, cross markets, and in
some cases, bundles our wireline products. 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. Our experience
has been that customers entering through this direct channel are generally higher value customers
who generate higher revenue per month on average and are less likely to cancel their service than
those who come through other mass-market channels. We had 15 company operated stores and kiosks as
of December 31, 2008. In addition, our direct channel also includes our business sales
organization, which is focused on supporting the needs of larger business customers.
Customer Service, Retention and Satisfaction
We believe that quality customer service increases customer satisfaction, which reduces churn,
and is a key differentiator in the wireless industry. We are committed to providing high quality
customer service, investing in loyalty and retention efforts and continually monitoring customer
satisfaction in all facets of our service.
Seasonality
We believe our wireless revenue is materially impacted by seasonal factors. Wireless revenue,
particularly roaming revenue, declines in the winter months and increases in the summer months. We
believe this is due to Alaska’s 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, 2009, we employed 967 regular full-time employees, 13 regular part time
employees and 2 temporary employees. Approximately 76% of our employees are represented by the
International Brotherhood of Electrical Workers, Local 1547 (“IBEW”). Management considers employee
relations to be satisfactory. However, 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 will expire on December 31, 2009. We expect to conduct
extensive negotiations with the IBEW during 2009. These negotiations may strain our labor relations
and we do not know whether we will complete negotiations on or before the term of our collective
bargaining agreement expires.
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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”).
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 and have the right to set maximum rates at a
level that allows us to recover the reasonable costs incurred in the provision of regulated
telecommunications services and to earn a reasonable rate of return on the investment required to
provide these services. 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 FCC’s 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
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 number
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 thereunder, which
require, among other things, that communications carriers offer interstate services at just,
reasonable and nondiscriminatory rates and terms. The amendments to the Communications Act added
provisions intended to promote competition in local telecommunications
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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, and 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 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 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 CLEC to install and maintain its network termination equipment in an ILEC’s central
office, or to obtain functionally equivalent forms of interconnection.
Our ACSN ILEC subsidiary enjoys a statutory exemption as a rural carrier 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 ACSN’s 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 ACS 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 the 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. Our ILECs’ interstate “access charges” are
usually developed using a cost-of-service methodology, based on our authorized maximum rate of
return. The National Exchange Carrier Association (“NECA”) develops averaged access rates for
participating ILECs, including our ILECs, based on the costs of these carriers. Three of the ACS
LECs participate in NECA’s tariff for non-traffic sensitive costs, which are primarily loop costs.
These same three LECs also participate in NECA’s traffic sensitive access tariff which covers
primarily switching costs. ACSA no longer participates in the NECA pooling process and has
developed and filed its own FCC tariff for both traffic sensitive and non-traffic sensitive access
services. Participants in a NECA tariff charge averaged access rates, pool their revenues, and
distribute the revenues on the basis of each individual carrier’s costs. The NECA tariffs reduce
the cost burden on individual ILECs of filing tariffs and also spread some of the risks of
providing interstate access services.
On August 20, 2007, the FCC granted ACSA partial forbearance from certain dominant carrier
regulations to ACSA’s provision of interstate switched access services, subject to a number of
conditions. Among other things, ACSA
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received relief from requirements to base interstate switched access service charges on ACSA’s
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 ACSA’s requested similar forbearance relief
with respect to interstate special access services. ACSA and other parties have sought
reconsideration of the FCC’s forbearance order. These reconsideration petitions remain pending.
In October 2008, we filed a petition for 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. If the petition is granted, the remaining ACS ILECs
would withdraw from the NECA pools, and the traffic sensitive charges of some of the ACS ILECs
would likely be lowered over time. ACS has requested that the waivers be granted in time for ACS to
file a price-cap tariff effective as of July 1, 2009. at&t and GCI filed comments but neither
opposed the petition. The petition remains pending before the FCC.
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. These proposals may result in the elimination 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.
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. If
the FCC grants the waiver petition discussed above such that ACS becomes a price-cap company, any
reforms that the FCC adopts as a part of that ongoing special access proceeding could affect ACS’s
revenues in ways that we cannot currently predict.
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 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 and non-rural carriers 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 FCC’s 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.
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 ACS Wireless, Inc.’s service area is
located in Alaska Native Regions. CETCs serving those areas may elect to continue to receive
uncapped high-cost support for eligible lines except that uncapped support was limited to “one
payment per each residential account”. The ambiguous wording of the exception led to differing
interpretations. ACSW, GCI, and Matanuska Telephone Association (“MTA”) have jointly requested that
the FCC clarify that CETCs electing the exception are to receive uncapped support for all eligible
lines served in tribal lands and Alaska Native Regions. On March 4, 2009 the FCC adopted an Order
granting this request. The practical effect of the Order is to remove the cap on USF support for
CETC’s on tribal lands and in Alaska.
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The FCC is still considering a number of other long-term revisions to the distribution
mechanisms for universal service support. The proposals under consideration include eliminating the
“identical support” rule that permits competitive carriers (such as our subsidiary ACS Wireless,
Inc. and our wireless competitors) to apply for funding based on the support received by the ILEC.
The FCC has proposed requiring competitive carriers to justify support based on some measure of
their own costs or on a model. 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. These
potential reforms 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
high-cost support requirements the FCC ultimately implements. 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. 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. 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.
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.
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-rated, per line
contributions, capacity-based contributions, or some combination of these or other proposals. We
cannot predict how the outcome of this proceeding 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 customer’s 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 its service on our Internet website and engage in other public disclosure
activities.
The FCC requires that ILECs that provide interstate long distance services originating from
their local exchange service territories must have long distance affiliates which maintain separate
books of account and acquire any services from their affiliated ILECs at tariff rates, terms and
conditions.
On December 8, 2004, Congress enacted a new law requiring, through 2009, the purchase and sale
of interstate wholesale switched service elements at rates equivalent to the rates set forth in
AT&T Alascom’s Tariff 11, subject to annual downward adjustments specified in the statute. Rural
telephone companies, or companies that are affiliated with and under the control of rural telephone
companies, are exempt from the requirement to purchase services at such rates.
Broadband and Internet services
We provide broadband Internet access services as an ISP. The FCC has classified such services
as information services, so they are not subject to many of the regulatory obligations that are
imposed on common carriers. 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 Internet protocol (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) the FCC’s rules protecting customer proprietary network information
(“CPNI”); (iv) local number portability (“LNP”) requirements; (v) regulatory fee obligations; (vi)
obligations under CALEA and (vii) the obligation to contribute to USF.
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. We cannot
predict the outcome or the impact of pending or future proceedings.
Recently, the FCC and lawmakers have considered several proposals to adopt requirements for
non-discriminatory treatment of traffic over broadband networks, often referred to as “net
neutrality”. The FCC has released a statement of
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principles favoring customer choice of content and services available over broadband networks.
It also has sought comment on industry practices in connection with this issue and pursued some
enforcement action in this area. There may be new legislation or further FCC action to address
access to the Internet or create disclosure requirements of ISPs as to treatment of Internet
traffic. We cannot predict the impact of any such actions on our results or operations.
In October 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. However, for carriers subject to rate-of-return regulation, like the ACS
ILECs, the FCC left uncertain whether loop cost allocations would change if they decide to offer
the underlying transmission capability on a non-common carrier basis. We currently provide
high-speed Internet access transmission capability on a common carrier basis under a stand-alone
FCC tariff for ACSA and the NECA tariff for our non-Anchorage LECs. We are considering whether to
offer it as non-common carrier service, and if the FCC grants our price cap petition, it may
facilitate that decision.
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 to develop
a plan for allocating costs between rate-of-return regulated services and the non-regulated
broadband services. This ruling gives us more flexibility in how we offer and price certain
broadband services, and we are considering how to implement this ruling.
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 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 FCC’s 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 District of Columbia 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, that may make
compliance more difficult to achieve for some carriers. 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. The FCC then asked for comments on these
proposals. We are awaiting further FCC action. Compliance may still be more difficult for smaller
and rural carriers even under the revised proposals. We cannot predict the outcome of this
proceeding or its impact on ACSW.
The FCC also requires that if a LEC customer wants to retain a telephone number while changing
to a CMRS service provider (such as ACSW), the LEC must have the capability to allow this
wireline-to-wireless number portability within six months of a bona fide request, where the
requesting CMRS carrier’s coverage area overlaps the geographic location of the LEC rate center to
which the number is assigned unless the LEC can provide specific evidence demonstrating that doing
so is not technically feasible. These number portability rules are expected to increase the level
of competition among CMRS service providers, but also to increase the ability of CMRS providers to
win customers from LECs. This rule has had little impact on our LECs, but we cannot predict the net
impact of these rules on us over the long-term.
Other federal regulations
We are subject to various other federal regulations and statutes, including those concerning
the use of CPNI in marketing services. CPNI generally includes information a carrier has regarding
the telecommunications services to which its customer subscribes and the customer’s use of those
services. The FCC limits the ways in which carriers may use or disclose
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CPNI and specifies what carriers must do to safeguard CPNI. The FCC has recently adopted
amendments to strengthen its rules governing carrier use and disclosure of 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 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 FCC’s rules, the RCA decides various aspects of local network
interconnection offerings and agreements.
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 in to 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 RCA’s 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.
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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 ILEC’s
most recently approved stand-alone revenue requirement. ACSN was our last ILEC to exit AECA. Prior
to formal exit, AECA administered ACSN’s intrastate access tariff, but ACSN had already implemented
a stand-alone 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 ACSN’s stipulation
allowing it to fully exit the pool. ACSN now operates under a price capped individual access
tariff.
Following up on its March 2008 order, the RCA asked for comment on access regulation changes
that would shift LECs’ recovery of access costs from long distance carriers to consumers. The RCA
proposed to reduce one long distance carrier access charge and cap LECs’ monthly access revenues
from that charge at $6 per line. To offset lost revenue, the RCA proposed increasing the access fee
charged directly to consumers to $4 per line and tapping the state USF, as discussed below. The
RCA is no longer considering increasing the customer access charge, but may still reduce the long
distance carrier access charge. As another option, the RCA proposed allowing carriers that may be
required to leave the State access charge pool to continue to participate in the AECA tariff, but
on a stand-alone basis. The order emphasized that the RCA remains open to alternative proposals.
The RCA’s proposed changes could impact the ACS LECs’ access revenue levels in ways that we
currently cannot predict.
Alaska Universal Service Fund
The RCA has established a state universal service fund, (“AUSF”). 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.
As part of its intrastate access reform, the RCA is considering whether to provide AUSF
support to high-cost, rural LECs to offset access revenue losses. It has also initially proposed
expanding the function of the AUSF to support high-cost interexchange facilities of long distance
carriers. However, further consideration of interexchange support has been deferred to a future
proceeding. Any offsets of reduced access charges would come from the AUSF because the RCA has
decided against increasing the customer access charge. Both proposals are designed to reduce
pressure on in-state toll rates. It is difficult to predict whether the RCA will move forward on
these reforms, particularly since the FCC is considering reforms at the same time that could shift
more universal service burden to the states.
ETC Determinations
The RCA granted GCI’s 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 and KPU Telecommunications study areas. On September 11, 2007,
the RCA denied ACSW’s request for ETC status in the areas served by Alaska Telephone Company and
Cordova Telephone Cooperative, Inc., without prejudice to re-filing.
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 carrier’s services. The RCA rejected
GCI’s 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
GCI’s fixed wireless service. GCI subsequently withdrew its ETC application for fixed wireless. The
RCA’s 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 designation as an ETC that were based in part on the FCC’s minimum ETC requirements.
The rules added new requirements for ETCs, including that they will have to strengthen emergency
back-up 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.
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Other state regulations
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.
Local Service
ACSN serves approximately 200 customers in very remote parts of Alaska through fixed wireless
service. Several consumers in two remote southeast locations, South Thorne Bay and Klawock on
Prince of Wales Island (PWI), had complained to the RCA about the quality of service provided by
the time division multiple access (“TDMA”) facilities. The RCA opened a docket to formally
investigate those complaints and has received similar criticisms from other local customers in the
area. Over the last year, ACSN upgraded its fixed wireless service from TDMA to a more advanced
CDMA platform. The RCA is planning a hearing to allow ACSN to respond to the consumer complaints,
now that its CDMA conversion is complete. The RCA may question ACSN on whether its CDMA upgrade has
addressed some of the consumer problems, whether ACSN should extend its wireline network to these
customers, and whether its fixed wireless service complies with the State Telecommunications
Modernization Plan which requires local companies to meet certain technology standards (e.g. data
speeds) and other service quality regulations. ACSN had used fixed wireless technology because
these customers were in difficult to serve areas. It is not possible to predict the outcome of this
proceeding at this time.
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 the Industry in Which We Compete
The telecommunications industry is extremely competitive, particularly in Alaska, and we may have
difficulty competing effectively for share in generally small markets.
The telecommunications industry in Alaska is extremely competitive, and providers compete for
a small number of customers in small markets. We face competition in each of our wireless and
wireline markets. Competitors in our markets:
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reduce our customer base; |
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require us to lower rates and other prices in order to compete; |
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require us to invest in new facilities and capabilities; |
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increase our marketing expenses and require us to use discounting and promotional
campaigns that adversely affect our margins; or |
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otherwise lead to reduced revenues, margins and returns. |
Our principal wireless competitors are at&t, GCI and its subsidiary Alaska Digitel. at&t is
one of the largest wireless service providers in the U.S. In addition, at&t has more Alaskan
customers than we do. at&t, and to some extent GCI, have greater access to financial, technical and
other resources than we do. Further, at&t may have greater access to consumer devices, and greater
market power to obtain these devices on more favorable terms, than we do. at&t, thus, might be able
to offer lower prices, additional products, services, features or other incentives that we cannot
match or offer. GCI and Alaska Digitel compete primarily on price, and their pricing may be
perceived as lower than ours. Larger competitors, especially at&t may be in a position to respond
more quickly to new technologies and be able to undertake more extensive marketing campaigns.
Moreover, at&t operates its own nationwide network, whereas we rely on roaming agreements with
other carriers to provide coverage outside Alaska. Our reliance on these agreements could adversely
affect our ability to maintain competitive pricing, which would have a material adverse effect on
our financial results.
Our principal wireline competitor 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
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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 three existing undersea fiber optic cables
connecting Alaska to the lower 48 and has a number of significant contracts with large carrier
customers. GCI competed very aggressively on price in this market during 2008 as it defended its
market share. In addition, at&t has acquired a substantial amount of interstate 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.
Risks Relating to Our Debt and the Credit Markets
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, 2008, and for the year then ended, we
had total long-term obligations, including current portion, of $561.5 million and a loss before
income tax benefit of $16.6 million. Our debt could have important consequences for you as a holder
of our common stock. For example, our substantial debt 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.
The downturn in the economy and the volatility in the capital markets could limit our ability to
access capital or could increase our costs of capital.
We have seen a dramatic downturn in the U.S. and global economy. The fair value of our
long-term debt, as compared to its carrying value, has declined significantly in 2008, primarily
due to changes in overall capital market conditions as demonstrated by lower liquidity in the
markets, increases in credit spreads, and decreases in bank lending activities, which result in
investors moving from high yield securities to lower yield investment grade or U.S. Treasury
securities in efforts to preserve capital.
Although we have had continued solid operating cash flow, the downturn and the disruption in
the credit markets may reduce sources of liquidity available to us. We can provide no assurance
that we will continue to meet our capital requirements from our cash resources, future cash flow
and external sources of financing, particularly if current market or economic conditions continue
or deteriorate further. We manage cash and cash equivalents in various institutions at levels
beyond FDIC coverage limits, and we purchase investments not guaranteed by the FDIC. Accordingly,
there may be a risk that we will not recover the full principal of our investments or that their
liquidity may be diminished. We rely on multiple financial institutions to provide funding pursuant
to existing credit agreements, and those institutions may not be able to meet their obligations to
provide funding in a timely manner, or at all, when we require it. The cost of or lack of available
credit could impact our ability to develop sufficient liquidity to maintain or grow our business,
which in turn may adversely affect our business and results of operations.
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. |
A breach of any of these covenants, ratios or tests could result in a default under our senior
credit facility. 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.
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 our AKORN and Northstar long-haul fiber facilities, and 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 senior credit facility, on or before maturity. 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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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/or the value of our
common stock could be adversely affected.
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.
Exercise of the outstanding warrants could dilute the ownership interests of our existing
stockholders.
Concurrently with the sale of our senior convertible notes, we sold warrants expiring in 2013
to purchase, subject to anti-dilution adjustments, approximately 10.7 million shares of common
stock at $16.422. The warrants may not be exercised prior to the maturity of the senior convertible
notes due in 2013. The warrants may be settled in cash at our election. Exercise of the warrants
could dilute the ownership interests of our existing stockholders.
Risks related to our Business
We may not successfully complete construction and integration of our AKORN and Northstar fiber
facilities that connect Alaska to the Lower 48, and even if we do, we may be unable to operate the
combined networks profitably.
Realization of the anticipated benefits of our redundant interstate investments will depend on
our ability to successfully integrate them into our businesses and operations and 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 its
operations and maintaining its support. If we fail to properly execute the construction of the
fiber facility or if we miss critical deadlines in its implementation or fail to identify critical
markets, we could experience serious disruption and harm to our business. We will face challenges
to our abilities to do the following:
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completing construction of the AKORN facility at an expected total cost of
approximately $105 million; |
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integrating Northstar and other assets acquired from Crest Communications to
achieve efficiencies while retaining operational redundancy; |
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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 relationship 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.
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 will be or when prices for these services will stabilize, if at all.
We provide services to our 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, 2008, the number of access lines we serve declined by 11.0%. We may continue 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.
Revenues from access charges may be reduced or lost.
We received approximately 22.7% of our operating revenues for the year ended December 31, 2008
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.
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 from time to time 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.
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We may not continue to receive as much Universal Service Fund 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. These federal revenues include universal service support
payments for local switching support, interstate common line support or high-cost loop support.
High-cost support for our rural and non-rural operations is determined pursuant to different
methodologies, aspects of which are now under review. Any changes to the existing rules could
reduce the Universal Service Fund revenues we receive. Corresponding changes in state universal
service support could likewise have a negative effect on the revenues we receive. We expect total
payments from the USF to our rural operations will fluctuate based upon our rural companies average
cost per loop compared to the national average cost per loop and are likely to decline based on
historical trends. High cost loop support revenue in 2008 totaled $8.7 million.
We also receive USF support for our wireless services in areas where we have been designated
an ETC. As an ETC, we receive high-cost universal service support for each wireless line provided
in high-cost service areas. Under the current “identical support” FCC rule CETCs that provide new
wireless service in a high-cost service areas, receive the same support as an incumbent ETC. We are
a CETC in a number of high-cost areas where we provide wireless services. In a notice of proposed
rulemaking adopted on January 29, 2008, the FCC tentatively concluded that the goal of universal
service will be better served if the “identical support” rule for CETCs were eliminated. The FCC
also tentatively concluded that CETCs should no longer receive interstate access support (“IAS”),
interstate common line support (“ICLS”), and local switching support (“LSS”). The FCC has stated
that permitting CETCs to receive IAS or ICLS is inconsistent with how CETCs recover their costs or
set rates and that LSS includes a number of assumptions regarding switching costs that are not
likely to be accurate for CETCs. The FCC proposed rulemaking would base CETC support instead on a
CETCs’ own costs. In addition, as proposed, new seekers of high-cost support would be required to
file cost data demonstrating their costs of providing service in high-cost service areas. CETC
revenue in 2008 totaled $18.6 million
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 5% of our revenue for the year ended December 31, 2008 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, our roaming
revenue generally increases during summer months and declines during other periods and depends
heavily in these areas 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.
We have substantial liabilities and cash requirements associated with pension and deferred
compensation plans.
Our post-retirement benefits, pension, and deferred compensation plans 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. We are currently reviewing the deficit in plan
assets and determining the amount we may be required to pay to maintain adequate funding. Prior to
the substantial drawdown in 2008 of the value of plan assets, which occurred solely as a result of
the decline in plan asset values, we did not anticipate making any contributions in 2009. This
unanticipated increase in pension expense may extend into future years if current market conditions
persist. 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.
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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 though 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 participant’s realized, but
unpaid, withdrawal liability. This could result in an unexpected contribution requirement which
could be substantial, and if it is, making such a contribution would have a material adverse effect
on our cash position and other financial results. These sources of potential liability are
difficult to predict.
If we do not adapt to technological changes in the telecommunications industry, we could lose
customers or market share.
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 change 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 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.
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 timely
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 LNP. 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”.
Union disputes, employee strikes and other labor-related disruptions may adversely affect our
operations.
Our collective bargaining agreement with the IBEW expires at the end of 2009. We cannot assure
you that future collective bargaining agreements will be on terms in line with our expectations or
comparable to agreements entered into by our competitors. Any future agreements may increase our
labor costs or strain our relationship with our represented employees. In the meantime, 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. In the event we are unable to negotiate a mutually satisfactory
collective bargaining agreement during 2009, we may experience concerted refusals to work, such as
strikes, slow downs, sick outs or other similar activities. These activities would harm our
operations and impair our financial performance.
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The inability to maintain labor costs at competitive levels could harm our financial performance.
Labor costs are a significant component of our expenses, and approximately 76% of our
workforce is represented by the International Brotherhood of Electrical Workers, or 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. For example, our primary in-state competitor GCI, and its
subsidiary Alaska Digitel, do not use union labor and pay 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.
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 senior
management 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.
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. For example, we rely
heavily on VeriSign to provide billing services for our wireless segment. In addition, we rely
heavily on equipment from Nortel Networks for many of our network elements as well as our redundant
lower 48 NOCC. Nortel filed for bankruptcy in January 2009 and we cannot predict the outcome of the
bankruptcy proceedings.
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.
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. In certain important cases our systems lack redundancy or diversity which reduces the
reliability of our network. Our network and infrastructure are constantly at risk of physical
damage to access lines or other inoperability as a result of human, natural or other factors. These
factors may include labor strikes, pandemics, acts of terrorism, sabotage, natural disasters, power
surges or outages, software defects, contractor or vendor failures 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.
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 caller’s 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 caller’s location at the time of the
call. Any inability of the answering point to automatically recognize the caller’s 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.
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The successful operation and growth of our businesses depends on economic conditions in Alaska.
Substantially all 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; |
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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 U.S. Census Bureau estimates, the population of Alaska is approximately
677,000 as of July 1, 2007, approximately 60% of whom live in Anchorage, Fairbanks and Juneau.
Alaska’s economy is heavily dependent on investment by oil companies and state tax revenues
correlate with the price of oil. During 2008, the price of crude oil exhibited significant
volatility while declining from $147.00 per barrel in July to nearly $30.00 per barrel in December.
We do not know what the long term effect on the Alaskan economy will be or if it will even be
stable.
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 driver’s
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. New government regulations in these matters may adversely affect our results of
operations.
Risks Related to our Common Stock
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. Should we reduce or eliminate dividends, the market price of our common stock may
decline.
Continued volatility in the price of our common stock would negatively affect us and our
stockholders.
The trading price of our common stock was extremely volatile during 2008 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 estimates 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. Volatility in our stock price regardless of cause 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
23
Item 2. Properties
We own and lease office facilities and related equipment for executive headquarters,
administrative personnel, central office buildings, and operations in locations throughout Alaska.
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 (CPE) 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 assets (including those of our subsidiaries) have been pledged as
collateral for our 2005 senior credit facility.
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 1—Business—Regulation”. We have recorded litigation reserves of $0.4
million as of December 31, 2008 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.
The information set forth under “Note 19—Commitments and Contingencies” in the Notes to
Consolidated Financial Statements, included in Part IV, Item 15 of this Report, and is incorporated
herein by reference. For an additional discussion of certain risks associated with legal
proceedings, see the section entitled “Risk Factors” in Item 1A of this Report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended December 31,
2008.
PART II
Item 5. Market for Registrant’s 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.
| |
|
|
|
|
|
|
|
|
| 2008 Quarters |
|
High |
|
Low |
4th |
|
$ |
12.30 |
|
|
$ |
8.05 |
|
3rd |
|
$ |
13.90 |
|
|
$ |
10.08 |
|
2nd |
|
$ |
12.94 |
|
|
$ |
10.64 |
|
1st |
|
$ |
15.18 |
|
|
$ |
11.08 |
|
| |
|
|
|
|
|
|
|
|
| 2007 Quarters |
|
High |
|
Low |
4th |
|
$ |
16.48 |
|
|
$ |
14.12 |
|
3rd |
|
$ |
15.92 |
|
|
$ |
12.60 |
|
2nd |
|
$ |
17.15 |
|
|
$ |
14.75 |
|
1st |
|
$ |
16.85 |
|
|
$ |
13.40 |
|
As of February 20, 2009, there were 43.7 million shares of our common stock issued and
outstanding and approximately 402 record holders of our common stock. Because many of our shares of
existing common stock are held by brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of stockholders represented by these record holders.
24
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 |
|
Announcement |
|
Ex-Dividend |
|
|
|
|
|
Amount |
| Number |
|
Date |
|
Date |
|
Record Date |
|
Payment Date |
|
Paid |
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 |
|
Based on approximately 43.7 million shares outstanding on February 20, 2009,and an assumed
dividend of $0.86 per share, per annum, dividends payable during 2009 would be approximately $37.6
million.
Our ability to make dividend payments in the future will depend on future 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 2005 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 1A—Risk Factors—Risks related to our Common Stock”. You may not receive the level
of dividends provided for in our dividend policy or any dividends at all.
25
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in this Report under “Item 12—Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters—Securities Authorized for
Issuance under Equity Compensation Plans” is incorporated herein by reference. For additional
information on our stock incentive plans and activity, see “Note 15 — Stock Incentive Plans” in
the “Notes to Consolidated Financial Statements”, included in Part IV, Item 15 of this Report.
Item 6. Selected Financial Data
Selected Historical Financial Data
The following selected consolidated financial data should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto in Part II, Item 8 and “Management’s
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, 2008, 2007,
2006, 2005 and 2004 and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 from our
audited consolidated financial statements, and accompanying notes, included in Part II, Item 8 of
this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
389,597 |
|
|
$ |
385,785 |
|
|
$ |
348,721 |
|
|
$ |
326,809 |
|
|
$ |
302,707 |
|
Net income (loss) |
|
|
(10,139 |
) |
|
|
144,136 |
|
|
|
13,278 |
|
|
|
(41,635 |
) |
|
|
(39,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share — basic |
|
$ |
(0.23 |
) |
|
$ |
3.38 |
|
|
$ |
0.32 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
Income (loss) per share — diluted |
|
$ |
(0.23 |
) |
|
$ |
3.26 |
|
|
$ |
0.31 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
Cash dividends per share |
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
$ |
0.86 |
|
|
$ |
0.80 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
757,338 |
|
|
$ |
663,203 |
|
|
$ |
556,216 |
|
|
$ |
576,413 |
|
|
$ |
637,127 |
|
Long-term debt, including current portion |
|
|
561,523 |
|
|
|
432,996 |
|
|
|
438,213 |
|
|
|
445,578 |
|
|
|
525,889 |
|
Item 7. Management’s 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.
Overview
We believe we are the leading provider of integrated communications services in Alaska. Our
wireline business comprises one of the most expansive end-to-end IP networks in Alaska and the
largest local exchange carrier network in Alaska. We believe our wireless business comprises the
most extensive, reliable wireless network in Alaska with the largest 3G coverage. For more
information on our business, services, and products, see “Item 1—Business” in Part I this Form
10-K.
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 performance and allocating
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; |
| |
| |
• |
|
military activity; |
| |
| |
• |
|
the cost of long-haul telecommunications bandwidth; |
| |
| |
• |
|
local customer preferences; |
| |
| |
• |
|
average usage of Internet technology; |
| |
| |
• |
|
unemployment levels; and |
| |
| |
• |
|
housing activity. |
26
We have observed variances in economic effect on Alaska when 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 they may have on the U.S. economy as a whole. In forecasting the local economic
conditions that affect us, we take particular note of these factors.
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
wireless, including wireless data, wireline broadband connections, including our long-haul
fiber optic cables connecting our network to the lower 48, as well as expanded strategic
services to business markets, 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 in each market covered by our network. We have targeted investment in
deploying high-speed fiber conductivity in and between Alaska’s urban centers. During 2008, we
invested heavily in interstate capacity through our purchase of Crest Communications and
construction of AKORN. We have increasingly targeted carrier and enterprise customers.
Revenues from these customers grew 42.9% 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 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. |
| |
| • |
|
Process Improvement: 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
improve the customer experience through process improvements. We expect to invest in
technology-assisted process improvement, including self-service initiatives. We expect efforts
such as call center routing improvements, deploying self-pay kiosks and customer service tools
to improve our cost structure and maintain or improve operating income margins. As a result of
past successes, we have been able to serve more customers while maintaining our workforce at
or below prior levels. |
| |
| • |
|
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
shareholders’ long-term interests. |
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, the company returned
approximately $37.3 million in cash dividends to our stockholders during 2008.
Recent Acquisition
On October 30, 2008, we closed on the purchase of 100% of the outstanding stock of Crest
Communications Corporation. The results of Crest’s operations have been included in our Wireline
segment in the Consolidated Financial Statements since that date. Crest’s operations include 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. We
believe that the acquisition will complement our AKORN fiber build, by providing meaningful
operating efficiencies and cost synergies, by offering enterprise customers the only diverse and
redundant routing of traffic between Alaska and the lower 48, by allowing management the use of
Network Operations Control Centers in Alaska and the lower 48, and by connecting our network to
Southeast Alaska. Furthermore, we believes that the acquisition will drive incremental utilization
of our differentiated Alaskan terrestrial assets from Crest’s customer base and allow us to
participate in the fast-growing bandwidth market ahead of AKORN’s commercial launch.
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 at replacement cost. These costs were derived from our current
build out of the AKORN fiber. In accordance with SFAS No. 141- Business
27
Combinations (“SFAS 141”), 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. Certain purchase price adjustments are still under review and therefore
the purchase price allocation is still subject to refinement.
The aggregate purchase price was $65.0 million, net of $1.1 million in cash acquired and
inclusive of $4.2 million of cash consideration that has been placed in an escrow account for the
settlement of any potential claims of misrepresentations, breach of warranties or covenants or for
other indemnifications during the first eighteen months following the closing. The Company and
Crest have made customary representations and warranties and covenants in the Agreement.
Additionally, $4.0 million has been deferred from the purchase price and placed in an escrow
account, until a specific claim for an unapproved asset sale has been resolved.
Revenue Sources by Segment
Wireline
Revenue from our wireline business services is generated from retail, wholesale and enterprise
customer segments as well as from the provision of network access services to interexchange and
wireless carriers.
Our Retail Business:
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; |
| |
| |
• |
|
space and power services to business customers; 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, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31 |
| |
|
2008 |
|
2007 |
|
2006 |
Local telephone |
|
|
174,524 |
|
|
|
185,658 |
|
|
|
194,815 |
|
Annual growth rate |
|
|
-6.0 |
% |
|
|
-4.7 |
% |
|
|
-2.3 |
% |
DSL |
|
|
47,648 |
|
|
|
47,501 |
|
|
|
44,066 |
|
Annual growth rate |
|
|
0.3 |
% |
|
|
7.8 |
% |
|
|
22.9 |
% |
Dial up |
|
|
6,741 |
|
|
|
9,125 |
|
|
|
12,591 |
|
Annual growth rate |
|
|
-26.1 |
% |
|
|
-27.5 |
% |
|
|
-27.6 |
% |
Long distance |
|
|
64,252 |
|
|
|
65,256 |
|
|
|
63,995 |
|
Annual growth rate |
|
|
-1.5 |
% |
|
|
2.0 |
% |
|
|
13.6 |
% |
Our 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 outpaced the rate of retail line loss generally 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, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31 |
| |
|
2008 |
|
2007 |
|
2006 |
UNE and resale local |
|
|
26,844 |
|
|
|
40,696 |
|
|
|
57,852 |
|
Annual growth rate |
|
|
-34.0 |
% |
|
|
-29.7 |
% |
|
|
-19.1 |
% |
28
Our Enterprise Business:
We generate enterprise revenue from large business customers, state and federal governments,
and other carriers primarily from local and long distance private line services;
| |
• |
|
provision of virtual network facilities to nationwide carriers for long distance
voice termination; |
| |
| |
• |
|
advanced network services; and |
| |
| |
• |
|
capacity sales on our in-state terrestrial fiber facility. |
Our 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 and data services, other value-added services across our
owned and operated network in Alaska and across the lower 48 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 lower 48 and Canadian carriers with roaming access to our network for
their subscribers; and |
| |
| |
• |
|
CETC subsidies. |
Our wireless business has been a principal driver of revenue growth since 2005. However, as
competition increases and markets become increasingly penetrated, we expect that the pace of growth
in the future will not reflect our past experience. The table below sets forth subscriber numbers
as of December 31, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31 |
| |
|
2008 |
|
2007 |
|
2006 |
Retail wireless |
|
|
149,466 |
|
|
|
144,449 |
|
|
|
130,971 |
|
Annual growth rate |
|
|
3.5 |
% |
|
|
10.3 |
% |
|
|
16.1 |
% |
Wholesale wireless |
|
|
346 |
|
|
|
1,999 |
|
|
|
3,017 |
|
Annual growth rate |
|
|
-82.7 |
% |
|
|
-33.7 |
% |
|
|
-35.6 |
% |
29
Results of Operations
The following table summarizes our company’s operations for the years ended December 31, 2008,
2007, and 2006. Net income for the year ended December 31, 2008 was affected by a one-time
impairment charge on goodwill and intangible assets of $29.6 million. Net income for the year ended
December 31, 2007 was affected substantially by a one-time, non-cash income tax benefit resulting
in a net benefit of $111.2 million arising out of the full release of a reserve previously held
against our deferred tax asset.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
$ |
246,028 |
|
|
$ |
248,265 |
|
|
$ |
233,351 |
|
Wireless |
|
|
143,569 |
|
|
|
137,520 |
|
|
|
115,370 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
389,597 |
|
|
|
385,785 |
|
|
|
348,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and amortization) |
|
|
185,321 |
|
|
|
179,456 |
|
|
|
172,421 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
84,751 |
|
|
|
74,305 |
|
|
|
62,478 |
|
Depreciation and amortization |
|
|
74,002 |
|
|
|
71,337 |
|
|
|
69,096 |
|
Loss on disposal of assets, net |
|
|
750 |
|
|
|
248 |
|
|
|
1,105 |
|
Loss on impairment of goodwill and intangible assets |
|
|
29,641 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
374,465 |
|
|
|
325,346 |
|
|
|
305,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15,132 |
|
|
|
60,439 |
|
|
|
43,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and loss on extinguishment of debt |
|
|
(32,921 |
) |
|
|
(28,741 |
) |
|
|
(40,095 |
) |
Interest income and other |
|
|
1,148 |
|
|
|
1,244 |
|
|
|
10,195 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(31,773 |
) |
|
|
(27,497 |
) |
|
|
(29,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(16,641 |
) |
|
|
32,942 |
|
|
|
13,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
6,502 |
|
|
|
111,194 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,139 |
) |
|
$ |
144,136 |
|
|
$ |
13,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.23 |
) |
|
$ |
3.38 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.23 |
) |
|
$ |
3.26 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
43,391 |
|
|
|
42,701 |
|
|
|
42,045 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
43,391 |
|
|
|
44,185 |
|
|
|
43,387 |
|
|
|
|
|
|
|
|
|
|
|
30
Year ended December 31, 2008 Compared to the Year ended December 31, 2007
Wireline
The following table summarizes wireline revenue by source for the years ended December 31,
2008, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Year Ended December 31, |
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
Amount |
|
|
Change |
|
|
Amount |
|
|
Change |
|
|
Amount |
|
Wireline Revenue by Source: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
94.7 |
|
|
|
-3.3 |
% |
|
$ |
97.9 |
|
|
|
2.4 |
% |
|
$ |
95.6 |
|
Wholesale |
|
|
20.4 |
|
|
|
-13.6 |
% |
|
|
23.6 |
|
|
|
-7.1 |
% |
|
|
25.4 |
|
Access |
|
|
93.9 |
|
|
|
-6.9 |
% |
|
|
100.9 |
|
|
|
6.8 |
% |
|
|
94.5 |
|
Enterprise |
|
|
37.0 |
|
|
|
42.9 |
% |
|
|
25.9 |
|
|
|
44.7 |
% |
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
246.0 |
|
|
|
-0.9 |
% |
|
$ |
248.3 |
|
|
|
6.4 |
% |
|
$ |
233.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
Retail: Retail revenue decreased by $3.2 million, or 3.3% in 2008. The decrease was driven by
a $2.9 million decline in local exchange revenue primarily associated with residential line losses,
a $0.9 million decline in long distance sales, $0.3 million in lower CPE sales to businesses, and a
$0.6 million decrease in dial up ISP revenue. These losses were offset, in part, by a $1.7 million
increase in revenue from our DSL subscriber base.
Declines in retail switched access lines in service of 6.0% in 2008 were concentrated in the
residential market and were driven by wireless substitution and competition.
Wholesale: Wholesale revenues decreased by $3.2 million, or 13.6%, in 2008 due to declines in
UNE and wholesale local revenue which is primarily attributable to the ongoing migration of lines
leased to our key competitor to cable telephony, offset in part by a negotiated increase in rates.
These losses were partially offset by higher revenues from billing and collection, and space and
power services.
Total UNE and wholesale lines declined by 34.0% in 2008, to 26,844, as a result of the ongoing
migration of lines over to cable telephony. As a result of ongoing declines in UNE and wholesale
local lines, we expect that wholesale revenue will decline as a component of wireline revenue for
the foreseeable future.
Network Access: Network access revenues decreased by $7.0 million, or 6.9% in 2008. In 2008
and 2007, we benefited from a $6.3 million and $10.1 million, respectively, in net out of period
settlements and net reserve releases. The 2008 out of period revenue included a $5.5 million
reserve release primarily related to refundable USF support while the 2007 settlement included $5.4
million in settlements with NECA and Universal Service Administrative Company (“USAC”) for our cost
studies. In addition, high-cost loop support decreased by $2.7 million and intrastate revenue
decreased by $1.7 million due to lower demand driven, in part, by the continued shift of voice
traffic to wireless networks. We expect network access revenue to decline as a component of revenue
for the foreseeable future.
Enterprise: Enterprise revenue increased by $11.1 million, or 42.9%, in 2008 due to $7.5
million in revenue from the provision of virtual network facilities to lower 48 carriers for long
distance voice termination, $1.5 million from higher sales of advanced network services to large
business and government customers, $0.9 million from a capacity exchange agreement with another
carrier and an increase of $0.8 million in point-to-point private line services.
Wireless
Wireless revenue increased $6.1 million, or 4.4%, to $143.6 million for the year ended
December 31, 2008 compared to $137.5 million for the year ended December 31, 2007. This increase is
due primarily to the following:
| |
• |
|
growth in average subscribers of 5.1% to 148,114 from 140,863 for the year ended
December 31, 2008 and 2007, respectively; |
| |
| |
• |
|
higher phone and accessory sales in the year ended December 31, 2008 resulting in
$11.1 million of handset revenue compared to $9.3 million for the year ended December
31, 2007; and |
| |
| |
• |
|
higher revenue from non-ACS customers roaming on our network resulting in third
party roaming revenue increasing to $20.5 million from $18.1 million for the year ended
December 31, 2008 and 2007, respectively. |
31
Offsetting these gains was a decrease in average revenue per unit (“ARPU”) of 2.5% to $61.01
from $62.58 for the year ended December 31, 2008 and 2007, respectively, following proactive
measures taken to match national pricing points for voice plans.
Operating Expense
Operating expense increased $49.1 million, or 15.1%, to $374.5 million for the year ended
December 31, 2008, from $325.3 million for the year ended December 31, 2007. Depreciation and
amortization associated with the operation of each of our segments has been included in total
depreciation and amortization.
Wireline: Wireline expenses, which include local telephone, Internet and interexchange
operating costs increased $5.9 million, or 3.3%, for the year ended December 31, 2008. The increase
is primarily attributable to a $4.8 million increase in LD interstate COGS, $3.5 million in start
up costs for our strategic long haul fiber investments, a $1.1 million increase in outside services
and consulting costs, a $0.9 million increase in ISP access and circuit expenses, a $0.5 increase
in utility costs, and a $1.8 million non-recurring expense benefit in the prior year due to a
favorable settlement on a long-term property tax dispute. Offsetting these increases were declines
of $3.4 million in labor, $1.3 million in an affiliate B&C charges, $1.6 million in DSL COGS and
$0.6 million in lower advertising costs associated with our DSL service.
Wireless: Wireless expense increased $10.4 million, or 14.1%, for the year ended December 31,
2008 compared to the year ended December 31, 2007. The increase is primarily attributable to an
increase of $3.7 million in handset, accessory and data content expense, $3.4 million in costs
associated with backhaul for our expanded wireless footprint, a $2.4 million increase in employee
sales and service costs and a $0.4 million increase in regulatory surcharges.
Depreciation and Amortization: Depreciation and amortization expense increased $2.7 million,
or 3.7%, for the year ended December 31, 2008 compared to the year ended December 31, 2007. The
change is due to an increase in depreciable asset base partially offset by a number of asset
classes reaching their maximum depreciable lives.
Loss on Impairment of Goodwill and Intangible Assets: 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 is 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 non-cash charge reduces
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 benefit and is
included in the deferred tax assets as part of our net operating loss carry forwards.
Other Income and Expense: Other income and expense was a net expense of $31.8 million in the
year ended December 31, 2008, an increase of 15.6% from the $27.5 million in the year ended
December 31, 2007. The increase is primarily attributable to the increase in interest expense in
2008 associated with our new 5.75% convertible debt instrument.
Income Taxes: In the year ended December 31, 2008, we recorded a tax benefit of $6.5 million
related to the build up of deferred tax assets from our $16.6 million book loss. In the year ended
December 31, 2007, we recorded a net benefit of $111.2 million when we reversed 100% of our
valuation allowance. We released the reserve as we believed it was more likely than not, that all
of the deferred tax assets would be realized based on the weight of all available evidence,
including two years of positive net income and our projected earnings. In 2008, if it were not for
the bonus depreciation taken for tax purposes allowed under the “Economic Stimulus Act of 2008”, we
would have recorded income for tax purposes.
Net Income (loss): Net income decreased to a loss of $10.1 million in 2008, from income of
$144.1 million in 2007. The change is primarily the result of incurring a goodwill impairment
charge of $29.6 million assessed against our wireline segment in 2008, while 2007 benefited from
the one-time reversal of the $122.5 million valuation allowance for our deferred tax asset.
32
Year ended December 31, 2007 Compared to the Year ended December 31, 2006
Wireline
The following table summarizes wireline revenue by source for the years ended December 31,
2007, 2006 and 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2005 |
|
| |
|
Amount |
|
|
Change |
|
|
Amount |
|
|
Change |
|
|
Amount |
|
Wireline Revenue by Source: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
97.9 |
|
|
|
2.4 |
% |
|
$ |
95.6 |
|
|
|
-2.6 |
% |
|
$ |
98.2 |
|
Wholesale |
|
|
23.6 |
|
|
|
-7.1 |
% |
|
|
25.4 |
|
|
|
-19.4 |
% |
|
|
31.5 |
|
Access |
|
|
100.9 |
|
|
|
6.8 |
% |
|
|
94.5 |
|
|
|
-0.9 |
% |
|
|
95.4 |
|
Enterprise |
|
|
25.9 |
|
|
|
44.7 |
% |
|
|
17.9 |
|
|
|
15.5 |
% |
|
|
15.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
248.3 |
|
|
|
6.4 |
% |
|
$ |
233.4 |
|
|
|
-3.0 |
% |
|
$ |
240.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
Retail: Retail revenue increased by $2.3 million, or 2.4% in 2007. The increase was primarily
driven by growth in revenue from our DSL subscriber base of $1.6 million and a $1.2 million
increase in long distance sales. These gains were offset in part by a $0.6 million decline in local
exchange revenue primarily associated with residential line losses; and a $0.7 million decline in
dial up ISP revenue.
Declines in retail switched access lines in service of 4.7% in 2007 were concentrated in the
residential market and were driven by wireless substitution and competition. During 2007 we added
3,400 DSL connections and exited the year with 47,500 DSL subscribers.
Wholesale: Wholesale revenues decreased by $1.8 million, or 7.1%, in 2007 due to declines in
UNE and wholesale local revenue of $2.9 million which is primarily attributable to the ongoing
migration of lines leased to our key competitor to cable telephony, offset in part by a negotiated
increase in rates. These losses were partially offset by higher revenues from billing and
collection, and space and power services.
Total UNE and wholesale lines declined by 29.7% in 2007, to 40,696, as a result of the ongoing
migration of lines over to cable telephony. As a result of ongoing declines in UNE and wholesale
local lines, we expect that wholesale revenue will decline as a component of wireline revenue for
the foreseeable future.
Network Access: Network access revenues increased by $6.4 million, or 6.8% in 2007. This
revenue increase is counter to longer term trends where we foresee network access revenue declining
as a component of wireline revenue, and was primarily attributable to positive settlements of $4.5
million with NECA and $2.0 million with USAC regarding our cost studies.
Enterprise: Enterprise revenue increased by $8.0 million, or 44.7%, in 2007 due to $3.0
million in revenue from the provision of virtual network facilities to lower 48 carriers for long
distance voice termination; $2.4 million from a capacity exchange agreement with another carrier;
$1.5 million from higher sales of advanced network services to large business and government
customers; and an incremental $1.0 million of capacity sales on our terrestrial fiber.
Wireless
Wireless revenue increased $22.2 million, or 19.2%, to $137.5 million for the year ended
December 31, 2007 compared to $115.4 million for the year ended December 31, 2006. This increase is
due primarily to the following:
| |
• |
|
growth in average subscribers of 13.1% to 140,863 from 124,591 for the year ended
December 31, 2007 and 2006, respectively; |
| |
| |
• |
|
an increase in average ARPU of 6.6% to $62.58 from $58.71 for the year ended
December 31, 2007 and 2006, respectively, primarily as a result of increased plan
revenue, feature revenue, wireless data revenue, roaming revenue, regulatory surcharges
and receipt of CETC funding which added $10.69 and $9.49 to wireless ARPU for the year
ended December 31, 2007 and 2006, respectively; |
| |
| |
• |
|
higher phone and accessory sales in the year ended December 31, 2007 resulting in
$9.3 million of handset revenue compared to $8.2 million for the year ended December
31, 2006; and |
| |
| |
• |
|
higher revenue from non-ACS customers roaming on our network resulting in third
party roaming revenue increasing to $18.1 million from $14.2 million for the year ended
December 31, 2007 and 2006, respectively. |
33
Operating Expense
Operating expense increased $20.2 million, or 6.6%, to $325.3 million for the year ended
December 31, 2007, from $305.1 million for the year ended December 31, 2006. Depreciation and
amortization associated with the operation of each of our segments has been included in total
depreciation and amortization.
Wireline: Wireline expenses, which include local telephone, Internet and interexchange
operating costs increased $7.0 million, or 4.1%, for the year ended December 31, 2007. The increase
is primarily attributable to activity supporting our Internet service offerings including $3.1
million in ISP access and circuit expense and $1.2 million in DSL COGS. Additionally, we saw a $1.5
million increase in advertising expenses, and a $1.7 million increase in expenses associated with
large CPE contracts. These expenses were partially offset by $1.0 million in net non-recurring
expense benefits comprising $1.8 million from a favorable settlement of a long-term property tax
dispute and $0.8 million in contingent liability charges for an anticipated loss on a vendor
agreement.
Wireless: Wireless expense increased $11.8 million, or 18.9%, for the year ended December 31,
2007 compared to the year ended December 31, 2006. The increase is primarily attributable to $7.2
million in costs associated with expanding our wireless footprint, an increase of $2.0 million in
handset and accessory and data content expense and a $2.3 million increase in employee sales and
service costs to support our growing customer base.
Depreciation and Amortization: Depreciation and amortization expense increased $2.2 million,
or 3.2%, for the year ended December 31, 2007 compared to the year ended December 31, 2006. The
change is due to an increase in depreciable asset base partially offset by a number of asset
classes reaching their maximum depreciable lives. In addition, we recorded additional depreciation
expense and a corresponding reduction of our regulatory asset of $5.2 million for the twelve months
ended December 31, 2007.
Loss on Disposal of Assets: The loss on disposal of assets decreased year over year $0.9
million from December 31, 2006, due to higher retirements in the prior year arising from our
process improvement initiatives.
Other Income and Expense: Other income and expense was a net expense of $27.5 million in the
year ended December 31, 2007, a decrease of 8.0% from the $29.9 million in the year ended December
31, 2006. The decline is primarily attributable to a number of large prior year non-recurring
transactions. These transactions included a $9.6 million loss on the extinguishment of debt, offset
by a $6.7 million gain on the liquidation of the Rural Telephone Bank (“RTB”), and a $2.0 million
gain on the purchase of the Alaska terrestrial assets from Crest Communications, LLC. In 2007 we
incurred $0.4 million in loss on the extinguishment of debt and recorded $0.6 million for gains
from the RTB liquidation that are payable to our regulated intrastate wireline customers.
Income Taxes: In the year ended December 31, 2007, we generated taxable income which was
offset by net operating loss carry forwards. We did, however, incur an alternative minimum tax
charge of $0.5 million for the same period. Prior to December 31, 2007, we had fully reserved the
unused income tax benefit resulting from the consolidated losses we have incurred since May 14,
1999, the date of the acquisition of substantially all of our operations. In 2007, the Company
reversed all of its valuation allowance of $122.5 million as management now believes it is more
likely than not, that all of the deferred tax asset will be realized based on the weight of all
available evidence, including the last two years of earnings as well as projected earnings.
Net Income: The increase in net income is primarily a result of the one-time reversal of the
valuation allowance against our deferred tax asset in 2007.
Liquidity and Capital Resources
Sources
We have satisfied our cash requirements for the year ended December 31, 2008 for operations,
capital expenditures and debt service primarily through internally generated funds and the
execution of a new convertible debt offering. For the year ended December 31, 2008, our net cash
flows provided by operating activities were $94.6 million. At December 31, 2008, we had
approximately $14.2 million in net working capital, approximately $1.3 million in cash and cash
equivalents; and $20.5 million in restricted cash. As of December 31, 2008, we had $40.0 million of
remaining capacity under our revolving credit facility, representing 89% of available capacity.
During 2008 we invested excess cash in auction rate securities. Uncertainties in the credit markets
have resulted in failed auctions for our entire existing portfolio of auction rate securities of
$1.0 million, net of impairment loss. These investments are no longer considered liquid and during
the year we took a $0.2 million other-than-temporary impairment charge to the income statement. For
further information on our investment in auction rate securities, see “Item 7A—Quantitative and
Qualitative Disclosures about Market Risk—Liquidity Risk” and “Item 1A—Risk Factors”.
34
As of December 31, 2008, total long-term obligations outstanding, including current portion,
were $561.5 million consisting of a $425.9 million draw from our 2005 senior credit facility, a
$5.0 million draw on our revolving credit facility of $45.0 million, $125.0 million of convertible
notes and $5.6 million in finance lease obligations. The $425.9 million term loan under the 2005
senior credit facility was drawn on February 1, 2005, July 15, 2005, and February 22, 2006 and
generally bears interest at an annual rate of London Inter-Bank Offered Rate (“LIBOR”) plus 1.75%,
with a term of seven years from the first closing date and no scheduled principal payments before
maturity. The $5.0 million draw on our revolving credit facility generally bears interest at LIBOR
plus 2.00%. To the extent a portion of the revolving credit facility under the 2005 senior credit
facility remains undrawn, we will pay an annual commitment fee of 0.375% of the undrawn principal
amount over its term. We also entered into floating-to-fixed interest rate swaps with total
notional amounts of approximately $135.0 million, $85.0 million, $40.0 million, $115.0 million and
$52.9 million. This swaps the floating interest rate on the entire term loan borrowings under the
2005 senior credit facility for a further one to three years at a fixed rate of 5.88%, 6.25%,
6.18%, 6.71% and 6.75% per year, respectively, inclusive of the 1.75% premium over LIBOR. The swaps
are accounted for as cash flow hedges.
Our 2005 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 2005 senior credit facility also requires that we achieve certain financial ratios
quarterly and we are currently operating comfortably within these restrictions.
Uses
Our networks require the timely maintenance of plant and infrastructure. Our historical
capital expenditures have been significant. The construction and geographic expansion of our
wireless network and our AKORN submarine fiber have required significant capital. The
implementation of our interexchange network and data services strategy is also capital intensive.
New capital acquisition for 2008 totaled $125.7 million, inclusive of $3.4 million in interest
capitalized during the course of construction. Exclusive of capitalized interest, $39.5 million was
expended on recurring maintenance capex requirements; $82.4 million was expended on the
construction of our long-haul fiber facilities which once complete will provide telecommunication
connectivity between the lower 48 states and Alaska as well as provide geographically diverse
connectivity between Anchorage and Fairbanks; and $0.4 million was expended on capex that is
reimbursable from the selling stockholders of Crest. During 2008 we acquired Crest Communications
in an all cash transaction deal that totaled $65.0 million, net of $1.1 million in cash acquired
and inclusive of $4.2 million of cash consideration that has been placed in an escrow account for
the settlement of any potential claims of misrepresentations, breach of warranties or covenants or
for other indemnifications during the first eighteen months following the closing. We intend to
fund $4.2 million due to the former stockholders of Crest and future capital expenditures,
including the completion of our long-haul fiber build to the lower 48 states which we estimate will
cost approximately $7.8 million to complete, exclusive of capitalized interest expense and internal
overhead allocations with cash on hand, through internally generated cash flows, access to our
restricted cash balance and borrowings under our revolving credit facility.
Our 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, among other things.
Cash interest expense, net of cash interest income, for 2008 totaled $29.5 million. Through a
series of interest rate swap transactions, interest on our term loan is effectively fixed at an
annual rate of 6.3% while our $125.0 million convertible debt has a fixed coupon of 5.75%.
From time to time we make purchases of our outstanding debt securities on the open market, in
negotiated transactions or on available call dates. The timing and amount of such purchases, if
any, depend upon cash needs and market conditions, among other things. 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. In 2008 we paid down $2.0 million of our term loan.
On October 28, 2004, we announced the adoption of a dividend policy by our Board of Directors
and declared our first quarterly dividend of $0.185 per share. On March 21, June 14, September 16,
and November 29, 2005, our Board of Directors declared quarterly cash dividends of $0.20 per share.
In February 2006, we announced our Board of Directors increased our dividend policy to an annual
rate of $0.86 per share, an increase of 7.5% over the previous annual rate of $0.80 per share.
Based on current shares outstanding at February 20, 2008 of approximately 43.7 million shares, and
our current dividend of $0.86 per share, our current annual dividend commitment is $37.6 million.
Dividends on our common stock are not cumulative.
35
We believe that we will have sufficient 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 12 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.
Contractual Obligations
Current accounting standards require us to disclose our material obligations and commitments
to making future payments under contracts, such as debt and lease agreements, and under contingent
commitments, such as debt guarantees. We disclose our contractual long-term debt repayment
obligations in “Note 10 — Long-term Obligations” and our capital and operating lease payments in
“Note 6 — Property, Plant and Equipment”, in our consolidated financial statements provided in
this report.
Our contractual obligations as of December 31, 2008, 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 reliably 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.
| |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
2009 |
|
|
2010-2011 |
|
|
2012-2013 |
|
|
Thereafter |
|
Long-term debt |
|
$ |
555,889 |
|
|
$ |
— |
|
|
$ |
5,000 |
|
|
$ |
550,889 |
|
|
$ |
— |
|
Interest on long-term debt |
|
|
114,839 |
|
|
|
35,346 |
|
|
|
67,953 |
|
|
|
10,935 |
|
|
|
605 |
|
Capital leases |
|
|
5,634 |
|
|
|
666 |
|
|
|
1,557 |
|
|
|
1,547 |
|
|
|
1,864 |
|
Operating leases |
|
|
89,876 |
|
|
|
7,617 |
|
|
|
12,709 |
|
|
|
10,422 |
|
|
|
59,128 |
|
Unconditional purchase
obligations |
|
|
53,204 |
|
|
|
18,325 |
|
|
|
17,766 |
|
|
|
12,594 |
|
|
|
4,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
819,442 |
|
|
$ |
61,954 |
|
|
$ |
104,985 |
|
|
$ |
586,387 |
|
|
$ |
66,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 significant
liabilities that are not reflected on the balance sheet or in “Contractual Obligations” above.
Critical Accounting Policies and Estimates
We have identified certain policies and estimates as critical to our business operations and
the understanding of our past or present results of operations. For additional discussion on the
application of these and other significant accounting policies, see “Note 1—Summary of Significant
Accounting Policies” to our consolidated financial statements provided in this report. These
policies and estimates are considered critical because they had a material impact, or they have the
potential to have a material impact, on our financial statements and because they require
significant judgments, assumptions or estimates.
The preparation of 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. Among the significant estimates affecting the financial statements are those
related to the realizable value of accounts receivable, materials and supplies, long-lived assets,
goodwill and intangible assets, income taxes and network access revenue reserves. Actual results
may differ from those estimates.
Regulatory and Intercompany Accounting
Our consolidated financial statements include all majority-owned subsidiaries. We and our
subsidiaries follow, where applicable, SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. Our local telephone company subsidiaries charge other subsidiaries based on regulated
rates for telecommunications services. Intercompany revenue between regulated local telephone
companies and all other subsidiaries is not eliminated upon consolidation. Other intercompany
balances are eliminated upon consolidation.
36
Our local telephone company subsidiaries account for costs in accordance with the accounting
principles prescribed by SFAS No. 71. This accounting recognizes the economic effects of rate
regulation by recording cost and a return on investment as such amounts are recovered through rates
authorized by regulatory authorities. Accordingly, plant and equipment is depreciated over lives
approved by regulators and certain costs and obligations are deferred based upon approvals received
from regulators to permit recovery of such amounts in future years.
We implemented, effective January 1, 2003, higher depreciation rates for our interstate
telephone plant, which management believes approximate the economically useful lives of the
underlying plant. As a result, we recorded a regulatory asset under SFAS No. 71, as of December 31,
2008 and 2007, related to depreciation of the regulated telephone plant allocable to its intrastate
and local jurisdictions. If we were not following SFAS No. 71, these costs would have been charged
to expense as incurred. The balances at December 31, 2008 and December 31, 2007, are $63.4 and
$65.3 million, respectively. We also have a regulatory liability of $64.1 million and $62.4 million
at December 31, 2008 and 2007, respectively, related to accumulated removal costs for our local
telephone subsidiaries. If we were not following SFAS No. 71, we would have followed SFAS No. 143
for asset retirement obligations associated with our regulated telephone plant. Non-regulated
revenues and costs incurred by the local telephone exchange operations and non-regulated operations
are not accounted for under SFAS No. 71. In accordance with industry practice and regulatory
requirements, revenues generated between regulated and non-regulated group companies are not
eliminated on consolidation; these revenues totaled $41.6 million, $38.4 million, and $32.8
million, for the years ended December 31, 2008, 2007 and 2006, respectively.
The methodologies discussed above for determining regulated rates and the resulting revenue
and charges are based on rules adopted by the RCA. We believe the accounting estimates related to
affiliate revenue and charges are “critical accounting estimates” because determining the cost
allocation methodology and the supporting allocation factors: (i) requires judgment and is subject
to refinement as facts and circumstances change or as new cost drivers are identified; (ii) are
based on regulatory rules which are subject to change; and (iii) the various subsidiaries may
change provided services which can impact overall costs and related charges, all of which require
significant judgment and assumptions and can affect consolidated results.
Should our local exchange businesses cease to be subject to rate regulation we would implement
SFAS 101 —"Accounting for Discontinuation of Application of SFAS 71”.
We believe that application of SFAS 101 would result in a reduction in our regulatory assets
and liabilities and the elimination of certain intercompany revenues and expenses. In addition, we
would recognize extraordinary income (loss) in the fiscal quarter where SFAS 71 is no longer
applied. The adjustment would be required to account for the change to recording expense on a
non-regulated GAAP basis rather than a regulatory basis.
We have filed with the FCC a petition to be re-characterized from a “rate of return” carrier
to a “price cap” carrier. If our petition is granted, SFAS 71 would no longer apply to our
regulated entities. We believe our petition is likely to be granted, in which case we would be
required to make the changes generally described above. We have not yet quantified the effect of
this change; however, this change in regulatory accounting may cause our financial condition to
appear to be adversely affected.
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.
Additionally, we establish a bad debt reserve against uncollectible revenues incurred during
the period. These estimates are derived through a quarterly analysis of account aging profiles and
a review of historical recovery experience. The reserve is adjusted when receivables are deemed to
be uncollectible or otherwise paid. We account for bad debt expense in accordance with SFAS No. 71
which prescribes that revenue be recognized net of bad debt expense.
We recognize access revenue when it is earned. 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
37
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, we defer revenue collected until settlement
methodologies are resolved and finalized. At December 31, 2008 and 2007, the Company had recorded
liabilities of $6.4 million and $11.0 million, respectively, related to its estimate of refundable
access revenue. The decrease in the reserve during the year ended December 31, 2008 of $4.6 million
was the result of refunds, the settlement of prior period claims and positive settlements with NECA
and USAC regarding our cost studies.
Debt Issuance Costs and Original Issue Discounts
We amortize using the straight-line method underwriting and issuance costs associated with the
issuance of our senior credit facility, convertible notes and senior unsecured notes over the term
of the debt, which approximates the effective interest method. During 2008. the Company executed a
new convertible debt offering that resulted in debt issuance costs of $4.4 million. During 2007 and
2006, the Company repurchased its 2011 senior unsecured notes resulting in a write off of debt
issuance costs in 2007 and 2006 of $0.1 million and $1.7 million, respectively. Debt issuance cost
amortization, inclusive of the write-offs, in the “Consolidated Statement of Cash Flows” for 2008,
2007 and 2006, was $2.5 million, $2.0 million and $3.6 million, respectively.
We have issued certain debt instruments below their face value, resulting in original issue
discounts that we record net in long-term debt. These original issue discounts are amortized using
the effective interest method. During 2007 and 2006, the Company repurchased its 2011 senior
unsecured notes, which resulted in a write off of original issue discount to expense of $0.1
million and $1.5 million, respectively. Original issue discount, inclusive of the write offs, in
the “Consolidated Statement of Cash Flows” for 2008, 2007 and 2006, was zero, $0.1 million and $1.5
million, respectively.
Income Taxes
We use 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 bases 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. We released during the fourth quarter of 2007, in full, the existing valuation allowance
against our deferred tax asset.
Non-Operating Expense
We periodically evaluate the fair value of our 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 Statement of Operations”. These items
require significant judgment and assumptions. We believe our estimates are reasonable, based on
information available at the time they were made. However, if our estimates are not correct or if
circumstances underlying our estimates change, we may incur unexpected impairment charges in future
periods.
Recently Adopted Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements. We adopted SFAS No. 157, effective January 1, 2008, for
financial assets and financial liabilities, and other items recognized or disclosed in the
consolidated financial statements on a recurring basis In February 2008, the FASB issued FSP SFAS
157-2, Effective Date of FASB Statement No. 157, which deferred the effective date of SFAS No. 157
for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis. In October
2008, the FASB also issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which clarifies the application of SFAS No. 157 in an inactive
market and illustrates how an entity would determine fair value when the market for a financial
asset is not active. On January 1, 2008, we adopted, without material impact on our consolidated
financial statements, the provisions of SFAS No. 157 related to financial assets and liabilities
and to nonfinancial assets and liabilities measured at fair value on a recurring basis. Beginning
January 1, 2009, we will adopt the provisions required related to nonfinancial assets and
nonfinancial liabilities that are not required or permitted to be measured at fair value on a
recurring basis, which include those measured at fair value in goodwill impairment testing,
indefinite-lived intangible assets measured at fair value for impairment assessment, nonfinancial
long-lived assets measured at fair value for impairment assessment, asset retirement obligations
initially measured at fair value, and those initially measured at fair value in a business
combination. We do not expect the provisions of SFAS No. 157 related to these items to have a
material impact on our consolidated financial statements.
38
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R)
requires the recognition of all the assets acquired, liabilities assumed and any non-controlling
interest in the acquiree at the acquisition date at fair value with limited exceptions. SFAS No.
141(R) requires that acquisition costs and restructuring costs associated with a business
combination be expensed as incurred. This standard also requires that in-process research and
development be recorded on the balance sheet at fair value as an indefinite-lived intangible asset
at the acquisition date. In addition, under SFAS No. 141(R), changes in an acquired entity’s
valuation allowance on deferred tax assets and uncertain tax positions after the measurement period
will impact income tax expense. SFAS No. 141(R) is effective on a prospective basis for all
business combinations where the acquisition date occurs in or after the first fiscal year beginning
on or after December 15, 2008, with the exception of the accounting for valuation allowances on
deferred taxes and acquired uncertain tax positions. Upon the implementation of SFAS No. 141(R),
any reduction in these valuation allowances will be recorded as a reduction to income tax expense.
In December 2008, the FASB issued FASB Staff Position No. FAS 132(R)-1, Employers’ Disclosures
about Postretirement Benefit Plan Assets (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 amends FASB
Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement
Benefits, (“FAS 132(R)”), to provide guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan. The additional disclosure requirements under
this FSP include expanded disclosures about an entity’s investment policies and strategies, the
categories of plan assets, and concentrations of credit risk and fair value measurements of plan
assets. We anticipate that the adoption of this statement will not have a material impact on our
consolidated financial statements, but will require additional footnote disclosures.
In June 2008, the FASB issued Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue
No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (“FSP No. EITF 03-6-1”), in which the FASB concluded that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable dividends or dividend
equivalents (such as restricted stock units granted by the Company) are considered participating
securities. Because the awards are considered participating securities, the issuing entity is
required to apply the two-class method of computing basic and diluted earnings per share. The
provisions of FSP No. EITF 03-6-1 became effective for us on January 1, 2009 are applied
retrospectively to all prior-period earnings per share computations. The adoption of FSP No. EITF
03-6-1 will not have a material impact on earnings per share amounts in prior periods.
In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled Upon Conversion (Including Partial Cash Settlement) (“FSP APB
14-1”). This new standard requires the initial proceeds from convertible debt that may be settled
in cash to be bifurcated between a liability component and an equity component. The objective of
the guidance is to require the liability and equity components of convertible debt to be separately
accounted for in a manner such that the interest expense recorded on the convertible debt would not
equal the contractual rate of interest on the convertible debt, but instead would be recorded at a
rate that would reflect the issuer’s conventional non-convertible debt borrowing rate at the date
of issuance. This is accomplished through the creation of a discount on the debt that would be
accreted using the effective interest method as additional non-cash interest expense over the
period the debt is expected to remain outstanding. The provisions of FSP APB 14-1 will be applied
retrospectively to all periods presented for fiscal years beginning after December 31, 2008. We
expect the adoption of FSP APB 14-1 to increase the interest expense on our 5.75% Convertible Notes
due 2013 recorded in our results of operations by an annual amount of approximately $6.6 million.
In June 2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”). Paragraph 11(a) of Statement
of Financial Accounting Standard No 133, Accounting for Derivatives and Hedging Activities (“SFAS
133”) specifies that a contract that would otherwise meet the definition of a derivative, but is
both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial instrument. EITF
07-5 provides a new two-step model to be applied in determining whether a financial instrument or
an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133
paragraph 11(a) scope exception. EITF 07-5 will be effective for the first annual reporting period
beginning after December 15, 2008, and early adoption is prohibited. We are currently evaluating
whether the adoption of EITF 07-5 will have an impact on our accounting for our 5.75% Convertible
Notes due 2013 and related derivative hedge transactions we entered into in connection with our
offering of the notes.
39
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets. FSP FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years, or
interim periods, beginning after December 15, 2008. The guidance contained in FSP FAS 142-3 for
determining the useful life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after the effective date. However, the disclosure requirements of FSP
FAS 142-3 must be applied prospectively to all intangible assets recognized in our financial
statements as of the effective date. The adoption of FSP FAS 142-3 is not expected to have a
material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities—an Amendment of FASB Statement 133. SFAS No. 161 enhances derivative and
hedging activity disclosures pertaining to how derivative instruments are used, how derivative
instruments and related hedged items are accounted for under SFAS No. 133, and how derivative
instruments and related hedged items affect the Company’s consolidated financial statements. SFAS
No. 161 is effective for fiscal years, and interim periods, beginning after November 15, 2008. We
do not anticipate that the adoption of SFAS No. 161 will have a material impact on our consolidated
financial statements.
40
Item 7A. Quantitative and qualitative disclosures about market risk
As of December 31, 2008, we had outstanding our 2005 senior credit facility, partial draw on
our revolver, and convertible notes. 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 2005 senior credit
facility and revolver.
The table below provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2008. 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 2005 senior credit facility, 5.75% convertible notes due in 2013, and
capital leases and other long-term obligations outstanding at December 31, 2008. Weighted average
variable rates for the 2005 senior credit facility are based on implied forward rates in the LIBOR
yield curve as of December 31, 2008. Fair values as of December 31, 2008 included herein have been
determined based on (i) quoted market prices for the 2005 senior secured credit facility; and (ii)
quoted market prices for the 5.75% convertible notes. Our consolidated financial statements contain
descriptions of the 2005 senior credit facility, 5.75% convertible notes and capital leases and
other long-term obligations and should be read in conjunction with the table below.
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|
|
|
|
|
|
|
|
|
Fair |
| |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Total |
|
Value |
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 bank credit facility |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
425,889 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
425,889 |
|
|
$ |
340,711 |
|
Weighted average interest rate (var) |
|
|
2.98 |
% |
|
|
3.42 |
% |
|
|
4.04 |
% |
|
|
4.26 |
% |
|
|
|
|
|
|
|
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolver draw |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,000 |
|
|
$ |
4,000 |
|
Weighted average interest rate (var) |
|
|
3.23 |
% |
|
|
3.67 |
% |
|
|
4.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.75% convertible notes due 2013 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
125,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
125,000 |
|
|
$ |
93,013 |
|
Average interest rate (fixed) |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
|
|
|
|
5.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Captial lease and other long-term |
|
$ |
666 |
|
|
$ |
737 |
|
|
$ |
820 |
|
|
$ |
903 |
|
|
$ |
644 |
|
|
$ |
1,864 |
|
|
$ |
5,634 |
|
|
$ |
5,634 |
|
Average interest rate (fixed) |
|
|
10.21 |
% |
|
|
10.28 |
% |
|
|
10.38 |
% |
|
|
10.57 |
% |
|
|
10.78 |
% |
|
|
10.87 |
% |
|
|
10.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to fixed interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
67,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
(1,863 |
) |
Fixed rate payable |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
67,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
(1,863 |
) |
Fixed rate payable |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
85,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
85,000 |
|
|
$ |
(3,222 |
) |
Fixed rate payable |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-3.27 |
% |
|
|
-3.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40,000 |
|
|
$ |
(2,685 |
) |
Fixed rate payable |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.43 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-3.19 |
% |
|
|
-2.76 |
% |
|
|
-2.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
115,000 |
|
|
$ |
(9,752 |
) |
Fixed rate payable |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.96 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-3.73 |
% |
|
|
-3.29 |
% |
|
|
-2.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,900 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,900 |
|
|
$ |
(4,532 |
) |
Fixed rate payable |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.00 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-3.76 |
% |
|
|
-3.33 |
% |
|
|
-2.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.26 |
% |
|
|
|
|
Total derivative fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(23,917 |
) |
41
The table below provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2007. 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 2005 senior credit facility, senior unsecured notes, and capital leases
and other long-term obligations outstanding at December 31, 2007. Weighted average variable rates
for the 2005 senior credit facility are based on implied forward rates in the LIBOR yield curve as
of December 31, 2007. Fair values as of December 31, 2007 included herein have been determined
based on (i) quoted market prices for the 2005 senior secured credit facility; and (ii) quoted
market prices for the senior unsecured notes. Our consolidated financial statements contain
descriptions of the 2005 senior credit facility, senior unsecured notes and capital leases and
other long-term obligations and should be read in conjunction with the table below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
| |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Value |
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 bank credit facility |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
427,900 |
|
|
$ |
— |
|
|
$ |
427,900 |
|
|
$ |
410,784 |
|
Weighted average interest rate (var) |
|
|
6.15 |
% |
|
|
5.75 |
% |
|
|
5.87 |
% |
|
|
6.24 |
% |
|
|
6.46 |
% |
|
|
|
|
|
|
6.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Captial lease and other long-term |
|
$ |
780 |
|
|
$ |
609 |
|
|
$ |
672 |
|
|
$ |
739 |
|
|
$ |
800 |
|
|
$ |
1,496 |
|
|
$ |
5,096 |
|
|
$ |
5,096 |
|
Average interest rate (fixed) |
|
|
10.20 |
% |
|
|
10.27 |
% |
|
|
10.38 |
% |
|
|
10.56 |
% |
|
|
10.95 |
% |
|
|
11.50 |
% |
|
|
10.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to fixed interest rate swap
Notional amount |
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
(482 |
) |
Fixed rate payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
0.27 |
% |
|
|
-0.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
67,500 |
|
|
$ |
(485 |
) |
Fixed rate payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
0.27 |
% |
|
|
-0.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
85,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
85,000 |
|
|
$ |
(1,352 |
) |
Fixed rate payable |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-0.10 |
% |
|
|
-0.50 |
% |
|
|
-0.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-0.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40,000 |
|
|
$ |
(669 |
) |
Fixed rate payable |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
4.43 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-0.02 |
% |
|
|
-0.42 |
% |
|
|
-0.30 |
% |
|
|
0.04 |
% |
|
|
|
|
|
|
|
|
|
|
-0.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
115,000 |
|
|
$ |
(4,195 |
) |
Fixed rate payable |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
|
|
|
|
|
|
|
|
4.96 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-0.56 |
% |
|
|
-0.96 |
% |
|
|
-0.84 |
% |
|
|
-0.47 |
% |
|
|
|
|
|
|
|
|
|
|
-0.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,900 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,900 |
|
|
$ |
(1,996 |
) |
Fixed rate payable |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
5.00 |
% |
|
|
|
|
Weighted average variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate receivable (payable) |
|
|
-0.59 |
% |
|
|
-0.99 |
% |
|
|
-0.87 |
% |
|
|
-0.50 |
% |
|
|
|
|
|
|
|
|
|
|
-0.74 |
% |
|
|
|
|
Total derivative fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(9,179 |
) |
Liquidity Risk
We currently hold a $1.0 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 $245. We may need to access these funds for operational
purposes during the time that these investments are expected to remain illiquid.
42
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 and Schedule, 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
(A) Evaluation of Disclosure Controls and Procedures.
Under supervision and with the participation of management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of December 31, 2008; and whether any change has occurred in
our internal control over financial reporting pursuant to Exchange Act Rules 13a-15(d) and
15d-15(d). Based on this evaluation, our principal executive officer and principal financial
officer concluded as of the Evaluation Date that the Company’s disclosure controls and procedures
were effective as of December 31, 2008.
(B) Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
our financial reporting. Our 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 U.S. generally accepted accounting
principles. Internal control over financial reporting includes policies and procedures that: (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with U.S. generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective may not prevent or detect misstatements.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
Our management’s assessment included an evaluation of such elements as the design and
operating effectiveness of key financial reporting controls, process documentation, accounting
policies, and overall control environment. Based on this assessment, management has concluded that
the Company’s internal control over financial reporting as of December 31, 2008 was effective.
(C) 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 2008 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
43
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is contained in our Proxy Statement for our 2009 Annual
Meeting of Stockholders and is incorporated herein by reference.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer, or controller, and persons performing similar
functions. We will provide to any person, free of charge, a copy of such code of ethics. The
request must be submitted in writing to the Corporate Secretary, Alaska Communications Systems
Group, Inc., 600 Telephone Avenue, Anchorage, Alaska 99503.
Item 11. Executive Compensation Summary Compensation Table
Information on compensation of our directors and executive officers is contained in our Proxy
Statement for our 2009 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 herein by reference to information included in the Proxy Statement for our 2009 Annual
Meeting of Stockholders.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2008, the number of securities remaining available for future issuance
under equity compensation plans includes 1,385,010 shares under the Alaska Communications Systems
Group, Inc. 1999 Stock Incentive Plan, 116,503 shares under the ACS Group, Inc. 1999 Non-Employee
Director Stock Compensation Plan, and 751,912 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. The units reserved as restricted stock unit equivalents (“RSUEs”) have been
awarded according to the terms of the amended and restated employment agreement between Alaska
Communications Systems Group, Inc. and Liane Pelletier. The RSUEs will settle in common stock on
July 31, 2009, unless stockholder approval is not obtained, in which case they will settle in cash.
See “Note 15 — Stock Incentive Plans”, to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements for further information on our equity compensation plans.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities |
|
|
|
|
|
Number of securities remaining |
| |
|
to be issued upon |
|
Weighted-average |
|
available for future issuance |
| |
|
exercise of outstanding |
|
exercise price of |
|
under equity compensation |
| |
|
options, warrants and |
|
outstanding options, |
|
plans (excluding securities |
| |
|
rights |
|
warrants and rights |
|
reflected in column (a)) |
| Equity compensation plans |
|
(a) |
|
(b) |
|
(c) |
Approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
1,150,549 |
|
|
$ |
9.71 |
|
|
|
|
|
Restricted stock |
|
|
1,382,067 |
|
|
$ |
— |
|
|
|
2,253,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Not approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
200,000 |
|
|
$ |
4.50 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Subject to future approval
by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock unit
equivalents |
|
|
100,000 |
|
|
$ |
— |
|
|
|
|
|
44
Item 13. Certain Relationships and Related Transactions
Information with respect to such contractual relationships is incorporated herein by reference
to the information in the Proxy Statement for our 2009 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
Information on our audit committee’s pre-approval policy for audit services, and information
on our principal accountant fees and services is contained in our Proxy Statement for our 2009
Annual Meeting of Stockholders.
45
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 and Schedule which appears on page F-1
hereof. |
| |
| |
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 and
Schedule which 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 by and among Alaska Communications Systems
Group, Inc. and Crest Communications Corporations Group, Inc.
(“Crest”) the Selling Stockholder; and Donald J. Schroeder and
Brooke Coburn dated April 1, 2008—Confidential treatment has been
granted for certain portions marked “***” of this Exhibit.
|
|
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 By-Laws of the Registrant.
|
|
Exhibit 3.2 to Form
8-K (filed
9/18/2008) |
|
|
|
|
|
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 as of August 26, 2003, among Alaska Communications
Systems Holdings, Inc., as Issuer, the Guarantors (as defined
therein) and The Bank of New York, as trustee.
|
|
Exhibit 4.1 to Form
S-4 file No.
333-109927 (filed
10/23/2003) |
|
|
|
|
|
4.3
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.11,
dated January 25, 2005, among the Company, Alaska Communications
Systems Holdings, Inc., the guarantor’s party thereto and The Bank
of New York, as trustee.
|
|
Exhibit 10.1 to
Form 8-K (filed
1/26/2005) |
|
|
|
|
|
4.4
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.5,
dated January 25, 2005, among the Company, Alaska Communications
Systems Holdings, Inc., the guarantors party thereto and The Bank
of New York, as trustee.
|
|
Exhibit 10.2 to
Form 8-K (filed
1/26/2005) |
|
|
|
|
|
4.5
|
|
Supplemental indenture to Indenture listed as Exhibit No. 4.11,
dated July 15, 2005, among the Registrant, Alaska Communications
Systems Holdings, Inc., the guarantors party thereto and the Bank
of New York, as trustee.
|
|
Exhibit 1.1 to Form
8-K (filed
7/21/2005) |
|
|
|
|
|
4.6
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.11,
dated February 22, 2006, among the Company, Alaska Communications
Systems Holdings, Inc., the guarantors party thereto and The Bank
of New York, as trustee.
|
|
Exhibit 10.1 to
Form 8-K (filed
2/27/2006) |
|
|
|
|
|
4.7
|
|
Indenture dated April 8, 2008 by and among Alaska Communications
Systems Group, Inc., the guarantors named therein, and The Bank of
New York Trust Company, N.A., as trustee , with respect to 5.75%
Convertible Notes due 2013.
|
|
Exhibit 4.1 to Form
8-K (filed
4/14/2008) |
|
|
|
|
|
4.8
|
|
Registration Rights Agreement dated April 8, 2008 by and among
Alaska Communications Systems Group, Inc., the guarantors named
therein, and the Initial Purchasers (as defined 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) |
46
| |
|
|
|
|
Exhibit
No. |
|
Exhibit |
|
Where Located |
| |
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*
|
|
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) |
|
|
|
|
|
10.4*
|
|
Alaska Communications Systems Group, Inc. 1999 Employee Stock
Purchase Plan.
|
|
Exhibit to Form
S-1/A file No.
333-888753 (filed
11/17/1999) |
|
|
|
|
|
10.5*
|
|
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) |
|
|
|
|
|
10.6
|
|
Settlement Agreement and Mutual Release, dated October 14, 2003, by
and between the State of Alaska and Alaska Communications Systems
Group, Inc.
|
|
Exhibit 10.4 to
Form S-4 file No.
333-109927 (filed
10/23/2003) |
|
|
|
|
|
10.7*
|
|
Executive Employment Agreement, dated as of January 23, 2004
between Alaska Communications Systems Group, Inc. and Sheldon
Fisher.
|
|
Exhibit 10.13 to
Form 10-K (filed
3/30/2004) |
|
|
|
|
|
10.8*
|
|
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) |
|
|
|
|
|
10.9
|
|
Letter Agreement, dated January 26, 2005, between Alaska
Communications Systems Holdings, Inc. and Fox Paine & Company, LLC.
|
|
Exhibit 10.1 to
Form 8-K (filed
1/27/2005) |
|
|
|
|
|
10.10
|
|
Credit Agreement, dated February 1, 2005, among the Company, ACSH,
the lenders named therein and Canadian Imperial Bank of Commerce,
as Administrative Agent.
|
|
Exhibit 10.1 to
Form 8-K (filed
2/2/2005) |
|
|
|
|
|
10.11
|
|
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) |
|
|
|
|
|
10.12
|
|
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) |
|
|
|
|
|
10.13
|
|
Consent and Agreement No. 1, dated July 15, 2005, among Alaska
Communications Systems Group, Inc. , 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) |
|
|
|
|
|
10.14*
|
|
Form of Restricted Stock Agreement between the Registrant and
certain participants in the Registrant’s 1999 Stock Incentive Plan.
|
|
Exhibit 10.1 to
Form 10-Q (filed
8/3/2007) |
|
|
|
|
|
10.15
|
|
Consent and Agreement No. 2, dated February 22, 2006, among Alaska
Communications Systems Group, Inc. , 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*
|
|
2006 Officer Severance Program.
|
|
Exhibit 99.1 to
Form 8-K (filed
7/17/2006) |
|
|
|
|
|
10.17*
|
|
2008 Officer Severance Policy.
|
|
Exhibit 10.2 to
Form 8-K (filed
12/24/2008) |
|
|
|
|
|
10.18
|
|
Supply and Construction Contract between ACS Cable Systems, Inc.
and Tyco Telecommunications (US), Inc. dated October 23, 2007***.
|
|
Exhibit 10.23 to
Form 10-K (filed
3/20/2008) |
|
|
|
|
|
10.19*
|
|
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) |
|
|
|
|
|
10.20
|
|
Purchase Agreement dated April 2, 2008 by and among Alaska
Communications Systems Group, Inc., the guarantors listed therein
and the Initial Purchasers.
|
|
Exhibit 10.1 to
Form 8-K (filed
4/14/2008) |
47
| |
|
|
|
|
Exhibit
No. |
|
Exhibit |
|
Where Located |
| |
10.21
|
|
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) |
|
|
|
|
|
10.22
|
|
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) |
|
|
|
|
|
10.23*
|
|
Form of Performance Share Unit Agreement.
|
|
Exhibit 99.1 to
Form 8-K/A (filed
6/12/2008) |
|
|
|
|
|
10.24*
|
|
Executive Employment Agreement, dated as of December 19, 2008
between Alaska Communications Systems Group, Inc. and Anand
Vadapalli.
|
|
Exhibit 10.1 to
Form 8-K (filed
12/24/2008) |
|
|
|
|
|
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. |
48
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: March 9, 2009
| |
|
|
|
|
| |
Alaska Communications Systems Group, Inc.
|
|
| |
By: |
/s/ Liane Pelletier
|
|
| |
|
Liane Pelletier |
|
| |
|
Chief Executive Officer,
Chairman of the Board and 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/ Liane Pelletier
Liane Pelletier |
|
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
|
|
March 9, 2009 |
| /s/ David Wilson
David Wilson |
|
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
|
|
March 9, 2009 |
| /s/ Annette M. Jacobs
Annette M. Jacobs |
|
Director
|
|
March 9, 2009 |
| /s/ Brian Rogers
Brian Rogers |
|
Director
|
|
March 9, 2009 |
| /s/ David A. Southwell
David A. Southwell |
|
Director
|
|
March 9, 2009 |
| /s/ John M. Egan
John M. Egan |
|
Director
|
|
March 9, 2009 |
| /s/ Peter Ley
Peter Ley |
|
Director
|
|
March 9, 2009 |
| /s/ Gary R. Donahee
Gary R. Donahee |
|
Director
|
|
March 9, 2009 |
| /s/ Edward J. Hayes, Jr.
Edward J. Hayes, Jr. |
|
Director
|
|
March 9, 2009 |
49
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
| |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-8 |
|
|
|
|
|
|
|
|
|
F-41 |
|
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, 2008 and 2007, and the related consolidated
statements of operation, stockholders’ equity (deficit) and comprehensive income (loss), and cash
flows for each of the years in the three-year period ended December 31, 2008. These consolidated
financial statements are the responsibility of the Company’s 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, 2008 and 2007, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2008, 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 System’s Group, Inc.’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 9, 2009 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
(signed) KPMG LLP
Anchorage, Alaska
March 9, 2009
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, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 Management’s Report on Internal Control Over
Financial Reporting (Item 9A.(B)). Our responsibility is to express an opinion on the Company’s
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 company’s 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
company’s 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 company’s 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, 2008, 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, 2008 and 2007, 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, 2008, and our report dated March 9, 2009
expressed an unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Anchorage, Alaska
March 9, 2009
F-3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
December 31, 2008 and 2007
(In Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Assets
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,326 |
|
|
$ |
35,208 |
|
Restricted cash |
|
|
20,517 |
|
|
|
2,589 |
|
Short-term investments |
|
|
— |
|
|
|
790 |
|
Accounts receivable-trade, net of allowance of $5,912 and $8,768 |
|
|
40,433 |
|
|
|
39,150 |
|
Materials and supplies |
|
|
9,404 |
|
|
|
10,467 |
|
Prepayments and other current assets |
|
|
6,515 |
|
|
|
5,155 |
|
Deferred income taxes |
|
|
21,145 |
|
|
|
21,347 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
99,340 |
|
|
|
114,706 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,391,351 |
|
|
|
1,209,257 |
|
Less: accumulated depreciation and amortization |
|
|
(891,899 |
) |
|
|
(825,663 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
499,452 |
|
|
|
383,594 |
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
|
1,005 |
|
|
|
— |
|
Goodwill |
|
|
8,850 |
|
|
|
38,403 |
|
Intangible assets, net |
|
|
24,118 |
|
|
|
21,604 |
|
Debt issuance cost |
|
|
9,290 |
|
|
|
7,461 |
|
Deferred income taxes |
|
|
114,831 |
|
|
|
96,095 |
|
Deferred charges and other assets |
|
|
452 |
|
|
|
1,340 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
757,338 |
|
|
$ |
663,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
666 |
|
|
$ |
780 |
|
Accounts payable, accrued and other current liabilities |
|
|
74,028 |
|
|
|
64,070 |
|
Advance billings and customer deposits |
|
|
10,399 |
|
|
|
10,051 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
85,093 |
|
|
|
74,901 |
|
|
|
|
|
|
|
|
|
|
Non-current obligations, net of current portion |
|
|
560,857 |
|
|
|
432,216 |
|
Other deferred credits and long-term liabilities |
|
|
98,693 |
|
|
|
82,075 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
744,643 |
|
|
|
589,192 |
|
|
|
|
|
|
|
|
Commitments
and contingencies
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 145,000 authorized, 43,719 and
42,883 issued and outstanding, respectively |
|
|
437 |
|
|
|
429 |
|
Additional paid in capital |
|
|
217,740 |
|
|
|
257,982 |
|
Accumulated deficit |
|
|
(187,452 |
) |
|
|
(177,313 |
) |
Accumulated other comprehensive loss |
|
|
(18,030 |
) |
|
|
(7,087 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity (deficit) |
|
|
12,695 |
|
|
|
74,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (deficit) |
|
$ |
757,338 |
|
|
$ |
663,203 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
Years ended December 31, 2008, 2007, and 2006
(In Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
$ |
246,028 |
|
|
$ |
248,265 |
|
|
$ |
233,351 |
|
Wireless |
|
|
143,569 |
|
|
|
137,520 |
|
|
|
115,370 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
389,597 |
|
|
|
385,785 |
|
|
|
348,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and
amortization) |
|
|
185,321 |
|
|
|
179,456 |
|
|
|
172,421 |
|
Wireless (exclusive of depreciation and
amortization) |
|
|
84,751 |
|
|
|
74,305 |
|
|
|
62,478 |
|
Depreciation and amortization |
|
|
74,002 |
|
|
|
71,337 |
|
|
|
69,096 |
|
Loss on disposal of assets, net |
|
|
750 |
|
|
|
248 |
|
|
|
1,105 |
|
Loss on impairment of goodwill and intangible assets |
|
|
29,641 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
374,465 |
|
|
|
325,346 |
|
|
|
305,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15,132 |
|
|
|
60,439 |
|
|
|
43,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(32,921 |
) |
|
|
(28,386 |
) |
|
|
(30,445 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
(355 |
) |
|
|
(9,650 |
) |
Interest income |
|
|
1,695 |
|
|
|
2,020 |
|
|
|
1,835 |
|
Other |
|
|
(547 |
) |
|
|
(776 |
) |
|
|
8,360 |
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(31,773 |
) |
|
|
(27,497 |
) |
|
|
(29,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax |
|
|
(16,641 |
) |
|
|
32,942 |
|
|
|
13,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
6,502 |
|
|
|
111,194 |
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,139 |
) |
|
$ |
144,136 |
|
|
$ |
13,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.23 |
) |
|
$ |
3.38 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.23 |
) |
|
$ |
3.26 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
43,391 |
|
|
|
42,701 |
|
|
|
42,045 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
43,391 |
|
|
|
44,185 |
|
|
|
43,387 |
|
|
|
|
|
|
|
|
|
|
|
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, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
|
|
|
|
Common |
|
|
Treasury |
|
|
Additional Paid |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Stock |
|
|
Stock |
|
|
in Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2006 |
|
|
46,230 |
|
|
$ |
462 |
|
|
$ |
(18,443 |
) |
|
$ |
333,522 |
|
|
$ |
(334,727 |
) |
|
$ |
322 |
|
|
$ |
(18,864 |
) |
Total comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,278 |
|
|
|
1,244 |
|
|
|
14,522 |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(36,274 |
) |
|
|
— |
|
|
|
— |
|
|
|
(36,274 |
) |
Stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,667 |
|
|
|
— |
|
|
|
— |
|
|
|
7,667 |
|
Surrender of 74 shares to cover
withholding taxes
on stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(872 |
) |
|
|
— |
|
|
|
— |
|
|
|
(872 |
) |
Issuance of common stock,
pursuant to stock plans, $.01 par |
|
|
641 |
|
|
|
6 |
|
|
|
— |
|
|
|
2,780 |
|
|
|
— |
|
|
|
— |
|
|
|
2,786 |
|
Retirement of stock held in treasury |
|
|
(4,549 |
) |
|
|
(45 |
) |
|
|
18,443 |
|
|
|
(18,398 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
42,322 |
|
|
|
423 |
|
|
|
— |
|
|
|
288,425 |
|
|
|
(321,449 |
) |
|
|
1,566 |
|
|
|
(31,035 |
) |
Total comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
144,136 |
|
|
|
(8,653 |
) |
|
|
135,483 |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(36,840 |
) |
|
|
— |
|
|
|
— |
|
|
|
(36,840 |
) |
Stock compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,390 |
|
|
|
— |
|
|
|
— |
|
|
|
6,390 |
|
Excess tax benefit from share-based
payments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
755 |
|
|
|
— |
|
|
|
— |
|
|
|
755 |
|
Surrender of 153 shares to cover
withholding taxes
on stock based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,330 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,330 |
) |
Issuance of common stock,
pursuant to stock plans, $.01 par |
|
|
561 |
|
|
|
6 |
|
|
|
— |
|
|
|
1,582 |
|
|
|
— |
|
|
|
— |
|
|
|
1,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
42,883 |
|
|
|
429 |
|
|
|
— |
|
|
|
257,982 |
|
|
|
(177,313 |
) |
|
|
(7,087 |
) |
|
|
74,011 |
|
Total comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,139 |
) |
|
|
(10,943 |
) |
|
|
(21,082 |
) |
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 |
|
Surrender of 273 shares to cover
withholding
taxes on stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,383 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,383 |
) |
Issuance of common stock
stock, pursuant to stock plans, $.01 par |
|
|
836 |
|
|
|
8 |
|
|
|
— |
|
|
|
1,417 |
|
|
|
— |
|
|
|
— |
|
|
|
1,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
43,719 |
|
|
$ |
437 |
|
|
$ |
— |
|
|
$ |
217,740 |
|
|
$ |
(187,452 |
) |
|
$ |
(18,030 |
) |
|
$ |
12,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In Thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,139 |
) |
|
$ |
144,136 |
|
|
$ |
13,278 |
|
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
74,002 |
|
|
|
71,337 |
|
|
|
69,096 |
|
Loss on disposal of assets, net |
|
|
750 |
|
|
|
248 |
|
|
|
1,105 |
|
Loss on impairment of goodwill and intangible assets |
|
|
29,641 |
|
|
|
— |
|
|
|
— |
|
Gain on sale of long-term investments |
|
|
— |
|
|
|
(152 |
) |
|
|
(6,685 |
) |
Loss on impairment of non-current investments |
|
|
245 |
|
|
|
— |
|
|
|
— |
|
Amortization of debt issuance costs and original
issue discount |
|
|
2,539 |
|
|
|
2,059 |
|
|
|
5,180 |
|
Stock-based compensation |
|
|
9,477 |
|
|
|
6,390 |
|
|
|
7,667 |
|
Deferred income taxes |
|
|
(6,445 |
) |
|
|
(112,495 |
) |
|
|
— |
|
Excess tax benefit from share-based payments |
|
|
— |
|
|
|
(755 |
) |
|
|
— |
|
Other non-cash expenses |
|
|
139 |
|
|
|
742 |
|
|
|
234 |
|
Changes in components of assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
|
955 |
|
|
|
(1,896 |
) |
|
|
2,136 |
|
Materials and supplies |
|
|
1,063 |
|
|
|
(2,490 |
) |
|
|
(92 |
) |
Accounts payable and other current liabilities |
|
|
(2,102 |
) |
|
|
(1,607 |
) |
|
|
8,823 |
|
Deferred charges and other assets |
|
|
470 |
|
|
|
(193 |
) |
|
|
3,856 |
|
Other deferred credits |
|
|
(6,018 |
) |
|
|
(532 |
) |
|
|
(13,013 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
94,577 |
|
|
|
104,792 |
|
|
|
91,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(125,711 |
) |
|
|
(62,645 |
) |
|
|
(59,720 |
) |
Change in unsettled construction and capital expenditures |
|
|
6,056 |
|
|
|
(509 |
) |
|
|
(915 |
) |
Investment in intangible assets |
|
|
(2,601 |
) |
|
|
— |
|
|
|
— |
|
Acquisitions, net of cash acquired |
|
|
(64,960 |
) |
|
|
— |
|
|
|
— |
|
Change in unsettled acquisition costs |
|
|
4,169 |
|
|
|
— |
|
|
|
— |
|
Purchase of short-term investments |
|
|
(9,400 |
) |
|
|
(64,638 |
) |
|
|
(57,500 |
) |
Proceeds from sale of short-term investments |
|
|
10,190 |
|
|
|
63,848 |
|
|
|
68,025 |
|
Purchase of non-current investments |
|
|
(3,625 |
) |
|
|
— |
|
|
|
— |
|
Proceeds from sale of non-current investments |
|
|
2,375 |
|
|
|
162 |
|
|
|
7,663 |
|
Placement of funds in restricted accounts |
|
|
(74,956 |
) |
|
|
(3,009 |
) |
|
|
— |
|
Release of funds from restricted accounts |
|
|
57,028 |
|
|
|
2,120 |
|
|
|
2,715 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(201,435 |
) |
|
|
(64,671 |
) |
|
|
(39,732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(7,832 |
) |
|
|
(5,089 |
) |
|
|
(61,860 |
) |
Proceeds from the issuance of long-term debt |
|
|
135,000 |
|
|
|
— |
|
|
|
52,900 |
|
Purchase of call options |
|
|
(20,431 |
) |
|
|
— |
|
|
|
— |
|
Sale of common stock warrants |
|
|
9,852 |
|
|
|
— |
|
|
|
— |
|
Debt issuance costs |
|
|
(4,368 |
) |
|
|
— |
|
|
|
(1,349 |
) |
Payment of cash dividend on common stock |
|
|
(37,287 |
) |
|
|
(36,697 |
) |
|
|
(35,475 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(3,383 |
) |
|
|
(2,330 |
) |
|
|
(872 |
) |
Excess tax benefit from share-based payments |
|
|
— |
|
|
|
755 |
|
|
|
— |
|
Proceeds from the issuance of common stock |
|
|
1,425 |
|
|
|
1,588 |
|
|
|
2,786 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
72,976 |
|
|
|
(41,773 |
) |
|
|
(43,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(33,882 |
) |
|
|
(1,652 |
) |
|
|
7,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
35,208 |
|
|
|
36,860 |
|
|
|
28,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,326 |
|
|
$ |
35,208 |
|
|
$ |
36,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
31,175 |
|
|
$ |
28,795 |
|
|
$ |
31,280 |
|
Income taxes paid |
|
|
355 |
|
|
|
545 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
1,359 |
|
|
$ |
51 |
|
|
|
60 |
|
Dividend declared, but not paid |
|
|
9,449 |
|
|
|
9,226 |
|
|
|
9,105 |
|
See Notes to Consolidated Financial Statements
F-7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
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, 2008
and 2007 and for the years ended December 31, 2008, 2007 and 2006. 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”) |
A summary of significant accounting policies followed by the Company is set forth below:
Basis of Presentation
The consolidated financial statements include all majority-owned subsidiaries. In accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 71, Accounting for the Effects of
Certain Types of Regulation, intercompany revenue between regulated local telephone companies and
all other group companies is not eliminated. All other significant intercompany balances have been
eliminated. Certain reclassifications have been made to the 2007 and 2006 balances to conform to
the current presentation.
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, income taxes and network access revenue reserves. These estimates and assumptions
are based on management’s 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 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.
F-8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Cash
As of December 31, 2008, the Company had placed into escrow $9,739 for the indemnification of
the Company in the event of breach by Crest Communications Corporation (“Crest”) of certain
obligations, representations and warranties specified in the Company’s agreement to purchase Crest
and the completion of certain capital projects; and $8,578 pending completion by Tyco
Telecommunications (“Tyco”) of specified milestones set forth in the Company’s agreement with Tyco
for the construction of its Alaska Oregon Network (“AKORN”) fiber optic cable system.
The remaining balance, as well as the prior year balance, consists of 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.
Short-Term Investments
For purposes of the “Consolidated Balance Sheets” and “Consolidated Statement of Cash Flows”,
the Company considers highly liquid investments with a maturity at acquisition of more than three
months but less than one year to be short-term investments. These investments are classified as
available for sale and are stated at estimated fair market value. Income related to these
investments is reported as interest income.
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 Company’s “Consolidated Statement of Cash Flows”.
Property, Plant and Equipment
Telephone plant is stated substantially at original cost of construction. Telephone plant
retired in the ordinary course of business, together with the cost of removal, less salvage, is
charged to accumulated depreciation with no gain or loss recognized. Renewals and betterments of
telephone plant are capitalized while repairs, as well as renewals of minor items, are charged to
operating expense as incurred. The Company provides for depreciation of telephone plant on the
straight-line method, using rates approved by regulatory authorities. The composite annualized rate
of depreciation for all classes of telephone property, plant, and equipment was 4.8%, 5.2% and 5.3%
for 2008, 2007 and 2006, respectively.
Non-Telephone plant is stated at purchased cost, and when sold or retired a gain or loss is
recognized. Depreciation of such property is provided on the straight-line method over its
estimated service life ranging from three to 39 years.
The Company is the lessee of equipment and buildings under capital leases expiring in various
years through 2019. 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 a straight-line method.
Non-current Investments
The Company’s 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.
F-9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
At December 31, 2008, the Company’s ARS portfolio was comprised of 100% AAA rated investments.
Although the Company has the ability to hold these investments to maturity, an assessment was
performed and management determined that the fair value of these securities was
other-than-temporarily impaired. The Company has recorded a loss in the Consolidated Statements of
Operations for the year ended December 31, 2008 of $245 related to its ARS portfolio. The Company
will reassess this conclusion and the remaining portfolio balance in future reporting periods based
on several factors, including the success or failure of future auctions, possible failure of the
investment to be redeemed, deterioration of the credit ratings of the investments, market risk and
other factors.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are assessed for
impairment on at least an annual basis. In 2008, the Company took a charge for impairment to the
goodwill balance on its wireline segment of $29,553 and intangibles of $88. See Note 8 — “Goodwill
and Other Intangible Assets” for information regarding the impairment charge recorded.
Debt Issuance Costs
Underwriting and issuance costs associated with the issuance of the Company’s 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 debt. During 2008, the Company
executed a new convertible debt offering that resulted in debt issuance costs of $4,368. During
2007 and 2006, the Company repurchased its 2011 senior unsecured notes which resulted in a
write-off of debt issuance costs in 2007 and 2006, of $84 and $1,731, respectively. Debt issuance
cost amortization, inclusive of the write-offs, in the “Consolidated Statement of Cash Flows” for
2008, 2007 and 2006, was $2,539, $1,976 and $3,645, respectively.
Original Issue Discounts
Certain debt instruments of the Company have been issued below their face value, resulting
in original issue discounts that are recorded net in long-term debt. These original issue
discounts are amortized using the effective interest method. During 2007 and 2006, the Company
repurchased its 2011 senior unsecured notes, which resulted in a write-off of original issue
discount to expense of $72 and $1,479, respectively. Original issue discount, inclusive of the
write-offs, in the “Consolidated Statement of Cash Flows” for 2008, 2007 and 2006, was zero, $83
and $1,535, respectively.
Capitalized Interest
The Company capitalizes interest charges to its construction in progress based on a weighted
average interest cost calculated on the Company’s outstanding debt. Interest expense for the year
ended December 31, 2008, 2007 and 2006 was $32,921, $28,386 and $30,445, net of capitalized
interest of $3,384, $1,904 and $807, respectively.
Preferred Stock
The Company has 5,000, no par, shares authorized, none of which were issued or outstanding
at December 31, 2008 and 2007.
Treasury Stock
The Company, with Board of Directors’ authorization, occasionally repurchases shares of its
common stock. Since management originally intended to hold the treasury stock temporarily for
later re-issuance, the cost method of accounting for treasury stock was used. On December 15,
2006, the Company’s Board of Directors approved the retirement of 100% of the Company’s treasury
stock.
F-10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Substantially all recurring 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 Company’s 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 its Company owned 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.
The Company establishes estimated bad debt reserves against uncollectible revenues 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 accounts for bad debt
expense in accordance with SFAS No. 71 for regulated entities which prescribes that revenue be
recognized net of bad debt expense.
Access revenue is recognized when earned. The Company participates in access revenue pools
with other telephone companies. Such pools are funded by toll revenue and/or access charges
regulated by the Federal Communications Commission (“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 the
Company and the other telephone companies. To the extent that disputes arise over revenue
settlements, the Company’s policy is to defer revenue collected until settlement methodologies
are resolved and finalized. At December 31, 2008 and 2007, the Company had deferred revenue of
$6,372 and $10,992, respectively, related to its estimate of refundable access revenue. The
decrease during the year ended December 31, 2008 of $4,620 was the result of refunds, the
settlement of prior period claims and positive settlements with National Exchange Carrier’s
Association (“NECA”) and Universal Service Administration Corporation (“USAC”) regarding our cost
studies.
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 Company’s
customers do not, individually, represent a material concentration of risk. During 2008, 2007 and
2006, no customer accounted for 10% of consolidated revenues.
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 Company’s wireless segment, billing processes. If
these suppliers experience financial or credit difficulties, service interruptions, patent
litigation, or other problems, subscriber growth the Company’s operating results could be adversely
affected.
Approximately 76% of the Company’s employees are represented by the International Brotherhood
of Electrical Workers, Local 1547 (“IBEW”). Management considers employee relations to be
satisfactory. However, the Master Collective Bargaining Agreement with the IBEW, as amended, that
governs the terms and conditions of employment for all IBEW represented employees working for the
Company in the state of Alaska will expire on December 31, 2009. The Company expects to conduct
extensive negotiations with the IBEW during 2009.
F-11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes the asset-liability method of accounting for income taxes in accordance
with SFAS No. 109 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.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation
(“FIN”) 48, Accounting for Uncertainty in Income Taxes, which was effective for the Company on
January 1, 2007. This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The impact of the Company’s reassessment of its tax positions in accordance with the adoption of
FIN 48 did not have a material impact on the results of operations, financial condition or
liquidity. The Company’s policy is to recognize interest and penalties related to uncertain tax
positions in income tax expense. As of December 31, 2008, the Company had no accrued income tax
interest or penalties. Tax returns prior to 2005 are no longer subject to examination by major
tax jurisdictions. The Company is not aware of any material tax contingencies.
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 operations of the Company account for costs in accordance with
the accounting principles for regulated enterprises prescribed by SFAS No. 71. This accounting
recognizes the economic effects of rate regulation by recording cost and a return on investment
as such amounts are recovered through rates authorized by regulatory authorities. Accordingly,
plant and equipment is depreciated over lives approved by regulators and certain costs and
obligations are deferred based upon approvals received from regulators to permit recovery of such
amounts in future years. The Company’s cost studies and depreciation rates are subject to
periodic audits that could result in reductions of revenues.
The Company utilizes blended depreciation rates for financial reporting, which management
believes approximates the economical useful lives of the underlying plant. As a result, the
Company has recorded a regulatory asset, as of December 31, 2008 and 2007, related to
depreciation of the regulated telephone plant allocable to its intrastate and local
jurisdictions. The balances at December 31, 2008 and 2007 are $63,363 and $65,271, respectively.
The Company also has a regulatory liability of $64,117 and $62,443 at December 31, 2008 and 2007,
respectively, related to accumulated removal costs for its local telephone subsidiaries. If the
Company were not following SFAS No. 71, it would have followed SFAS No. 143, Accounting for Asset
Retirement Obligations for asset retirement obligations associated with its regulated telephone
plant. Non-regulated revenues and costs incurred by the local telephone exchange operations and
non-regulated operations of the Company are not accounted for under SFAS No. 71 principles. In
accordance with industry practice and regulatory requirements, revenue generated between
regulated and non-regulated group companies are not eliminated on consolidation; these revenues
totaled $41,597, $38,417 and $32,814 for the years ended December 31, 2008, 2007 and 2006,
respectively.
F-12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Statement of Operations.
Derivative Financial Instruments
The Company recognizes all derivatives as either assets or liabilities on the balance sheet
and measures those instruments at fair value in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The accounting for changes in fair
value of a derivative depends 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 derivative’s 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 hedge’s 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
Dividends are payable when, as, and if declared by the Company’s Board of Directors. In 2008,
2007 and 2006, the Company’s board of directors declared quarterly cash dividends. Dividends on the
Company’s common stock are not cumulative.
Share-Based Payments
The Company accounts for share-based payments under SFAS No. 123(R), Share-Based Payment,
which requires measurement of compensation cost from January 1, 2005, for all unvested stock-based
awards at fair value on date of grant and recognition of compensation over the service period for
awards expected to vest. 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 our 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
our 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. The Company determines the fair value of restricted stock based on
the number of shares granted and the quoted market price of the Company’s common stock on the date
of grant, discounted for estimated dividend payments that do not accrue to the employee during the
vesting period. 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 the realized tax benefit exceeds the book based compensation, the
excess tax benefit is credited to additional paid in capital.
F-13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the second quarter of 2008, the Company granted performance stock units (“PSUs”) to certain
executive employees’ contingent upon satisfaction of established performance goals. Compensation
expense is recorded over the expected performance period, which is estimated by the Compensation
Committee of the Company’s Board of Directors. 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 Company’s common stock or if the PSUs
otherwise vest, expire, or are determined by the Compensation Committee to be unlikely to vest
prior to expiration.
In September 2008, the Company began issuing stock-settled stock appreciation rights (“SSARs”)
to certain of its executive officers. 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 Company’s common stock.
Additionally, in the third quarter of 2008, the Company awarded restricted stock unit
equivalents (“RSUEs”) to our Chief Executive Officer. These RSUEs are required to be settled in
shares of the Company’s common stock on a one-for-one basis on July 31, 2009, unless stockholder
approval is not obtained, in which case they will be settled in cash. Compensation expense was
recorded upon award and is adjusted at the close of each reporting period based upon the fair value
of the Company’s common stock until the RSUEs are converted to shares of common stock or paid in
cash.
Accounting for Pensions
The Company accounts for pensions in accordance with FASB Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement requires an employer to
recognize in its statement of financial position the over-funded or under-funded status of a
defined benefit post-retirement plan measured as the difference between the fair value of a plan’s
assets and the benefit obligation. Employers must also recognize 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 adoption of the standard, effective December 31, 2006,
had no impact as the plan is frozen.
On December 23, 2008, President Bush signed the Worker, Retiree, and Employer Recovery Act of
2008 (“WRERA”), which is designed to provide funding relief for certain defined benefit plans.
Under the Pension Protection Act (“PPA”), and prior to enactment of WRERA, the Company was required
to maintain a 92% funding level during 2008 to continue to qualify for transitional relief provided
under the PPA. In the absence of any such transitional relief, any shortfall in funding below 100%
would have been amortized and payable over a 7-year period. For most defined benefit plans,
including the Company’s single-employer plans, WRERA reduces the shortfall amount that is required
to be amortized over a 7-year period to 92%, rather than 100%, for 2008. The Company is currently
undertaking a review of WRERA to quantify its effect, if any, on the Company’s obligation to make
contributions during 2009.
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.
F-14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
2. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss) were comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Minimum pension liability adjustment (1) |
|
$ |
(6,700 |
) |
|
$ |
(2,855 |
) |
|
$ |
(4,188 |
) |
Tax effect of pension liability (2) |
|
|
2,754 |
|
|
|
1,174 |
|
|
|
— |
|
Interest rate swap marked to fair value |
|
|
(23,917 |
) |
|
|
(9,179 |
) |
|
|
5,754 |
|
Tax effect of interest rate swap (2) |
|
|
9,833 |
|
|
|
3,773 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss) |
|
$ |
(18,030 |
) |
|
$ |
(7,087 |
) |
|
$ |
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Liability adjustment is recorded pursuant to the Company’s December 31, 2006,
adoption of SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans. |
| |
| (2) |
|
Tax effect is recorded pursuant to the 2007 release of the Tax Valuation
Allowance. See Note 13 — Income Taxes. |
Components of other comprehensive income (loss) was comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
Minimum pension liability adjustment |
|
$ |
(3,845 |
) |
|
$ |
1,333 |
|
|
$ |
234 |
|
Tax effect of pension liability |
|
|
1,580 |
|
|
|
1,174 |
|
|
|
— |
|
Interest rate swap marked to fair value |
|
|
(14,738 |
) |
|
|
(14,933 |
) |
|
|
1,010 |
|
Tax effect of interest rate swap |
|
|
6,060 |
|
|
|
3,773 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(10,943 |
) |
|
$ |
(8,653 |
) |
|
$ |
1,244 |
|
|
|
|
|
|
|
|
|
|
|
3. 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 Crest’s operations have been included in the
Wireline segment of the Consolidated Financial Statements since that date. Crest’s operations
include 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.
The Company’s management believes that the acquisition will complement the AKORN fiber build, by
providing meaningful operating efficiencies and cost synergies, by offering enterprise customers
the only diverse and redundant routing of traffic between Alaska and the lower 48, by allowing
management the use of Network Operations Control Centers in Alaska and the lower 48, and by
connecting our network to Southeast Alaska. Furthermore, management believes that the acquisition
will drive incremental utilization of ACS’ differentiated Alaskan terrestrial assets from Crest’s
customer base and allow ACS to participate in the fast-growing bandwidth market ahead of AKORN’s
commercial launch.
The aggregate purchase price was $64,960, net of $1,072 in cash acquired and inclusive of
$4,169 cash consideration that has been 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 during the first eighteen months following the closing. The Company and Crest have
made customary representations and warranties and covenants in the Agreement. Additionally, $4,000
has been deferred and placed in escrow until claims made by the Company against the selling
stockholders for an unauthorized asset sale have been resolved.
F-15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
3. CREST COMMUNICATIONS ACQUISITION (Continued)
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 at replacement cost. In accordance with SFAS No. 141, Business
Combinations (“SFAS 141”), 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. Certain purchase price adjustments are still under review and therefore
the purchase price allocation is still subject to refinement. The following table summarizes the
fair value of the assets acquired and liabilities assumed at the date of the acquisition after
push-down of the excess.
| |
|
|
|
|
| |
|
October 30, 2008 |
|
Current Assets |
|
$ |
5,434 |
|
Property and equipment |
|
|
61,685 |
|
Other assets |
|
|
10 |
|
Deferred tax asset |
|
|
3,393 |
|
|
|
|
|
Total assets acquired |
|
|
70,522 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
2,007 |
|
Long-term liabilities |
|
|
2,483 |
|
|
|
|
|
Total liabilities assumed |
|
|
4,490 |
|
|
|
|
|
Net assets acquired |
|
$ |
66,032 |
|
|
|
|
|
4. FAIR VALUE MEASUREMENTS
The Company adopted the disclosure requirements of SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”) effective January 1, 2008. SFAS No. 157 clarifies the definition of fair value,
prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs
used to measure fair value and expands disclosures about the use of fair value measurements. The
valuation techniques required by SFAS No. 157 are based upon observable and unobservable inputs.
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. The fair values of
cash and cash equivalents, accounts receivable and payable, and other short-term monetary
assets and liabilities approximate carrying values due to their short-term nature. |
Fair Value Measurements on a Recurring Basis
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Company’s 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, 2008 at each hierarchical level:
F-16
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
4. FAIR VALUE MEASUREMENTS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair Value Measurement at Reporting Date Using |
|
| |
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
| |
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
| |
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
| |
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
| |
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
| |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current investments |
|
$ |
1,005 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferred credits and long-term liabilities |
|
$ |
(23,917 |
) |
|
$ |
— |
|
|
$ |
(23,917 |
) |
|
$ |
— |
|
The following table presents the recociliation discoloures about fair value measurements at December 31, 2008 using significany unobservable (“Level 3”).
| |
|
|
|
|
| |
|
Auction |
|
| |
|
Rate Securities |
|
Beginning balance, January 1, 2008 |
|
$ |
— |
|
Total gains or losses (realized / unrealized)
included in earnings |
|
|
(245 |
) |
Purchases, issuances and settlements |
|
|
1,250 |
|
|
|
|
|
Ending balance, December 31, 2008 |
|
$ |
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, 2008 |
|
$ |
245 |
|
|
|
|
|
Non-current investments consist of auction rate securities that have maturity dates greater
than one year from December 31, 2008. The investments in auction rate securities 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 also done in which management
determined that the securities were other-than-temporarily impaired, and in 2008, a charge was
taken to the income statement of $245.
Included in liabilities, in other deferred credits and long-term liabilities, are derivative
contracts, 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 of Financial Instruments
The fair value of cash and cash equivalents, accounts receivable and payable, and other
short-term monetary assets and liabilities approximate carrying value due their short-term nature.
The fair value of the Company’s 2005 senior credit facility, convertible notes, revolver draw,
capital leases and other long-term obligations, of $443,358 and $432,996, at December 31, 2008 and 2007, respectively, were estimated based on quoted market prices.
Comparatively, the carrying values of these liabilities were $561,523 and $432,996 at December 31,
2008 and 2007, respectively.
F-17
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
4. FAIR VALUE MEASUREMENTS (Continued)
Fair Value Measurements on a Nonrecurring Basis
In February 2008, the FASB issued Financial Statement of Position (“FSP”) SFAS 157-2,
Effective Date of FASB Statement No. 157, which deferred the effective date of SFAS No. 157 for one
year for certain non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis. In October
2008, the FASB also issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which clarifies the application of SFAS No. 157 in an inactive
market and illustrates how an entity would determine fair value when the market for a financial
asset is not active. On January 1, 2008, the Company adopted, without material impact on our
consolidated financial statements, the provisions of SFAS No. 157 related to financial assets and
liabilities and to non-financial assets and liabilities measured at fair value on a recurring
basis. Beginning January 1, 2009, the Company will adopt the provisions required related to
nonfinancial assets and non-financial liabilities that are not required or permitted to be measured
at fair value on a recurring basis, which include those 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, asset
retirement obligations initially measured at fair value, and those initially measured at fair value
in a business combination. We do not expect the provisions of SFAS No. 157 related to these items
to have a material impact on our consolidated financial statements.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an
Amendment of SFAS 115 (“SFAS No. 159”)
SFAS No. 159 permits but does not require the measurement of financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. As the Company did not elect to fair value any of our
financial instruments under the provisions of SFAS No. 159, the adoption of this statement
effective January 1, 2008 did not have an impact on the Company’s financial statements.
5. ACCOUNTS RECEIVABLE
Accounts receivable — trade consists of the following at December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Customers |
|
$ |
30,420 |
|
|
$ |
34,277 |
|
Connecting companies |
|
|
8,460 |
|
|
|
6,901 |
|
Other |
|
|
7,465 |
|
|
|
6,740 |
|
|
|
|
|
|
|
|
|
|
|
46,345 |
|
|
|
47,918 |
|
Less: allowance for doubtful accounts |
|
|
(5,912 |
) |
|
|
(8,768 |
) |
|
|
|
|
|
|
|
Accounts receivable — trade, net |
|
$ |
40,433 |
|
|
$ |
39,150 |
|
|
|
|
|
|
|
|
F-18
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Land, buildings and support assets |
|
$ |
235,324 |
|
|
$ |
204,858 |
|
Central office switching and transmission |
|
|
344,532 |
|
|
|
332,528 |
|
Outside plant cable and wire facilities |
|
|
585,288 |
|
|
|
524,925 |
|
Wireless switching and transmission |
|
|
98,300 |
|
|
|
98,151 |
|
Other |
|
|
2,822 |
|
|
|
6,022 |
|
Construction work in progress |
|
|
125,085 |
|
|
|
42,773 |
|
|
|
|
|
|
|
|
|
|
|
1,391,351 |
|
|
|
1,209,257 |
|
Less: accumulated depreciation and amortization |
|
|
(891,899 |
) |
|
|
(825,663 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
499,452 |
|
|
$ |
383,594 |
|
|
|
|
|
|
|
|
The following is a summary of property held under capital leases included in the above
property, plant and equipment:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Land, buildings and support assets |
|
$ |
17,665 |
|
|
$ |
12,621 |
|
Outside plant cable and wire facilities |
|
|
2,115 |
|
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
19,780 |
|
|
|
14,736 |
|
Less: accumulated depreciation and amortization |
|
|
(7,266 |
) |
|
|
(7,910 |
) |
|
|
|
|
|
|
|
Property held under capital leases, net |
|
$ |
12,514 |
|
|
$ |
6,826 |
|
|
|
|
|
|
|
|
Amortization of assets under capital leases included in depreciation expense in 2008, 2007 and
2006 was $938, $1,189 and $1,205, respectively. Future minimum payments under these leases for the
next five years and thereafter are as follows:
| |
|
|
|
|
2009 |
|
$ |
1,209 |
|
2010 |
|
|
1,212 |
|
2011 |
|
|
1,218 |
|
2012 |
|
|
1,217 |
|
2013 |
|
|
871 |
|
Thereafter |
|
|
2,469 |
|
|
|
|
|
|
|
$ |
8,196 |
|
|
|
|
|
The Company leases various land, buildings, right-of-ways and personal property under
operating lease agreements. Rental expense under operating leases for 2008, 2007 and 2006 was
$7,559, $6,135 and $4,725, respectively.
Future minimum payments under these leases for the next five years and thereafter are as
follows:
| |
|
|
|
|
2009 |
|
$ |
7,617 |
|
2010 |
|
|
6,901 |
|
2011 |
|
|
5,808 |
|
2012 |
|
|
5,332 |
|
2013 |
|
|
5,090 |
|
Thereafter |
|
|
59,128 |
|
|
|
|
|
|
|
$ |
89,876 |
|
|
|
|
|
F-19
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
7. ASSET RETIREMENT
The Company accounts for asset retirement obligations in accordance with FIN No. 47,
Accounting for Conditional Asset Retirement Obligations. FIN No. 47 requires the Company to
recognize asset retirement obligations which are conditional on a future event. Uncertainty about
the timing or settlement of the obligation is factored into the measurement of the liability. The
Company has a regulatory asset and liability of $64,117 and $62,443 at December 31, 2008 and 2007,
respectively, related to accumulated removal costs for its local telephone subsidiaries. Consistent
with the industry, the Company follows SFAS No. 71 for asset retirement obligations associated with
its regulated telephone plant. The Company’s assets are pooled and the depreciable lives set by the
regulators include a removal component which in effect accounts for the cost of removal.
Non-regulated operations of the Company are accounted for under the principles of SFAS No. 143,
Accounting for Asset Retirement Obligations and FIN No. 47 for which the Company has a retirement
obligation of $1,969 and $1,411. These balances were recorded as a result of the Company’s
estimated obligation related to the removal of certain cell sites at the end of their operating
lease term, adjusted for accretion/depreciation over the life of the lease. Also included in this
balance is an acquired liability for $380, related to the removal of batteries in the Company’s new
cable operations.
The following table outlines the changes in the accumulated retirement obligation
liability:
| |
|
|
|
|
Balance, January 1, 2007 |
|
$ |
1,171 |
|
Asset retirement obligation |
|
|
143 |
|
Accretion expense |
|
|
99 |
|
Settlement of lease obligations |
|
|
(2 |
) |
|
|
|
|
Balance, December 31, 2007 |
|
$ |
1,411 |
|
Asset retirement obligation |
|
|
119 |
|
Accretion acquired |
|
|
380 |
|
Accretion expense |
|
|
117 |
|
Settlement of lease obligations |
|
|
(58 |
) |
|
|
|
|
Ending Balance, December 31, 2008 |
|
$ |
1,969 |
|
|
|
|
|
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company performs its annual impairment test for goodwill in accordance with SFAS No. 142
— 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 SFAS No. 142 prescribes the approach for
determining the impairment amount, if any.
After conducting its 2008 test, 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 charge is
primarily driven by adverse equity market conditions, the industry transition from wireline to
wireless products and services, decrease in current market multiples and the decline in the
Company’s stock price. This impairment charge reduces goodwill but does not impact the Company’s
overall business operations or cash flows. The tax benefit derived from recording the impairment
charge was recorded as a deferred income tax benefit and is included in the deferred tax assets as
part of the net operating loss carry forwards. Prior to recording the goodwill impairment charges,
the Company tested the amortizable intangible assets and other long-lived assets as required by SFAS
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, and determined no
impairment existed.
The Company also annually reassesses previously recognized intangible assets. Cellular and
PCS licenses have terms of 10 years, but are renewable indefinitely through a routine process
involving a nominal fee. 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
F-20
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
8. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
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 domain and trade names associated
with its wireline segment were impaired and the balance of $88 was taken as an impairment loss.
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 SFAS 144. The following table provides the gross carrying value and accumulated amortization for
each major class of intangible asset by segment as of December 31, 2008 and 2007 based on the
Company’s reassessment of previously recognized intangible assets and their remaining amortization
lives:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Wireline |
|
|
Wireless |
|
|
Total |
|
Goodwill: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008 |
|
$ |
29,553 |
|
|
$ |
8,850 |
|
|
$ |
38,403 |
|
Impairment loss |
|
|
(29,553 |
) |
|
|
— |
|
|
|
(29,553 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
— |
|
|
$ |
8,850 |
|
|
$ |
8,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Domain names and trade names |
|
$ |
88 |
|
|
$ |
— |
|
|
$ |
88 |
|
Cellular licenses |
|
|
— |
|
|
|
18,193 |
|
|
$ |
18,193 |
|
PCS licenses |
|
|
— |
|
|
|
3,323 |
|
|
|
3,323 |
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008 |
|
$ |
88 |
|
|
$ |
21,516 |
|
|
$ |
21,604 |
|
Spectrum licenses |
|
|
|
|
|
$ |
2,602 |
|
|
$ |
2,602 |
|
Impairment loss |
|
|
(88 |
) |
|
|
— |
|
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
— |
|
|
$ |
24,118 |
|
|
$ |
24,118 |
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Company retired its only definite-lived intangible asset. This asset had a
carrying value of zero at its retirement date. Amortization expense on that asset for the years
ended December 31, 2008 and 2007 was zero and in 2006 was $91.
9. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES
Accounts payable, accrued and other current liabilities consist of the following at December
31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Accounts payable — trade |
|
$ |
23,854 |
|
|
$ |
19,160 |
|
Accrued payroll, benefits, and related liabilities |
|
|
16,822 |
|
|
|
18,715 |
|
Dividend payable |
|
|
9,449 |
|
|
|
9,226 |
|
Access revenue subject to refund |
|
|
5,226 |
|
|
|
4,097 |
|
Unsettled acquisition costs |
|
|
4,169 |
|
|
|
— |
|
Other |
|
|
14,508 |
|
|
|
12,872 |
|
|
|
|
|
|
|
|
|
|
$ |
74,028 |
|
|
$ |
64,070 |
|
|
|
|
|
|
|
|
F-21
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
10. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
2005 senior credit facility term loan due 2012 |
|
$ |
425,889 |
|
|
$ |
427,900 |
|
5.75% convertible notes due 2013 |
|
|
125,000 |
|
|
|
— |
|
Revolving credit facility loan |
|
|
5,000 |
|
|
|
— |
|
Capital leases and other long-term obligations |
|
|
5,634 |
|
|
|
5,096 |
|
|
|
|
|
|
|
|
|
|
|
561,523 |
|
|
|
432,996 |
|
Less current portion |
|
|
(666 |
) |
|
|
(780 |
) |
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
$ |
560,857 |
|
|
$ |
432,216 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term obligations for each of the five years and thereafter
subsequent to December 31, 2008 are as follows:
| |
|
|
|
|
2009 |
|
$ |
666 |
|
2010 |
|
|
737 |
|
2011 |
|
|
5,820 |
|
2012 |
|
|
551,792 |
|
2013 |
|
|
644 |
|
Thereafter |
|
|
1,864 |
|
|
|
|
|
|
|
$ |
561,523 |
|
|
|
|
|
2005 Senior Credit Facility
During the first quarter of 2005, the Company completed refinancing transactions whereby it
entered into a new $380,000 senior secured credit facility, the (“2005 senior credit facility”),
which consisted of $335,000 of term loan borrowings and a $45,000 revolving loan facility.
On July 15, 2005, the Company completed a refinancing transaction whereby it amended and
entered into a new term loan under its 2005 senior credit facility with substantially the same
terms, increasing the size of the facility to $420,000. In February 2006, the Company amended its
2005 senior credit facility, increasing the $375,000 term loan under the facility by $52,900 and
re-priced the facility to London Inter-Bank Offered Rate (“LIBOR”) plus 1.75% from LIBOR plus
2.00%. The amendment and the re-price became effective as of February 23, 2006 and February 22,
2006, respectively. The amendment permitted ACS Holdings to purchase any and all of its currently
outstanding 9 7/8 % Senior Notes due 2011.
The $425,889 term loan balance under the 2005 senior credit facility was first drawn on
February 1, 2005, and generally bears interest at an annual rate of LIBOR plus 1.75%, with a term
of seven years from the date of closing and no scheduled principal payments before maturity.
However, in conjunction with the new convertible debt offering in 2008, the Company paid down
$2,011 of the term loan principal balance. At December 31, 2008 the Company had drawn $5,000 from
its revolving credit facility leaving a remaining $40,000 un-drawn. To the extent drawn, the
revolving credit facility bears interest at an annual rate of LIBOR plus 2.00% and has a term of
six years from the date of closing. To the extent the $45,000 revolving credit facility under the
2005 senior credit facility is un-drawn, the Company will pay an annual commitment fee of 0.375% of
the un-drawn principal amount over its term. The Company also entered into floating-to-fixed
interest rate swaps with total notional amounts of $135,000, $85,000, $40,000, $115,000 and
$52,900, which swap the floating interest rate on the entire term loan borrowings under the 2005 senior credit facility for
remaining periods at December 31, 2006 which range from one to three years, at a fixed rate of
5.88%, 6.25%, 6.18%, 6.71% and 6.75% per year, respectively, inclusive of the 1.75% premium over
LIBOR. The swaps are accounted for as cash flow hedges.
F-22
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
10. LONG-TERM OBLIGATIONS (Continued)
The 2005 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 2005 senior credit facility also requires that we achieve certain financial ratios
quarterly and we are currently operating comfortably within these restrictions.
5.75% Convertible Notes due 2013
On April 8, 2008 the Company closed the sale of $125,000 aggregate principal amount of its
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
senior credit facility, will 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 ACS common stock or a combination of both. The notes are
guaranteed by substantially all of the Company’s 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. The Company also
entered into a registration rights agreement with the initial purchasers of the notes. Under the
registration rights agreement, the Company is obligated under certain circumstances to file a shelf
registration statement under the Securities Act related to the resale of the notes and the common
stock issuable upon conversion of the notes. If such registration statement is required and is not
filed, or does not become effective within specified time periods, the Company will be required to
pay additional interest to holders of the notes.
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 Company’s 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 Emerging Issues Task Force (“EITF”) No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially settled in, a Company’s Own Stock. Tax
benefits of $1,056 were recorded for the twelve months 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 also been classified as equity because they meet all of the equity
classification criteria within EITF No. 00-19. Further, the Company expects the adoption of FSP APB
14-1 to increase the interest expense on the 5.75% Convertible Notes due 2013 recorded in the
results of operations by an annual amount of approximately $6.5 million.
The call options purchased and warrants sold contemporaneously with the sale of the
convertible notes are equity contracts that meet the paragraph 11(a) scope exception of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, 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 unto 77.5014 shares of the Company’s 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.
F-23
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
10. LONG-TERM OBLIGATIONS (Continued)
Amounts in excess of the principal balance may be paid in cash or in stock at the Company’s
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:
(1) 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 our 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% of the conversion price of the
notes on the applicable trading day;
(2) 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 Company’s common stock and the conversion rate of the notes on each such
day; or
(3) 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, 2008, 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 Company’s intent to settle the principal portion of this debt in cash, under
the provisions of, EITF No. 04-08, The Effect of Convertible Instruments on Diluted Earnings per
Share, the Company must use the “if converted” method set forth in SFAS No. 128, Earnings per
Share, in calculating the diluted earnings per share effect of the assumed conversion of our
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 in to common stock at the earlier of the debt issuance date or
the beginning of the period.
Also in accordance with SFAS No. 128, the warrants sold in connection with the hedge
transaction will have no impact on earnings per share until the Company’s 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, 2008 and, therefore, will have no effect on
earnings per share.
Repurchased 9 7/8% Senior Unsecured Notes due 2011
In January and February 2006, the Company’s subsidiary, ACS Holdings, repurchased $8,039 principal
amount of its existing 9 7/8% senior unsecured notes due 2011 (CUSIP No. 011679AF4) at a weighted
average premium of 9.7% over the par value. The Company incurred an early extinguishment of debt
charge of $1,227 in connection with this transaction, inclusive of $778 in cash premiums. In
February 2006, ACS Holdings commenced a cash tender offer for any and all of the
$56,939 aggregate principal amount of outstanding 9 7/8% senior unsecured notes due 2011 issued by
ACS Holdings. On February 23, 2006, the Company successfully repurchased $52,899 of the remaining
$56,939 outstanding principal balance of these notes. The Company incurred an early extinguishment
of debt charge of $8,423 in connection with this transaction, inclusive of $5,640 in cash premiums.
On August 15, 2007, the Company successfully repurchased the remaining $4,040 outstanding principal
balance of these notes. The Company incurred an early extinguishment of debt charge of $355 in
connection with this transaction, inclusive of $199 in cash premiums.
F-24
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
10. LONG-TERM OBLIGATIONS (Continued)
Capital Leases and Other Long-term Obligations
The Company has entered into various capital leases and other financing agreements totaling
$5,634 and $5,096 with a weighted average interest rate of 10.16% and 9.94% at December 31, 2008
and 2007, respectively.
11. OTHER DEFERRED CREDITS AND LONG-TERM LIABILITIES
Deferred credits and other long-term liabilities consist of the following at December 31, 2008
and 2007:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Regulatory liabilities — accumulated removal costs |
|
$ |
64,117 |
|
|
$ |
62,443 |
|
Interest rate swaps |
|
|
23,917 |
|
|
|
9,179 |
|
Refundable access revenue |
|
|
1,146 |
|
|
|
6,895 |
|
Pension liability |
|
|
3,556 |
|
|
|
— |
|
Other deferred credits |
|
|
5,957 |
|
|
|
3,558 |
|
|
|
|
|
|
|
|
|
|
$ |
98,693 |
|
|
$ |
82,075 |
|
|
|
|
|
|
|
|
12. NON-OPERATING CHARGES
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 Statement of Operations”.
13. INCOME TAXES
The following table includes a reconciliation of federal statutory tax at 35%, 35%, and 34%,
respectively, to the recorded tax (expense) benefit, for the years ended December 31, 2008, 2007
and 2006, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Computed federal income taxes at the statutory rate |
|
$ |
5,824 |
|
|
$ |
(11,530 |
) |
|
$ |
(4,665 |
) |
(Increase) reduction in tax resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes (net of federal benefit) |
|
|
966 |
|
|
|
(2,254 |
) |
|
|
(799 |
) |
Excess compensation not allowed |
|
|
— |
|
|
|
(209 |
) |
|
|
(60 |
) |
Other |
|
|
197 |
|
|
|
(183 |
) |
|
|
(771 |
) |
Rate change |
|
|
— |
|
|
|
3,361 |
|
|
|
— |
|
Stock-based compensation |
|
|
(485 |
) |
|
|
(489 |
) |
|
|
747 |
|
Valuation allowance |
|
|
— |
|
|
|
122,498 |
|
|
|
5,105 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
6,502 |
|
|
$ |
111,194 |
|
|
$ |
(443 |
) |
|
|
|
|
|
|
|
|
|
|
F-25
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
13. INCOME TAXES (Continued)
The Company files a consolidated federal income tax return. The income tax provision for the
years ended December 31, 2008 and 2007 comprised of the following charges:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
Federal income tax |
|
$ |
48 |
|
|
$ |
(1,103 |
) |
State income tax |
|
|
9 |
|
|
|
(198 |
) |
|
|
|
|
|
|
|
Total current |
|
|
57 |
|
|
|
(1,301 |
) |
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
Federal income tax |
|
|
4,966 |
|
|
|
(7,616 |
) |
State income tax |
|
|
1,479 |
|
|
|
(2,387 |
) |
Change in valuation allowance |
|
|
— |
|
|
|
122,498 |
|
|
|
|
|
|
|
|
Total deferred |
|
|
6,445 |
|
|
|
112,495 |
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
6,502 |
|
|
$ |
111,194 |
|
|
|
|
|
|
|
|
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 Company’s deferred tax assets and liabilities are recorded at a
combined federal and state effective rate of 41.1% as of December 31, 2008 and 2007, are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Accrued compensation |
|
$ |
3,723 |
|
|
$ |
5,053 |
|
Allowance for doubtful accounts |
|
|
2,430 |
|
|
|
3,604 |
|
Net operating loss carry forwards |
|
|
3,238 |
|
|
|
6,757 |
|
Fair value on interest rate swaps |
|
|
9,833 |
|
|
|
3,773 |
|
Pension liability |
|
|
410 |
|
|
|
145 |
|
Specific reserves |
|
|
685 |
|
|
|
1,022 |
|
Self insurance accruals |
|
|
665 |
|
|
|
682 |
|
Other |
|
|
161 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
21,145 |
|
|
|
21,347 |
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
|
56,076 |
|
|
|
41,141 |
|
Alternative minimum tax carry forward |
|
|
5,169 |
|
|
|
1,866 |
|
Intangibles/goodwill |
|
|
25,782 |
|
|
|
20,428 |
|
Deferred revenue |
|
|
865 |
|
|
|
— |
|
Pension liability |
|
|
2,344 |
|
|
|
1,029 |
|
Property, plant and equipment |
|
|
21,319 |
|
|
|
29,807 |
|
Stock-based compensation |
|
|
3,125 |
|
|
|
1,732 |
|
Other |
|
|
151 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
114,831 |
|
|
|
96,095 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
135,976 |
|
|
$ |
117,442 |
|
|
|
|
|
|
|
|
In the year ended December 31, 2008, the Company generated a taxable loss which was primarily
caused by electing to take bonus depreciation, as allowed under the “Economic Stimulus Act of
2008”, on qualified fixed assets. Offsetting the loss, the Company recorded a tax benefit related
to NOL’s generated in the current year. In the year ended December 31, 2007
the Company recorded a net benefit when management reversed 100% of the existing valuation
allowance. The allowance was reversed as management believed it was more likely than not that all
of the deferred tax assets would be realized based on the weight of all available evidence,
including two years of positive net income and projected future earnings. In 2008, if it
F-26
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
13. INCOME TAXES (Continued)
were not for the bonus depreciation taken for tax purposes and the goodwill write-off for book
purposes the Company would have recorded income for both book and tax purposes. Therefore,
management continues to believe that all of the deferred tax assets will be realized and the
release of our valuation allowance was appropriate.
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 2005. The Company is not currently being audited, nor has it been
notified of any pending audits. 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 its Net Operating Loss (“NOL”) carry forwards to rectify its filings.
The Company has a $1,041 income tax receivable at December 31, 2008 and a $137 income tax payable
at December 31, 2007.
The Company accounts for income tax uncertainties using the provision of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). The Company has reviewed all of its
tax filings and position 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.
In connection with the provisions of SFAS No. 123(R), 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 $1,393 and decreased $1,011
in 2008 and 2007, respectively.
The Company has available at December 31, 2008, unused acquired and operating loss carry
forwards of $148,002 federal and $120,057 state that may be applied against future taxable income
as shown below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal |
|
|
State |
|
| |
|
Acquired Unused |
|
|
Unused |
|
|
Total Unused |
|
|
Total Unused |
|
| Year of |
|
Operating Loss |
|
|
Operating Loss |
|
|
Operating Loss |
|
|
Operating Loss |
|
| Expiration |
|
Carry forwards |
|
|
Carry forwards |
|
|
Carry forwards |
|
|
Carry forwards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
$ |
8,879 |
|
|
$ |
— |
|
|
$ |
8,879 |
|
|
$ |
— |
|
2020 |
|
|
2,209 |
|
|
|
— |
|
|
|
2,209 |
|
|
|
2,193 |
|
2021 |
|
|
— |
|
|
|
34,034 |
|
|
|
34,034 |
|
|
|
30,719 |
|
2022 |
|
|
7,797 |
|
|
|
17,983 |
|
|
|
25,780 |
|
|
|
17,458 |
|
2023 |
|
|
4,565 |
|
|
|
— |
|
|
|
4,565 |
|
|
|
— |
|
2024 |
|
|
230 |
|
|
|
43,974 |
|
|
|
44,204 |
|
|
|
43,715 |
|
2025 |
|
|
— |
|
|
|
22,648 |
|
|
|
22,648 |
|
|
|
22,613 |
|
2026 |
|
|
2,299 |
|
|
|
— |
|
|
|
2,299 |
|
|
|
— |
|
2028 |
|
|
— |
|
|
|
3,384 |
|
|
|
3,384 |
|
|
|
3,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,979 |
|
|
$ |
122,023 |
|
|
$ |
148,002 |
|
|
$ |
120,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired unused operating loss carry forwards associated with the Company’s acquisition of
Internet Alaska in June 2000 and Crest in October of 2008 are limited by Section 382 of the
Internal Revenue Code of 1986. Internet Alaska is limited to $216 and Crest is limited to $3,068
per year plus the benefit of unrealized built-in gains. To the extent that these limits are not
used they can be carried forward to subsequent years thereby effectively increasing that year’s
limitation.
Section 382 of the Internal Revenue Code of 1986, as amended, 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 ACS 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 will be in effect through the year
F-27
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
13. INCOME TAXES (Continued)
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. In addition to the utilization of Internet Alaska’s
operating losses, ACS utilized additional operating losses of zero
and $23,882 for 2008 and 2007,
respectively, out of its operating loss carry forward.
14. 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 Company’s reported net losses for the year
ended December, 31, 2008, 1,428 potential common share equivalents, which consisted of options,
restricted stock and stock-settled stock appreciation rights (“SSARs”) granted to employees and
deferred shares granted to directors, were anti-dilutive. Also excluded from the calculation were
shares related to the Company’s convertible debt which were anti-dilutive for the twelve month
period ending December 31, 2008. No shares were anti-dilutive at December 31, 2007 or December 31,
2006. The following table sets forth the computation of basic and diluted earnings per share for
the years ending December 31, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator — net income (loss) |
|
$ |
(10,139 |
) |
|
$ |
144,136 |
|
|
$ |
13,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator — weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
43,391 |
|
|
|
42,701 |
|
|
|
42,045 |
|
Dilutive impact of restricted stock, options
and deferred shares |
|
|
— |
|
|
|
1,484 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
43,391 |
|
|
|
44,185 |
|
|
|
43,387 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.23 |
) |
|
$ |
3.38 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.23 |
) |
|
$ |
3.26 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
15. STOCK INCENTIVE PLANS
Under various plans, ACS Group, through the Compensation 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. At December 31, 2008, ACS Group has reserved a total of
11,560 (11.56 million) shares of authorized common stock for issuance under the plans. In general,
options under the plans vest ratably over three, four or five years and the plans terminate in 10
years. After the plans terminate, all shares granted under the plan, prior to its termination,
continue to vest under the terms of the grant when it was awarded.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
ACS Group has reserved 8,660 shares under this plan, which was adopted by the Company in November
1999. At December 31, 2008, 10,769 equity instruments have been granted, 3,488 have been forfeited,
4,742 have been exercised, and 1,385 shares are available for grant under the plan.
In August 2005, the Company began granting restricted stock units in lieu of stock options as
the primary equity-based incentive compensation for executive and non-union represented employees.
The time-based restricted stock units have vesting terms that range from three to five years with
equal annual vesting amounts. The performance-based restricted stock units generally cliff vest in
five years and have accelerated vesting terms of one third per year if specified performance
criteria are met. A long term incentive program (“LTIP”) also exists for executive management. LTIP
awards
F-28
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
15. STOCK INCENTIVE PLANS (Continued)
are awarded annually and cliff vest in five years with accelerated vesting in three years if
cumulative three year performance criteria are met.
In June 2008, the Company began granting performance share units (“PSUs”) to certain
executives under the 1999 Stock Incentive Plan. These performance based awards expire on December
31, 2009 if their vesting terms have not been
met. The PSUs are 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 is recorded over the estimated
performance period which would likely result in the vesting of the awards. The amount of expense
recorded each period is dependent upon our estimate of the number of shares that will ultimately be
issued. As the ultimate payout of these awards is subject to the approval of the compensation
committee, the awards are being re-measured at each reporting period end until such time as they
are vested.
The Company also granted SSARs to Ms. Pelletier, the Company’s Chief Executive Officer and
another named executive officer during 2008. The SSARs have a term of five years and include
ratable vesting through December 2011. The Company accounts for the SSARs in the same manner as
options using a Black-Scholes model for valuation.
2003 Options for Officer Inducement Grant
During 2003, the Company’s Board of Directors awarded 1,000 options as an inducement grant in
hiring the Company’s Chief Executive Officer. As of December 31, 2008, 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 Company’s Chief Executive Officer. Under the agreement, the Company granted
Ms. Pelletier 100 fully vested (“RSUEs”). These RSUEs are required to be settled in shares of the
Company’s common stock on a one-for-one basis on July 31, 2009, unless required stockholder
approval is not obtained, in which case they will be settled in cash. When settled, the Company
will pay cash dividend equivalents on any and all dividends declared on shares of the Company’s
common stock from September 1, 2008 through July 31, 2009. The Company currently accounts for these
RSUEs as a liability, re-measured at each reporting period.
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
This plan was adopted by ACS Group in November 1999 and will terminate December 31, 2009. The
Company has reserved 1,550 shares under this plan. At December 31, 2008, 752 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 a maximum of
15% and a minimum of 1% of base compensation. The fair market value of shares which may be
purchased by any employee during any calendar year may not exceed $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 date of purchase or on the offering date for such offering
period. The offering dates are January 1 and July 1 of each purchase plan year, and each offering
period will consist of one six-month purchase period. The first offering period under the plan
commenced on January 1, 2000. Shares are purchased on the open market or issued from authorized but
unissued shares on behalf of participating employees on the last business days of June and December
for each purchase plan year and each such participant has the rights of a stockholder with respect
to such shares. During the year ended December 31, 2008, approximately 22% of eligible employees
elected to participate in the plan.
F-29
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
15. STOCK INCENTIVE PLANS (Continued)
ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
This plan was adopted by ACS Group in November 1999. ACS Group has reserved 350 shares under
this plan. At December 31, 2008, 233 shares have been awarded and 117 shares are available for
grant under the plan. In 2007 and 2006, the plan required directors to receive not less than 50% of
their annual retainer in the form of ACS Group’s stock. Directors were permitted to elect up to
100% of their annual retainer in the form of ACS Group’s stock. Beginning January 1, 2008 the plan
was revised to require that Directors receive a portion of their annual retainer in the form of
shares of ACS Group’s stock. Directors are permitted to elect to receive up to 100% of their
remaining annual retainer and meeting fees in the form of ACS Group’s stock. Once a year, the
Directors elect the method by which they receive their stock (issued or deferred). During the year
ended December 31, 2008, 28 shares under the plan were awarded to directors, of which 11 were
deferred until termination of service.
SFAS No. 123(R) Share-Based Payment
Total compensation cost for share-based payments was $9,477, $6,390 and $7,668 for the
twelve months ended December 31, 2008, 2007 and 2006, respectively
The Company purchases, from shares reserved under the Alaska Communications Systems Group,
Inc. 1999 Stock Incentive Plan, 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 aggregated
exercise price upon exercise of options. Shares repurchased by the Company for this purpose are not
reallocated to the share reserve set aside for future grants under the plan. The Company expects to
repurchase approximately 180 shares in 2009. 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
2009.
Stock Options and Stock-Settled Stock Appreciation Rights
No options were granted for the twelve months ended December 31, 2008, 2007 and 2006. There
were 775 SSARs granted for the twelve months ended December 31, 2008 and no SSARs granted for the
same period in 2007 or 2006.
Restricted Stock Units and Performance Share Units
There were 846, 591 and 760 restricted stock grants for the twelve months ended December 31,
2008, 2007 and 2006, respectively. There were 263 PSUs awards for the period ended December 31,
2008 and no PSUs granted for the same period in 2007 or 2006. The following table describes the
assumptions used for valuation of equity instruments awarded during the twelve months ended
December 31, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
2006 |
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0.25% - 2.00 |
% |
|
|
— |
|
|
|
— |
|
Dividend yield |
|
|
7.59 |
% |
|
|
— |
|
|
|
— |
|
Expected volatility factor |
|
|
33.88 |
% |
|
|
— |
|
|
|
— |
|
Expected option life (years) |
|
|
3.22 |
|
|
|
— |
|
|
|
— |
|
Expected forfeiture rate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0.25% -2.25 |
% |
|
|
4.25% - 5.25 |
% |
|
|
4.50% - 5.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected, per annum,
forfeiture rate |
|
|
0% - 4.47 |
% |
|
|
4.47 |
% |
|
|
4.47 |
% |
F-30
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
15. STOCK INCENTIVE PLANS (Continued)
Options and Restricted Stock Outstanding
Stock Options and SSARs
Proceeds from the exercise of stock options for the year ended December 31, 2008 were $848.
The Company chose to remit $3,003 of these proceeds for payroll taxes in exchange for shares
surrendered back to the Company. Information on outstanding options under the plan for the year
ended December 31, 2008 is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
| |
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
Outstanding, January 1, 2008 |
|
|
1,160 |
|
|
$ |
5.27 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
775 |
|
|
|
11.33 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(573 |
) |
|
|
4.70 |
|
|
|
|
|
|
|
|
|
Canceled or expired |
|
|
(12 |
) |
|
|
11.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2008 |
|
|
1,350 |
|
|
|
8.94 |
|
|
|
4.69 |
|
|
$ |
2,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 |
|
|
749 |
|
|
$ |
8.43 |
|
|
|
4.68 |
|
|
|
1,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select information on equity instruments under the plan for the years ended December 31, 2008,
2007 and 2006 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended |
| |
|
December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Weighted-average grant-date fair value of equity
instruments granted |
|
$ |
5.87 |
|
|
$ |
10.48 |
|
|
$ |
9.81 |
|
Total fair value of shares vested during the period |
|
$ |
8,403 |
|
|
$ |
5,273 |
|
|
$ |
2,762 |
|
Total intrinsic value of options exercised |
|
$ |
4,260 |
|
|
$ |
2,225 |
|
|
$ |
2,927 |
|
Restricted Stock and PSU’s
Restricted stock grants outstanding, all of which are non-vested at December 31, 2008, are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
Average |
| |
|
Number of |
|
Fair |
| |
|
Shares |
|
Value |
Outstanding at January 1, 2008 |
|
|
1,296 |
|
|
$ |
11.07 |
|
Granted |
|
|
846 |
|
|
|
9.91 |
|
Vested |
|
|
(593 |
) |
|
|
10.19 |
|
Canceled or expired |
|
|
(167 |
) |
|
|
11.39 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
1,382 |
|
|
$ |
10.70 |
|
|
|
|
|
|
|
|
|
|
F-31
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
15. STOCK INCENTIVE PLANS (Continued)
Unamortized stock-based payment and the weighted average expense period at December 31, 2008,
are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Average Period |
|
| |
|
Unamortized |
|
|
to Expense |
|
| |
|
Expense |
|
|
(years) |
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
426 |
|
|
|
0.9 |
|
Restricted stock |
|
|
5,953 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
$ |
6,379 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
16. RETIREMENT PLANS
Pension benefits for substantially all of the Company’s employees are provided through the
Alaska Electrical Pension Plan (“AEPP”). 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. The Company’s portion of the plan’s pension cost for 2008, 2007 and 2006 was
$11,548, $11,772 and $11,892, respectively.
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 no matching contribution for
2008, 2007 or 2006.
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 CenturyTel’s 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
AEPP. 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 recent down turn in the economy, the
plan is not adequately funded under ERISA at December 31, 2008. Management is currently assessing
the timing and amount of a contribution that the Company will make during 2009, to regain 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 plan’s assets remains volatile
or continue to decline. In September 2007, the Company funded $300 for the 2006 tax year. The
Company made no contributions in 2008. The Company uses a December 31 measurement date for the
plan.
F-32
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
16. RETIREMENT PLANS (Continued)
The following is a calculation of the funded status of the ACS Retirement Plan using beginning
and ending balances for 2008 and 2007 for the projected benefit obligation and the plan assets:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
12,883 |
|
|
$ |
13,604 |
|
Interest cost |
|
|
810 |
|
|
|
782 |
|
Actuarial gain |
|
|
166 |
|
|
|
(769 |
) |
Benefits paid |
|
|
(765 |
) |
|
|
(734 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
13,094 |
|
|
|
12,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
13,311 |
|
|
|
12,713 |
|
Actual return on plan assets |
|
|
(3,008 |
) |
|
|
1,032 |
|
Employer contribution |
|
|
— |
|
|
|
300 |
|
Benefits paid |
|
|
(765 |
) |
|
|
(734 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
9,538 |
|
|
|
13,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(3,556 |
) |
|
$ |
428 |
|
|
|
|
|
|
|
|
The plans projected benefit obligation equals its accumulated benefit obligation. The 2008
liability balance of $3,556 is recorded on the balance sheet in other deferred credits and
long-term liabilities while the 2007 asset balance of $428 is recorded in deferred charges and
other assets.
The following table represents the net periodic pension expense for the ACS Retirement Plan
for 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Interest cost |
|
$ |
810 |
|
|
$ |
782 |
|
|
$ |
762 |
|
Expected return on plan assets |
|
|
(1,031 |
) |
|
|
(994 |
) |
|
|
(858 |
) |
Amortization of loss |
|
|
157 |
|
|
|
322 |
|
|
|
444 |
|
Amortization of prior service cost |
|
|
203 |
|
|
|
203 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
139 |
|
|
$ |
313 |
|
|
$ |
551 |
|
|
|
|
|
|
|
|
|
|
|
In 2009, the Company expects amortization of prior service costs of $203 and amortization of
net gains and losses of $793.
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Components of other comprehensive income/loss: |
|
|
|
|
|
|
|
|
Prior service cost |
|
$ |
332 |
|
|
$ |
535 |
|
Net loss |
|
|
6,368 |
|
|
|
2,320 |
|
|
|
|
|
|
|
|
|
|
$ |
6,700 |
|
|
$ |
2,855 |
|
|
|
|
|
|
|
|
F-33
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
16. RETIREMENT PLANS (Continued)
The assumptions used to account for the plan as of December 31, 2008 and 2007 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
Discount rate for benefit obligation |
|
|
6.63 |
% |
|
|
6.49 |
% |
Discount rate for pension expense |
|
|
6.49 |
% |
|
|
6.49 |
% |
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.
The plan’s asset allocations at December 31, 2008 and 2007, by asset category are as follows:
| |
|
|
|
|
|
|
|
|
| Asset Category |
|
2008 |
|
2007 |
Equity securities* |
|
|
54 |
% |
|
|
63 |
% |
Debt securities* |
|
|
46 |
% |
|
|
35 |
% |
Other/Cash |
|
|
0 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Note that mutual funds that may contain both stock and bonds may be included in these
categories. |
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 Company’s 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 Plan’s
investment goal is to protect the assets’ longer term purchasing power. The Plan’s 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 plan’s
actuarial rate of return assumption over time.
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 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:
| |
|
|
|
|
2009 |
|
$ |
850 |
|
2010 |
|
|
891 |
|
2011 |
|
|
916 |
|
2012 |
|
|
926 |
|
2013 |
|
|
955 |
|
2014-2018 |
|
|
5,115 |
|
F-34
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
16. RETIREMENT PLANS (Continued)
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. The ACS Health Plan provides a graded subsidy for medical, dental
and vision coverage. The Compensation Committee of the Board of Directors decided to terminate The
ACS Health Plan in January 2004. In February 2005, the Board adopted a resolution to exclude a
former employee from the plan, causing a $90 decrease in the accumulated post retirement benefit.
Three people qualified under the plan are eligible for future benefits, but 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 2008, 2007 or 2006, and no
contribution is expected in 2009. The Company uses a December 31 measurement date for the plan.
The following is a calculation of the funded status and a reconciliation of the beginning and
ending balances for 2008 and 2007 for the projected benefit obligation and the plan assets for The
ACS Health Plan:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Change in accumulated post-retirement benefit obligation: |
|
|
|
|
|
|
|
|
Accumulated post-retirement benefit obligation at beginning of the year |
|
$ |
176 |
|
|
$ |
168 |
|
Interest cost |
|
|
10 |
|
|
|
10 |
|
Actuarial gain |
|
|
1 |
|
|
|
— |
|
Benefits paid |
|
|
(7 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
Accumulated post-retirement benefit obligation at end of the year |
|
|
180 |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
236 |
|
|
|
218 |
|
Actual return on plan assets |
|
|
(26 |
) |
|
|
20 |
|
Benefits paid |
|
|
(7 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
203 |
|
|
|
236 |
|
|
|
|
|
|
|
|
Funded status |
|
$ |
23 |
|
|
$ |
60 |
|
|
|
|
|
|
|
|
The following represents the net periodic post-retirement benefit expense for The ACS Health
Plan for 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Interest cost |
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
10 |
|
Expected return on plan assets |
|
|
(14 |
) |
|
|
(13 |
) |
|
|
(12 |
) |
Amortization of net gain |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net periodic post-retirement benefit |
|
$ |
(8 |
) |
|
$ |
(8 |
) |
|
$ |
(2 |
) |
|
|
|
|
|
|
|
|
|
|
The Company expects to incur no net periodic costs associated with this plan in 2009. The actuarial
assumptions used to account for The ACS Health Plan as of December 31, 2008 and 2007 is an assumed
discount rate of 5.75% and 6.00% for projected benefit obligation and an assumed discount rate of
6.00% and 5.89% for plan expense, respectively, and an expected long-term rate of return on plan
assets of 6.00%. The discount rate is based on Moody’s AA Corporate bonds. The expected long-term
rate of return on assets 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.
For measurement purposes, the assumed annual rate of increase in health care costs for the
next five years and thereafter, for both Pre-65 and Post-65 premiums, is 7.00%.
F-35
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
16. RETIREMENT PLANS (Continued)
Assumed health care cost trend rates have a significant effect on the amounts reported for The
ACS Health Plan. A one percentage point change in assumed health care cost trend rates would have
the following effects for 2008:
| |
|
|
|
|
|
|
|
|
|
| |
|
+1% |
|
-1% |
|
Effect on total of service and interest cost components |
|
|
— |
|
|
|
|
(1 |
) |
Effect on accumulated postretirement benefit obligation |
|
|
7 |
|
|
|
|
(9 |
) |
The ACS Health Plan’s asset allocations at December 31, 2008 and 2007, by asset category, are
as follows:
| |
|
|
|
|
|
|
|
|
| Asset Category |
|
2008 |
|
2007 |
Equity securities* |
|
|
19 |
% |
|
|
28 |
% |
Debt securities* |
|
|
73 |
% |
|
|
66 |
% |
Other/Cash |
|
|
8 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Note that mutual funds that may contain both stock and bonds may be included in these
categories. |
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 account’s assets in mutual funds. The portfolio may hold common stock,
fixed income securities, money market instruments and U.S. Treasury obligations.
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:
| |
|
|
|
|
| |
|
Target |
Equity securities |
|
|
30 |
% |
Fixed income |
|
|
60 |
% |
Other/cash |
|
|
10 |
% |
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:
| |
|
|
|
|
2009 |
|
$ |
10 |
|
2010 |
|
|
16 |
|
2011 |
|
|
16 |
|
2012 |
|
|
16 |
|
2013 |
|
|
16 |
|
2014-2018 |
|
|
59 |
|
F-36
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
17. BUSINESS SEGMENTS
Our 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 the chief operating decision maker 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. In accordance with industry practice and
regulatory requirements, affiliate revenue and expense between local telephone and all other
segments is not eliminated on consolidation. 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, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
261,534 |
|
|
$ |
143,606 |
|
|
$ |
19,391 |
|
|
$ |
(34,934 |
) |
|
$ |
389,597 |
|
Intersegment revenue |
|
|
54,411 |
|
|
|
2,729 |
|
|
|
19,391 |
|
|
|
— |
|
|
|
76,531 |
|
Eliminated intersegment revenue |
|
|
(15,506 |
) |
|
|
(37 |
) |
|
|
(19,391 |
) |
|
|
— |
|
|
|
(34,934 |
) |
Depreciation and amortization |
|
|
52,159 |
|
|
|
8,223 |
|
|
|
13,620 |
|
|
|
— |
|
|
|
74,002 |
|
(Gain) loss on disposal of assets, net |
|
|
775 |
|
|
|
(39 |
) |
|
|
14 |
|
|
|
— |
|
|
|
750 |
|
Loss on impairment of goodwill and
intangible assets |
|
|
29,641 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,641 |
|
Operating income (loss) |
|
|
(32,394 |
) |
|
|
42,423 |
|
|
|
5,103 |
|
|
|
— |
|
|
|
15,132 |
|
Interest expense |
|
|
2,065 |
|
|
|
504 |
|
|
|
(35,490 |
) |
|
|
— |
|
|
|
(32,921 |
) |
Interest income |
|
|
1 |
|
|
|
— |
|
|
|
1,694 |
|
|
|
— |
|
|
|
1,695 |
|
Income (loss) before income tax |
|
|
(30,328 |
) |
|
|
42,913 |
|
|
|
(29,226 |
) |
|
|
— |
|
|
|
(16,641 |
) |
Income tax (expense) benefit |
|
|
3,408 |
|
|
|
(17,950 |
) |
|
|
21,044 |
|
|
|
— |
|
|
|
6,502 |
|
Net income (loss) |
|
|
(26,920 |
) |
|
|
24,964 |
|
|
|
(8,183 |
) |
|
|
— |
|
|
|
(10,139 |
) |
Total assets |
|
|
561,305 |
|
|
|
188,604 |
|
|
|
10,645 |
|
|
|
(3,216 |
) |
|
|
757,338 |
|
Capital expenditures |
|
|
107,920 |
|
|
|
12,151 |
|
|
|
7,118 |
|
|
|
— |
|
|
|
127,189 |
|
F-37
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
17. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the
year ended December 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
260,975 |
|
|
$ |
137,566 |
|
|
$ |
11,207 |
|
|
$ |
(23,963 |
) |
|
$ |
385,785 |
|
Intersegment revenue |
|
|
48,569 |
|
|
|
2,604 |
|
|
|
11,207 |
|
|
|
— |
|
|
|
62,380 |
|
Eliminated intersegment revenue |
|
|
(12,710 |
) |
|
|
(46 |
) |
|
|
(11,207 |
) |
|
|
— |
|
|
|
(23,963 |
) |
Depreciation and amortization |
|
|
53,297 |
|
|
|
13,199 |
|
|
|
4,841 |
|
|
|
— |
|
|
|
71,337 |
|
Loss on disposal of assets, net |
|
|
110 |
|
|
|
12 |
|
|
|
126 |
|
|
|
— |
|
|
|
248 |
|
Operating income |
|
|
11,327 |
|
|
|
43,315 |
|
|
|
5,797 |
|
|
|
— |
|
|
|
60,439 |
|
Interest expense |
|
|
38 |
|
|
|
1,208 |
|
|
|
(29,632 |
) |
|
|
— |
|
|
|
(28,386 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
(355 |
) |
|
|
— |
|
|
|
(355 |
) |
Interest income |
|
|
2 |
|
|
|
— |
|
|
|
2,018 |
|
|
|
— |
|
|
|
2,020 |
|
Income (loss) before income tax |
|
|
10,729 |
|
|
|
44,522 |
|
|
|
(22,309 |
) |
|
|
— |
|
|
|
32,942 |
|
Income tax (expense) benefit |
|
|
(664 |
) |
|
|
(18,191 |
) |
|
|
130,049 |
|
|
|
— |
|
|
|
111,194 |
|
Net income |
|
|
10,065 |
|
|
|
26,331 |
|
|
|
107,740 |
|
|
|
— |
|
|
|
144,136 |
|
Total assets |
|
|
464,824 |
|
|
|
191,194 |
|
|
|
7,185 |
|
|
|
— |
|
|
|
663,203 |
|
Capital expenditures |
|
|
28,213 |
|
|
|
15,662 |
|
|
|
18,964 |
|
|
|
— |
|
|
|
62,839 |
|
The following table illustrates selected financial data for each segment as of and for the
year ended December 31, 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
242,601 |
|
|
$ |
115,412 |
|
|
$ |
10,687 |
|
|
$ |
(19,979 |
) |
|
$ |
348,721 |
|
Intersegment revenue |
|
|
39,474 |
|
|
|
2,632 |
|
|
|
10,687 |
|
|
|
— |
|
|
|
52,793 |
|
Eliminated intersegment revenue |
|
|
(9,250 |
) |
|
|
(42 |
) |
|
|
(10,687 |
) |
|
|
— |
|
|
|
(19,979 |
) |
Depreciation and amortization |
|
|
53,181 |
|
|
|
11,515 |
|
|
|
4,400 |
|
|
|
— |
|
|
|
69,096 |
|
Loss on disposal of assets, net |
|
|
469 |
|
|
|
23 |
|
|
|
613 |
|
|
|
— |
|
|
|
1,105 |
|
Operating income |
|
|
1,489 |
|
|
|
37,140 |
|
|
|
4,992 |
|
|
|
— |
|
|
|
43,621 |
|
Interest expense |
|
|
(373 |
) |
|
|
426 |
|
|
|
(30,498 |
) |
|
|
— |
|
|
|
(30,445 |
) |
Loss on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
(9,650 |
) |
|
|
— |
|
|
|
(9,650 |
) |
Interest income |
|
|
1 |
|
|
|
— |
|
|
|
1,834 |
|
|
|
— |
|
|
|
1,835 |
|
Income (loss) before income tax |
|
|
1,117 |
|
|
|
37,565 |
|
|
|
(24,961 |
) |
|
|
— |
|
|
|
13,721 |
|
Income tax (expense) benefit |
|
|
(3,821 |
) |
|
|
(15,578 |
) |
|
|
18,956 |
|
|
|
— |
|
|
|
(443 |
) |
Net income (loss) |
|
|
(2,704 |
) |
|
|
21,987 |
|
|
|
(6,005 |
) |
|
|
— |
|
|
|
13,278 |
|
Total assets |
|
|
404,502 |
|
|
|
146,611 |
|
|
|
5,103 |
|
|
|
— |
|
|
|
556,216 |
|
Capital expenditures |
|
|
39,094 |
|
|
|
14,771 |
|
|
|
6,154 |
|
|
|
— |
|
|
|
60,019 |
|
18. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivative financial instruments to hedge variable interest rate debt to manage
interest rate risk. To the extent that derivative financial instruments are outstanding as of a
period end, the fair value of those instruments, represented by the estimated amount the Company
would receive or pay to terminate the agreement, is reported on the balance sheet.
The Company is party to floating-to-fixed interest rate swaps with total notional amounts of
$135,000 and $85,000, respectively, which swap the floating interest rate on a portion of the term
loan borrowings under the 2005 senior credit facility for a five year term at a fixed rate of 6.13%
and 6.50%, per year. The Company also entered into a six year $40,000 notional amount fixed to
floating swap arrangement, effectively fixing the rate on this portion of the term loan at 6.43% per year.
F-38
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
18. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)
In February 2006, the Company and ACS Holdings executed $115,000 and $52,900 notional amount
floating-to-fixed interest rate swap agreements related to its $375,000 term loan under its 2005
senior bank credit facility. The swaps effectively fix the LIBOR rate on $115,000 and $52,900
principal amount of senior bank credit facility at 6.71% and 6.75%. On December 31, 2008, 2007 and
2006 substantially all for the Company’s swaps were effective. During 2008, in connection with the
Company’s issuance of its 5.75% convertible notes Due 2013, the Company prepaid $2,011 of principal
required by its senior credit facility. The Company did not adjust its swap position to compensate
for the prepayment as it was determined the overall effect on the hedge position was de minimus.
The negative carrying value of our swaps of $23,917, gross of $9,833 in tax, is the result of
our fair value estimate at December 31, 2008. This balance was recorded as other comprehensive
loss in the Company’s Consolidated Statement of Stockholders’ Equity (Deficit) with a corresponding
liability recorded in Other deferred credits and long-term liabilities on the Consolidated Balance
Sheet.
Concurrent with the issuance of its 5.75% Convertible Notes due 2013, 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 who have the option of receiving up to the same number of
shares of the Company’s common stock when the price exceeds $16.42 per share. The convertible note
hedge had a cost of $20,431 and the Company received proceeds of $9,852 related to the sale of the
warrants, each of which has been accounted for as an equity transaction in accordance with “EITF”
No. 00-19.
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.
The Company is involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business and has recorded litigation reserves of $350 as of December 31,
2008 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 Company’s consolidated financial
position, results of operations or cash flows.
The Company pledges substantially all property, assets and revenue as collateral on its
outstanding debt instruments.
F-39
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Amounts)
20. SELECTED QUARTERLY FINANCIAL INFORMATION (unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarterly Financial Data |
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
| |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
96,776 |
|
|
$ |
94,356 |
|
|
$ |
101,322 |
|
|
$ |
97,143 |
|
|
$ |
389,597 |
|
Operating income |
|
|
16,908 |
|
|
|
9,699 |
|
|
|
12,121 |
|
|
|
(23,596 |
) |
|
|
15,132 |
|
Net income (loss) |
|
|
5,776 |
|
|
|
908 |
|
|
|
2,044 |
|
|
|
(18,867 |
) |
|
|
(10,139 |
) |
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.13 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
(0.43 |
) |
|
|
(0.23 |
) |
Diluted |
|
|
0.13 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
(0.43 |
) |
|
|
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
91,623 |
|
|
$ |
94,501 |
|
|
$ |
100,554 |
|
|
$ |
99,107 |
|
|
$ |
385,785 |
|
Operating income |
|
|
14,157 |
|
|
|
13,351 |
|
|
|
17,886 |
|
|
|
15,045 |
|
|
|
60,439 |
|
Net income |
|
|
7,312 |
|
|
|
6,169 |
|
|
|
10,300 |
|
|
|
120,355 |
|
|
|
144,136 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.17 |
|
|
|
0.14 |
|
|
|
0.24 |
|
|
|
2.81 |
|
|
|
3.38 |
|
Diluted |
|
|
0.17 |
|
|
|
0.14 |
|
|
|
0.23 |
|
|
|
2.71 |
|
|
|
3.26 |
|
F-40
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Schedule II — Valuation and Qualifying Accounts
(In Thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
|
Balance at |
| |
|
Beginning |
|
costs and |
|
other |
|
|
|
|
|
End |
| Description |
|
of Period |
|
expenses |
|
accounts (2) |
|
Deductions (3) |
|
of Period |
| |
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
8,768 |
|
|
$ |
4,624 |
|
|
$ |
105 |
|
|
$ |
(7,585 |
) |
|
$ |
5,912 |
|
Valuation allowance for
deferred taxes |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
7,434 |
|
|
$ |
5,103 |
|
|
$ |
2 |
|
|
$ |
(3,771 |
) |
|
$ |
8,768 |
|
Valuation allowance for
deferred taxes |
|
$ |
122,498 |
|
|
$ |
(122,498 |
)(1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
6,206 |
|
|
$ |
5,121 |
|
|
$ |
(61 |
) |
|
$ |
(3,832 |
) |
|
$ |
7,434 |
|
Valuation allowance for
deferred taxes |
|
$ |
127,603 |
|
|
$ |
(5,105 |
)(1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
122,498 |
|
|
|
|
| (1) |
|
Change in the valuation allowance allocated to income tax expense. |
| |
| (2) |
|
Represents the reserve for accounts receivable collected on behalf of others, net of
recovery. |
| |
| (3) |
|
Represents credit losses, net of recovery. |
F-41