e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from to .
Commission file number 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.) |
600 Telephone Avenue, Anchorage, Alaska 99503
(Address of Principal Executive Offices) (Zip Code)
(907) 297-3000
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former three months, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes o
No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the registrants Common Stock, as of October 26, 2007, was
42,836,407.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
(In Thousands Except Per Share Amounts)
|
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|
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|
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|
|
|
Unaudited |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
41,765 |
|
|
$ |
36,860 |
|
Restricted cash |
|
|
2,559 |
|
|
|
1,700 |
|
Accounts receivable-trade, net of allowance of $8,465 and $7,434 |
|
|
39,750 |
|
|
|
39,801 |
|
Materials and supplies |
|
|
9,835 |
|
|
|
7,977 |
|
Prepayments and other current assets |
|
|
4,270 |
|
|
|
3,514 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
98,179 |
|
|
|
89,852 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,196,228 |
|
|
|
1,164,450 |
|
Less: accumulated depreciation and amortization |
|
|
807,920 |
|
|
|
767,907 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
388,308 |
|
|
|
396,543 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
38,403 |
|
|
|
38,403 |
|
Intangible assets |
|
|
21,604 |
|
|
|
21,604 |
|
Debt issuance cost |
|
|
7,934 |
|
|
|
9,437 |
|
Deferred charges and other assets |
|
|
2,705 |
|
|
|
6,482 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
557,133 |
|
|
$ |
562,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
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|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
957 |
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|
$ |
1,025 |
|
Accounts payable affiliates |
|
|
|
|
|
|
2,942 |
|
Accounts payable, accrued and other current liabilities |
|
|
63,575 |
|
|
|
62,307 |
|
Advance billings and customer deposits |
|
|
9,905 |
|
|
|
10,667 |
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|
|
|
|
|
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Total current liabilities |
|
|
74,437 |
|
|
|
76,941 |
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|
|
|
|
|
|
|
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|
Long-term obligations, net of current portion |
|
|
432,497 |
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|
437,188 |
|
Other deferred credits and long-term liabilities |
|
|
78,463 |
|
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|
72,881 |
|
|
|
|
|
|
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Total liabilities |
|
|
585,397 |
|
|
|
587,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 145,000 authorized |
|
|
428 |
|
|
|
423 |
|
Additional paid in capital in excess of par value |
|
|
312,234 |
|
|
|
311,975 |
|
Accumulated deficit |
|
|
(337,169 |
) |
|
|
(338,653 |
) |
Accumulated other comprehensive (loss) income |
|
|
(3,757 |
) |
|
|
1,566 |
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(28,264 |
) |
|
|
(24,689 |
) |
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit) |
|
$ |
557,133 |
|
|
$ |
562,321 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
(Unaudited, In Thousands Except Per Share Amounts)
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|
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|
|
|
|
|
|
|
|
|
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Three Months Ended |
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Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
$ |
62,672 |
|
|
$ |
58,935 |
|
|
$ |
181,409 |
|
|
$ |
175,194 |
|
Wireless |
|
|
37,159 |
|
|
|
31,441 |
|
|
|
102,227 |
|
|
|
82,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
99,831 |
|
|
|
90,376 |
|
|
|
283,636 |
|
|
|
258,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline (exclusive of depreciation and amortization) |
|
|
45,801 |
|
|
|
43,147 |
|
|
|
134,166 |
|
|
|
126,789 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
19,695 |
|
|
|
16,667 |
|
|
|
53,394 |
|
|
|
45,412 |
|
Depreciation and amortization |
|
|
15,672 |
|
|
|
14,538 |
|
|
|
48,368 |
|
|
|
47,669 |
|
Loss on disposal of assets, net |
|
|
113 |
|
|
|
|
|
|
|
137 |
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,281 |
|
|
|
74,352 |
|
|
|
236,065 |
|
|
|
220,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
18,550 |
|
|
|
16,024 |
|
|
|
47,571 |
|
|
|
37,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(7,739 |
) |
|
|
(7,722 |
) |
|
|
(23,064 |
) |
|
|
(23,339 |
) |
Loss on extinguishment of debt |
|
|
(355 |
) |
|
|
|
|
|
|
(355 |
) |
|
|
(9,650 |
) |
Interest income |
|
|
485 |
|
|
|
492 |
|
|
|
1,520 |
|
|
|
1,286 |
|
Other |
|
|
(72 |
) |
|
|
(74 |
) |
|
|
(64 |
) |
|
|
8,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(7,681 |
) |
|
|
(7,304 |
) |
|
|
(21,963 |
) |
|
|
(23,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
10,869 |
|
|
|
8,720 |
|
|
|
25,608 |
|
|
|
13,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(170 |
) |
|
|
|
|
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,699 |
|
|
$ |
8,720 |
|
|
$ |
25,333 |
|
|
$ |
13,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
$ |
0.59 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.57 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
42,812 |
|
|
|
42,143 |
|
|
|
42,649 |
|
|
|
41,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
44,159 |
|
|
|
43,541 |
|
|
|
44,185 |
|
|
|
43,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
For the Nine months Ended September 30, 2007
(Unaudited, In Thousands Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Excess of |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Stock |
|
|
Par |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
|
|
|
$ |
423 |
|
|
$ |
311,975 |
|
|
$ |
(338,653 |
) |
|
$ |
1,566 |
|
|
$ |
(24,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,333 |
|
|
|
(5,323 |
) |
|
|
20,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
(3,765 |
) |
|
|
(23,849 |
) |
|
|
|
|
|
|
(27,614 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
costs |
|
|
|
|
|
|
|
|
|
|
5,172 |
|
|
|
|
|
|
|
|
|
|
|
5,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surrender of shares to
cover withholding taxes
on stock-based
compensation |
|
|
153 |
|
|
|
|
|
|
|
(2,323 |
) |
|
|
|
|
|
|
|
|
|
|
(2,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of
common stock
pursuant to stock
plans, $.01 par |
|
|
513 |
|
|
|
5 |
|
|
|
1,175 |
|
|
|
|
|
|
|
|
|
|
|
1,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
428 |
|
|
$ |
312,234 |
|
|
$ |
(337,169 |
) |
|
$ |
(3,757 |
) |
|
$ |
(28,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
25,333 |
|
|
$ |
13,854 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
48,368 |
|
|
|
47,669 |
|
Loss on disposal of assets, net |
|
|
137 |
|
|
|
1,105 |
|
Gain on sale of long-term investments |
|
|
(152 |
) |
|
|
(6,685 |
) |
Amortization of debt issuance costs and original issue discount |
|
|
1,586 |
|
|
|
4,696 |
|
Stock-based compensation |
|
|
5,172 |
|
|
|
5,275 |
|
Other non-cash expenses |
|
|
394 |
|
|
|
|
|
Changes in components of assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
|
(2,563 |
) |
|
|
(1,747 |
) |
Accounts payable and other current liabilities |
|
|
(3,471 |
) |
|
|
348 |
|
Deferred charges and other assets |
|
|
(208 |
) |
|
|
(469 |
) |
Other deferred credits |
|
|
3,123 |
|
|
|
575 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
77,719 |
|
|
|
64,621 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(39,502 |
) |
|
|
(38,765 |
) |
Change in unsettled construction and capital expenditures |
|
|
908 |
|
|
|
(1,656 |
) |
Purchase of short-term investments |
|
|
(55,615 |
) |
|
|
(39,600 |
) |
Proceeds from sale of short-term investments |
|
|
55,615 |
|
|
|
50,125 |
|
Proceeds from liquidation of long-term investments |
|
|
162 |
|
|
|
7,663 |
|
Placement of funds in restricted account |
|
|
(2,979 |
) |
|
|
|
|
Release of funds from escrow account |
|
|
2,120 |
|
|
|
2,715 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(39,291 |
) |
|
|
(19,518 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(4,893 |
) |
|
|
(61,658 |
) |
Proceeds from the issuance of long-term debt |
|
|
|
|
|
|
52,900 |
|
Debt issuance costs |
|
|
|
|
|
|
(1,349 |
) |
Payment of cash dividend on common stock |
|
|
(27,487 |
) |
|
|
(26,403 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(2,323 |
) |
|
|
(864 |
) |
Proceeds from the issuance of common stock |
|
|
1,180 |
|
|
|
1,636 |
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(33,523 |
) |
|
|
(35,738 |
) |
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
4,905 |
|
|
|
9,365 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
36,860 |
|
|
|
28,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
41,765 |
|
|
$ |
38,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
21,564 |
|
|
$ |
24,255 |
|
Income taxes paid |
|
|
508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Noncash Transactions: |
|
|
|
|
|
|
|
|
Property acquired under captial leases |
|
$ |
51 |
|
|
$ |
|
|
Dividend declared, but not paid |
|
|
9,215 |
|
|
|
9,077 |
|
See Notes to Consolidated Financial Statements
6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Group, Inc., a Delaware corporation, and its Subsidiaries (the
Company or ACS Group), is engaged principally in providing wireline and wireless services to
its retail consumer, business and wholesale customers in the State of Alaska through its
telecommunications subsidiaries. The Companys wireline activities include local telephone,
Internet and interexchange services. 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 represent the consolidated
financial position, results of operations and cash flows principally of the following entities:
|
|
|
ACS Group |
|
|
|
|
Alaska Communications Systems Holdings, Inc. (ACS Holdings) |
|
|
|
|
ACS of Anchorage, Inc. (ACSA) |
|
|
|
|
ACS of the Northland, Inc. (ACSN) |
|
|
|
|
ACS of Alaska, Inc. (ACSAK) |
|
|
|
|
ACS of Fairbanks, Inc. (ACSF) |
|
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
ACS Wireless, Inc. (ACSW) |
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission. However, the Company believes the disclosures which are made are adequate to
make the information presented not misleading. The consolidated financial statements and footnotes
included in this Form 10-Q should be read in conjunction with the consolidated financial statements
and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2006. Certain reclassifications have been made to the 2006 financial statements to make them
conform to the current presentation. The most significant of these reclassifications is the
presentation of the business segment footnote. The note was modified to more accurately represent
the way the Companys management views the operations of the business. The presentation focuses on
wireline and wireless activities rather than individual product lines offered under those segments.
See Note 6, Business Segments for further detail. Additionally, the Company reclasses additional
paid in capital and accumulated deficit in the equity section of the Consolidated Balance Sheets
and on the Statement of Stockholders Equity (Deficit). This change was made because management
believes it is a more appropriate presentation to show dividends paid as a charge to retained
earnings (accumulated deficit) in periods where there were earnings, rather than a reduction of
additional paid-in capital.
In the opinion of management, the financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the consolidated financial position,
results of operations and cash flows for all periods presented. The results of operations for the
three and nine months ended September 30, 2007 are not necessarily indicative of the results of
operations which might be expected for the entire year or any other interim periods.
Revenue Recognition
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 Regulatory Commission of Alaska (RCA) within the intrastate jurisdiction and 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. To the extent that disputes arise over revenue
settlements, the Companys policy is to defer revenue collected until settlement methodologies are
resolved and finalized. At September 30, 2007 and December 31, 2006, the Company had liabilities of
$17,781 and $21,448, respectively, related to its estimate of refundable revenue. Actual results
could vary significantly from this estimate.
7
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Wireless revenue is materially impacted by seasonal factors. Wireless revenue, particularly
roaming revenue, declines in the winter months and increases in the summer months due to Alaskas
northern latitude and the wide swing in available daylight, changes in weather patterns between
summer and winter and their effect on business, tourism and subscriber calling patterns. Non-ACS
customers roaming on the Companys network resulted in third-party roaming revenue increasing to
$6,332 from $5,498 for the three months ended September 30, 2007 and 2006, respectively, and to
$14,043 from $10,993 for the nine months ended September 30, 2007 and 2006, respectively. The
Companys wireline segment experiences similar seasonal effects, but these effects are not believed
to be material.
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 Statement of Financial Accounting
Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. 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, under SFAS No. 71, 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.
Effective January 1, 2003, the Company implemented higher depreciation rates for its regulated
telephone plant for the interstate jurisdiction which management believes approximate the
economically useful lives of the underlying plant. As a result, the Company has recorded a
regulatory asset under SFAS No. 71 of $73,939 and $65,724 as of September 30, 2007 and December 31,
2006, respectively, related to depreciation of the regulated telephone plant allocable to its
intrastate and local jurisdictions. If the Company were not following SFAS No. 71 it would have
recorded additional cumulative depreciation expense for the three and nine months ended September
30, 2007 of $2,622 and $8,216, respectively, for the intrastate and local jurisdictions. The
Company also has a regulatory liability of $62,131 and $61,486 at September 30, 2007 and December
31, 2006, respectively, related to accumulated removal costs. If the Company were not following
SFAS No. 71 it would have followed SFAS No. 143, Accounting for Asset Retirement Obligations.
Non-regulated revenues incurred by the local telephone exchange operations and non-regulated
operations of the Company are not accounted for under SFAS No. 71 principles. SFAS No. 71 also
requires revenue generated between regulated and non-regulated group companies not be eliminated on
consolidation; these revenues totaled $10,202 and $8,589 for the three months ended September 30,
2007 and 2006, respectively, and $28,531 and $24,149 for the nine months ended September 30, 2007
and 2006, respectively.
Income Taxes
The Company recorded $170 and $275 for income taxes for the three and nine month periods ended
September 30, 2007 and zero expense for the comparative periods in 2006. The Company has recorded
valuation allowances to fully reserve its deferred tax assets, as management believes it is more
likely than not that these assets will not be realized. The Company will continue to assess the
recoverability of the deferred tax assets and the related valuation allowance, including the
consideration of its ability to generate sustainable future taxable income. On January 1, 2007, the
Company had $120,478 of net deferred tax assets for which it had recorded a valuation allowance. At
September 30, 2007, the Company had $111,518 of net deferred tax assets for which it had recorded a
valuation allowance. At such time as the Company determines that it is more likely than not that
the deferred tax assets can be realized in the future, all or a portion of the valuation allowance
would be reversed as a credit to the income statement.
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 Companys 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 Companys policy is to recognize
interest and penalties related to uncertain tax positions in income tax expense. As of September
30, 2007, the Company had no accrued income tax interest or
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
penalties. Tax returns prior to 2004
are no longer subject to examination by major tax jurisdictions. The Company is not aware of any
material tax contingencies.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the Companys consolidated financial statements and
the accompanying notes. Actual results could differ from those estimates.
Taxes Collected from Customers and Remitted to Government Authorities
In June 2006, the FASB Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected
from Customers and Remitted to Government Authorities Should Be Presented in the Income Statement
was issued. EITF 06-3 was effective for accounting periods beginning after December 15, 2006. The
consensus reached in this Issue is that the presentation of taxes on either a gross (included in
revenue and costs) or a net (excluded from revenues) basis is an accounting policy decision and
should be disclosed pursuant to Opinion 22. The Company currently 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.
2. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
The following table describes the components of comprehensive income (loss) for the three and
nine months ended September 30, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
10,699 |
|
|
|
8,720 |
|
|
|
25,333 |
|
|
|
13,854 |
|
Minimum pension liability adjustment * |
|
|
131 |
|
|
|
|
|
|
|
394 |
|
|
|
|
|
Interest rate swap marked to market |
|
|
(9,292 |
) |
|
|
(9,844 |
) |
|
|
(5,717 |
) |
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
1,538 |
|
|
$ |
(1,124 |
) |
|
$ |
20,010 |
|
|
$ |
14,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Balance is pursuant to the Companys December 31, 2006, adoption of SFAS 158 Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans. |
3. ASSET RETIREMENT OBLIGATION
In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement
Obligations. FIN 47 was effective for the Company on December 31, 2005, and required it 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 liability of $62,131 and $61,486 at September
30, 2007 and December 31, 2006, 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 Companys assets are
pooled and the depreciable lives set by the regulators include a removal component which, in
effect, accounts for the cost of removal.
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
3. ASSET RETIREMENT OBLIGATION (Continued)
Non-regulated operations of the Company are accounted for under the principles of SFAS No. 143
and FIN 47 for which the Company has recorded a retirement obligation of $1,374 and $1,171 as of
September 30, 2007 and December 31, 2006, respectively. These costs were recorded as a result of
the Companys estimated obligation related to the removal of certain cell sites at the end of their
operating lease term, adjusted for accretion over the life of the lease.
The following table outlines the changes in the accumulated retirement obligation liability:
|
|
|
|
|
Balance, January 1, 2006 |
|
$ |
836 |
|
Asset retirement obligation |
|
|
239 |
|
Accretion expense |
|
|
100 |
|
Settlement of lease obligations |
|
|
(4 |
) |
|
|
|
|
Balance, December 31, 2006 |
|
$ |
1,171 |
|
Asset retirement obligation |
|
|
133 |
|
Accretion expense |
|
|
72 |
|
Settlement of lease obligations |
|
|
(2 |
) |
|
|
|
|
Ending Balance, September 30, 2007 |
|
$ |
1,374 |
|
|
|
|
|
4. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common stock and
dilutive potential common share 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. Potential common share
equivalents which consisted of options and restricted stock granted to employees and deferred
shares granted to directors, resulted in dilutive earnings per share for the three and nine months
ended September 30, 2007 and 2006.
Earnings per share for the three and nine months ended September 30, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator net income |
|
$ |
10,699 |
|
|
$ |
8,720 |
|
|
$ |
25,333 |
|
|
$ |
13,854 |
|
Denominator weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
42,812 |
|
|
|
42,143 |
|
|
|
42,649 |
|
|
|
41,976 |
|
Dilutive impact of restricted stock, options
and deferred shares |
|
|
1,347 |
|
|
|
1,398 |
|
|
|
1,536 |
|
|
|
1,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
44,159 |
|
|
|
43,541 |
|
|
|
44,185 |
|
|
|
43,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.25 |
|
|
$ |
0.21 |
|
|
$ |
0.59 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.57 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
5. STOCK INCENTIVE PLANS
Under various plans, ACS Group, through the Compensation Committee of the Board of Directors,
may grant stock options, stock appreciation rights and other awards to officers, employees and
non-employee directors. At September 30, 2007, ACS Group has reserved a total of 11,560 shares
(11.56 million) of authorized common stock for issuance under the plans. In general, restricted
stock and options under the plans vest ratably over three, four or five 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.
SFAS No. 123(R), Share-Based Payment
Total compensation cost for share-based payments under SFAS No. 123(R) was $5,172 and $5,275
for the nine months ended September 30, 2007 and 2006, respectively. Accrued compensation expense
associated with restricted stock and ESPP shares yet to be awarded was $60 and $1,143 for the nine
months ended September 30, 2007 and 2006, respectively. The Company did not recognize a tax benefit
from the stock compensation expense because the Company considers it more likely than not that the
related deferred tax assets, which have been reduced by a full valuation allowance, will not be
realized.
There were 589 and 747 restricted stock grants for the nine months ended September 30, 2007
and 2006, respectively. The following table summarizes the assumptions used for valuation of equity
instruments awarded during the nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Restricted stock: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
4.75% - 5.25 |
% |
|
|
4.50% - 5.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected, per annum, forfeiture rate |
|
|
4.47 |
% |
|
|
2.00 |
% |
6. RETIREMENT PLANS
Pension benefits for substantially all of the Companys 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 also provides a 401(k) retirement savings plan covering
substantially all of its employees. The Company provides no matching of employee contributions to
the 401(k) retirement savings plan.
The Company 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, Inc.s Alaska properties. Existing
plan assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan on
September 1, 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 will be
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). The Company uses a December 31 measurement date
for the plan. In September 2007, the Company made a $300 cash contribution to the 2006 plan year
and in March of 2006, the Company contributed $600 for the 2005 plan year.
11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
6. RETIREMENT PLANS (Continued)
The following table represents the net periodic pension expense for the ACS Retirement Plan
for the three and nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest cost |
|
$ |
185 |
|
|
$ |
191 |
|
|
$ |
587 |
|
|
$ |
572 |
|
Expected return on plan assets |
|
|
(238 |
) |
|
|
(215 |
) |
|
|
(746 |
) |
|
|
(644 |
) |
Amortization of loss |
|
|
80 |
|
|
|
111 |
|
|
|
241 |
|
|
|
333 |
|
Amortization of prior service cost |
|
|
51 |
|
|
|
51 |
|
|
|
153 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
78 |
|
|
$ |
138 |
|
|
$ |
235 |
|
|
$ |
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. BUSINESS SEGMENTS
The Company has two reportable segments: wireline and wireless. The wireline segment in turn
has three unique product lines: local telephone, Internet and interexchange. Local telephone
provides landline telecommunications services and consists of local telephone service and other
revenue, and network access. Internet provides Internet service and advanced IP based private
networks. Interexchange provides switched and dedicated long distance services. The wireless
segment provides wireless telecommunications service. Each reportable segment is a strategic
business offering different services. The Company evaluates the performance of its segments based
on operating income (loss) and other quantitative factors related to the overall contribution of
individual products and services to total Company performance.
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 SFAS No. 71, 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
three months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
66,766 |
|
|
$ |
37,168 |
|
|
$ |
2,328 |
|
|
$ |
(6,431 |
) |
|
$ |
99,831 |
|
Intersegment revenue |
|
|
13,593 |
|
|
|
712 |
|
|
|
2,328 |
|
|
|
|
|
|
|
16,633 |
|
Eliminated intersegment revenue |
|
|
(4,094 |
) |
|
|
(9 |
) |
|
|
(2,328 |
) |
|
|
|
|
|
|
(6,431 |
) |
Income before income tax |
|
|
4,876 |
|
|
|
11,862 |
|
|
|
(5,869 |
) |
|
|
|
|
|
|
10,869 |
|
Income tax (expense) benefit |
|
|
(1,729 |
) |
|
|
(4,863 |
) |
|
|
6,422 |
|
|
|
|
|
|
|
(170 |
) |
Net income |
|
|
3,147 |
|
|
|
6,999 |
|
|
|
553 |
|
|
|
|
|
|
|
10,699 |
|
Total assets |
|
|
391,633 |
|
|
|
162,820 |
|
|
|
2,680 |
|
|
|
|
|
|
|
557,133 |
|
Capital expenditures |
|
|
8,582 |
|
|
|
2,640 |
|
|
|
4,716 |
|
|
|
|
|
|
|
15,938 |
|
12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
7. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the
three months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
61,921 |
|
|
$ |
31,450 |
|
|
$ |
1,955 |
|
|
$ |
(4,950 |
) |
|
$ |
90,376 |
|
Intersegment revenue |
|
|
10,942 |
|
|
|
642 |
|
|
|
1,955 |
|
|
|
|
|
|
|
13,539 |
|
Eliminated intersegment revenue |
|
|
(2,986 |
) |
|
|
(9 |
) |
|
|
(1,955 |
) |
|
|
|
|
|
|
(4,950 |
) |
Income before income tax |
|
|
3,830 |
|
|
|
10,689 |
|
|
|
(5,799 |
) |
|
|
|
|
|
|
8,720 |
|
Income tax (expense) benefit |
|
|
(1,440 |
) |
|
|
(4,394 |
) |
|
|
5,834 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
2,390 |
|
|
|
6,295 |
|
|
|
35 |
|
|
|
|
|
|
|
8,720 |
|
Total assets |
|
|
417,567 |
|
|
|
142,778 |
|
|
|
5,262 |
|
|
|
|
|
|
|
565,607 |
|
Capital expenditures |
|
|
11,978 |
|
|
|
4,221 |
|
|
|
1,908 |
|
|
|
|
|
|
|
18,107 |
|
The following table illustrates selected financial data for each segment as of and for the
nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
190,633 |
|
|
$ |
102,261 |
|
|
$ |
9,175 |
|
|
$ |
(18,433 |
) |
|
$ |
283,636 |
|
Intersegment revenue |
|
|
35,817 |
|
|
|
1,972 |
|
|
|
9,175 |
|
|
|
|
|
|
|
46,964 |
|
Eliminated intersegment revenue |
|
|
(9,224 |
) |
|
|
(34 |
) |
|
|
(9,175 |
) |
|
|
|
|
|
|
(18,433 |
) |
Income before income tax |
|
|
8,037 |
|
|
|
34,352 |
|
|
|
(16,781 |
) |
|
|
|
|
|
|
25,608 |
|
Income tax (expense) benefit |
|
|
(2,779 |
) |
|
|
(14,102 |
) |
|
|
16,606 |
|
|
|
|
|
|
|
(275 |
) |
Net income |
|
|
5,258 |
|
|
|
20,250 |
|
|
|
(175 |
) |
|
|
|
|
|
|
25,333 |
|
Total assets |
|
|
391,633 |
|
|
|
162,820 |
|
|
|
2,680 |
|
|
|
|
|
|
|
557,133 |
|
Capital expenditures |
|
|
19,111 |
|
|
|
13,541 |
|
|
|
6,901 |
|
|
|
|
|
|
|
39,553 |
|
The following table illustrates selected financial data for each segment as of and for the
nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
181,545 |
|
|
$ |
82,929 |
|
|
$ |
8,004 |
|
|
$ |
(14,389 |
) |
|
$ |
258,089 |
|
Intersegment revenue |
|
|
28,560 |
|
|
|
1,974 |
|
|
|
8,004 |
|
|
|
|
|
|
|
38,538 |
|
Eliminated intersegment revenue |
|
|
(6,351 |
) |
|
|
(34 |
) |
|
|
(8,004 |
) |
|
|
|
|
|
|
(14,389 |
) |
Income before income tax |
|
|
7,076 |
|
|
|
26,083 |
|
|
|
(19,305 |
) |
|
|
|
|
|
|
13,854 |
|
Income tax (expense) benefit |
|
|
(3,276 |
) |
|
|
(10,724 |
) |
|
|
14,000 |
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,800 |
|
|
|
15,359 |
|
|
|
(5,305 |
) |
|
|
|
|
|
|
13,854 |
|
Total assets |
|
|
417,567 |
|
|
|
142,778 |
|
|
|
5,262 |
|
|
|
|
|
|
|
565,607 |
|
Capital expenditures |
|
|
25,496 |
|
|
|
10,033 |
|
|
|
3,236 |
|
|
|
|
|
|
|
38,765 |
|
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business against certain current claims and legal actions. The Company
believes that the disposition of these matters will not have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows. Based on liability
expected to be incurred under an existing vendor contract and other legal proceedings, the Company
has recorded a contingent reserve of $844 at September 30, 2007.
13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands Except Per Share Amounts)
9. OTHER EVENTS
On August 15, 2007, the Company redeemed 100% of the principal outstanding balance of its 9
7/8% Senior Notes due 2011. The Company paid $4,239 exclusive of accrued and unpaid interest.
On October 23, 2007, the Company entered into a definitive Supply Agreement with a third party
to construct a long haul fiber facility that connects Alaska and the Pacific Northwest. The fiber
facility, which is comprised of both terrestrial and undersea elements, will originate in
Anchorage, Alaska and terminate in Florence, Oregon, where it will interconnect with diverse
facilities linked to Seattle and Portland. The Company expects that this fiber facility will be
available commercially in early 2009. The total cost of the system, including the undersea portions
of the project and the complementary terrestrial system work is estimated to be approximately $95
million, $86 of which is attributable to the Supply Agreement.
14
ITEM 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations
Forward Looking Statements and Analysts Reports
This Form 10-Q 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-Q under Managements
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):
|
|
|
our strongly competitive environment, which comprises national and local wireless
and wireline facilities-based competitors; |
|
|
|
|
our ability to complete, manage, integrate, market, maintain, and attract sufficient
customers to our recently announced long-haul fiber facility and our ability to develop
attractive integrated products and services making use of the facility; |
|
|
|
|
our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders; |
|
|
|
|
changes in revenue from Universal Service Funds (USFs); |
|
|
|
|
rapid technological developments and changes in the telecommunications industries; |
|
|
|
|
changes in revenue resulting from regulatory actions affecting intercarrier
compensation; |
|
|
|
|
regulatory limitations on our ability to change our pricing for communications
services; |
|
|
|
|
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 loss of customers; |
|
|
|
|
other unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps or natural disasters; |
|
|
|
|
the possible future unavailability of SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation, to our wireline subsidiaries; |
|
|
|
|
our ability to bundle our products and services; |
|
|
|
|
changes in the demand for our products and services; |
|
|
|
|
changes in general industry and market conditions and growth rates; |
|
|
|
|
changes in interest rates or other general national, regional or local economic
conditions; |
|
|
|
|
governmental and public policy changes; |
|
|
|
|
the continued availability of financing in the amounts, at the terms, and subject to
the conditions necessary to support our future business; |
|
|
|
|
the success of any future acquisitions; |
|
|
|
|
changes in accounting policies or practices adopted voluntarily or as required by
accounting principles generally accepted in the United States; and |
|
|
|
|
the matters described under Item 1ARisk Factors in our Annual Report on Form
10-K for the fiscal year ended December 31, 2006 or subsequently filed Forms 10-Q. |
15
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-Q
or our other reports not to occur as described. Except as otherwise
required by applicable securities laws, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events, changed
circumstances or any other reason after the date of this Form 10-Q.
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.
Introduction
As our Company and the industry have evolved, members of our management have re-evaluated the
way we manage our operations and how we measure success. The focus on bundling of services and the
recognition that individual product lines combine to represent a cohesive package to our customers
has resulted in a change in our segment reporting. These segments now focus on wireline and
wireless activities as combined product offerings. The following MD&A now classifies our offerings
within these segments while still providing information on how individual components of our
segments contribute to the whole. This 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-Q.
We generate revenue primarily through:
|
|
|
the provision of wireline services, including: |
|
|
|
local telephone services, which includes; |
|
|
|
basic local service to retail customers within our service areas, |
|
|
|
|
wholesale service to Competitive Local Exchange Carriers (CLECs), |
|
|
|
|
network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls, |
|
|
|
|
enhanced services, |
|
|
|
|
ancillary services, such as billing and collection, and |
|
|
|
|
universal service payments. |
|
|
|
Internet services; and |
|
|
|
|
interexchange network long-distance and data services. |
|
|
|
the provision of wireless services. |
In addition, we provide video entertainment services through our resale agreement with the
satellite operator, DISH Network.
Local Telephone We are the largest Local Exchange Carrier (LEC) in Alaska. Basic local
service is generally provided at a flat monthly rate and allows the user to place unlimited calls
within a defined local calling area. Access revenues are generated, in part, by billing
interexchange carriers for access to the LECs local network and its customers and, in part, by
billing the local customers themselves. Universal service revenues are a subsidy paid to rural LECs
to support the high cost of providing service in rural markets.
Changes in local revenue are largely attributable to changes in the number of access lines,
local service rates and minutes of use. Other factors can also impact revenue, including:
|
|
|
intrastate and interstate revenue settlement methodologies; |
|
|
|
|
authorized rates of return for regulated services; |
|
|
|
|
whether an access line is used by a business or consumer subscriber; |
|
|
|
|
intrastate and interstate calling patterns; |
|
|
|
|
customers selection of various local rate plan options; |
|
|
|
|
sales of special access and data services; |
16
|
|
|
selection of enhanced calling services, such as voice mail; and |
|
|
|
|
other subscriber usage characteristics. |
LECs have three basic tiers of customers:
|
|
|
consumer and business customers located in our local service areas that pay for
local phone service and a portion of network access; |
|
|
|
|
interexchange carriers that pay for access to long distance calling customers
located within our local service areas; and |
|
|
|
|
CLECs that pay for wholesale access to our network in order to provide
competitive local service on either a wholesale or UNE basis as prescribed under the
Telecommunications Act. |
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.
Our local service rates for end users are authorized by the RCA. Authorized rates are set by
the FCC and the RCA for interstate and intrastate access charges, respectively, and may change from
time to time.
Internet - We are the second largest provider of Internet access services in Alaska with over
56,000 customers. We offer dial-up and dedicated digital subscriber line (DSL) Internet access.
We are also a single source provider of advanced IP based private networks in Alaska.
Interexchange - We provide switched and dedicated long distance services to over 64,000
customers in Alaska and private line services to other carriers. The traffic from these customers
is carried over our owned or leased facilities.
Wireless - We are the second largest statewide provider of wireless services in Alaska,
currently serving over 143,000 subscribers. Our wireless network footprint covers over 562,000
residents, including all major population centers and highway and ferry corridors. We offer
wireless service primarily on our digital network known as code division multiple access (CDMA)
1xRTT, which provides customers with improved voice call quality, average mobile data speeds of
70-80kbps and a platform for the launch of enhanced services. We offer wireless broadband service
based on evolution data optimized (EV-DO) which enables high speed data connectivity with speeds
that burst up to 2mbps to our wireless markets in Anchorage, Fairbanks, Juneau and the North Slope.
We also maintain a time division multiple access (TDMA) wireless network for our customers who
have not yet upgraded to CDMA. We estimate that our CDMA service currently covers 83% of the state
of Alaskas population of approximately 670,000 residents.
Video Entertainment We provide video entertainment services on a resale basis through our
partnership with the satellite provider, DISH Network. The current agreement with the provider
became effective in August 2003 and will either be renegotiated or will terminate in December 2007.
Critical Accounting Policies and Accounting Estimates
Management is responsible for the financial statements herein and has evaluated the accounting
policies used in their preparation. Management believes these policies to be reasonable and
appropriate. Our significant accounting policies are described in Note 1, Description of Company
and Summary of Significant Accounting Policies, to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements. The following discussion identifies those accounting policies
that management believes are critical in the preparation of our financial statements, the judgments
and uncertainties affecting the application of those policies, and the possibility that materially
different amounts would be reported under different conditions or using different assumptions.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of commitments and
contingencies 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
17
related to the realizable value of accounts receivable, long-lived assets (in particular,
those assets accounted for under SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation), stock-based compensation, income taxes, network access revenue reserves and litigation
reserves. Actual results may differ from those estimates.
We use an allowance method to estimate the net realizable value of accounts receivable. As of
September 30, 2007, the allowance for doubtful accounts receivable was $8.5 million. Actual
collection results could vary significantly from this estimate.
Access revenue is recognized when 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
RCA within the intrastate jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These estimates are derived
from interim financial statements, available separations studies and the most recent information
available about achieved rates of return. These estimates are subject to adjustment in future
accounting periods as additional operational information becomes available. To the extent that
disputes arise over revenue settlements, our policy is to defer revenue collected until settlement
methodologies are resolved and finalized. At September 30, 2007, we had recorded liabilities of
$17.8 million related to our estimate of refundable access revenue. Actual results could vary from
this estimate.
We use the liability method of accounting for income taxes. Under the 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 it
is more likely than not that such deferred tax assets will not be realized. The cumulative
valuation allowance against deferred tax assets was $111.5 million as of September 30, 2007, which
represents 100% of all deferred tax assets. We will continue to assess the recoverability of
deferred tax assets and the related valuation allowance. To the extent we generate taxable income
in future periods, and it is determined that such valuation allowance is no longer required, the
tax benefit of the remaining deferred tax assets will be recognized at such time.
Our local telephone exchange operations 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, under SFAS No. 71,
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.
Effective January 1, 2003, we implemented higher depreciation rates for our regulated
telephone plant for the interstate jurisdiction, which we believe approximates the economically
useful lives of the underlying plant. As a result, we have recorded a regulatory asset under SFAS
No. 71 of $73.9 million and $65.7 million as of September 30, 2007 and December 31, 2006,
respectively, related to depreciation of the regulated telephone plant allocable to our intrastate
and local jurisdictions. If we were not following SFAS No. 71, these costs would have been charged
to expense as incurred. We also have a regulatory liability of $62.1 million and $61.5 million at
September 30, 2007 and December 31, 2006, respectively, related to accumulated removal costs on the
local exchange 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. SFAS No. 71
also requires revenue generated between regulated and non-regulated companies not be eliminated on
consolidation; these revenues totaled $28.5 million and $24.1 million for the nine months ended
September 30, 2007 and 2006, respectively. Non-regulated revenues incurred by our local telephone
exchange operations and our non-regulated operations are not accounted for under SFAS No. 71
principles.
Goodwill and indefinite-lived intangible assets are assessed for impairment on at least an
annual basis. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit
level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial
step requires us to determine the fair value of each reporting unit and compare it to the carrying
value, including goodwill, of such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds
its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is
then measured in the second step. We determined the fair value of each reporting unit for purposes
of this test primarily by using a discounted cash flow valuation technique. 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. At
September 30, 2007, we had recorded goodwill of $38.4 million applicable to our local telephone and
wireless segments and intangible assets of $21.6 million related primarily to our wireless segment,
of which none was considered impaired.
18
As of July 1, 2005, we adopted SFAS No. 123(R), which requires us to measure compensation cost
for all outstanding unvested share-based awards at fair value and recognize compensation over the
service period for awards expected to vest. The estimation of stock awards that will ultimately
vest requires judgment, and to the extent actual results differ from our estimates, such amounts
will be recorded as a cumulative adjustment in the period estimates are revised. We consider many
factors when estimating expected forfeitures, including types of awards, employee class, and
historical experience. Actual results may differ substantially from these estimates. As a result of
the adoption of SFAS No. 123(R), and the issuance of restricted stock, we recorded $1.8 million and
$2.0 million of stock-based compensation for each of the three month periods ended September 30,
2007 and 2006, respectively and $5.2 million and $5.3 million for each of the nine month periods
ended September 30, 2007 and 2006, respectively.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective as of the beginning of our 2008 fiscal
year. We do not expect the adoption of SFAS 157 will have a material impact on our financial
condition, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities including an amendment of FASB Statement No. 115, which permits entities
to choose to measure many financial instruments and certain other items at fair value. The
provisions of SFAS No. 159 are effective as of the beginning of our 2008 fiscal year. We are
currently determining whether fair value accounting is appropriate for any of our eligible items
and cannot estimate the impact, if any, which SFAS 159 will have on our financial condition,
results of operations or cash flows.
We are involved in various claims, legal actions, personnel matters and regulatory proceedings
arising in the ordinary course of business, and have recorded contingent liability and litigation
reserves of $0.8 million against certain expected contract losses, claims and legal actions as of
September 30, 2007. 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 beyond
the amounts already recorded. Estimates involved in developing these litigation reserves could
change as these claims, legal actions and regulatory proceedings progress.
Employees
As of September 30, 2007, we employed 984 regular full-time employees, 8 regular part-time
employees and 9 temporary employees. Of these employees, approximately 77% were represented by the
International Brotherhood of Electrical Workers, Local 1547 (IBEW). Management considers employee
relations to be good with both the represented and non-represented workforce.
RESULTS OF OPERATIONS
All amounts are discussed at the consolidated level after the elimination of affiliate revenue
and expense.
Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
Operating Revenue
Operating revenue increased $9.5 million, or 10.5%, for the three months ended September 30,
2007 compared to the three months ended September 30, 2006. Wireline revenue increased 6.3%, while
wireless revenue increased 18.2% compared to the corresponding period of 2006.
19
Wireline
The following table summarizes our consolidated wireline revenue by category:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Local network service |
|
$ |
19,285 |
|
|
$ |
20,371 |
|
Network access |
|
|
23,290 |
|
|
|
22,086 |
|
Deregulated and other |
|
|
6,054 |
|
|
|
5,405 |
|
|
|
|
|
|
|
|
Local telephone |
|
|
48,629 |
|
|
|
47,862 |
|
Internet |
|
|
7,986 |
|
|
|
6,544 |
|
Interexchange |
|
|
6,057 |
|
|
|
4,529 |
|
|
|
|
|
|
|
|
Total wireline revenue |
|
$ |
62,672 |
|
|
$ |
58,935 |
|
|
|
|
|
|
|
|
Local Telephone. Local telephone revenue, which consists of local network service, network
access, and deregulated and other revenue increased $0.8 million for the three months ended
September 30, 2007 compared to the same period in 2006. While we saw a decline in our local network
service, we had an offsetting increase in network access revenue and deregulated and other revenue.
The following table summarizes our local telephone access lines:
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Local telephone access lines |
|
|
|
|
|
|
|
|
Retail |
|
|
188,549 |
|
|
|
195,997 |
|
Wholesale and UNE lines |
|
|
43,087 |
|
|
|
63,134 |
|
|
|
|
|
|
|
|
Total local telephone access lines |
|
|
231,636 |
|
|
|
259,131 |
|
|
|
|
|
|
|
|
Consistent with the U.S. telecommunications industry trend, we experienced a loss of local
telephone access lines as customers migrated to broadband Internet services reducing demand for
second lines, migrated to cable telephony, or replaced landline service with wireless service. Our
primary competitor is deploying cable telephony and continues to switch its wholesale and UNE lines
over to its own network. We have seen wholesale and UNE lines decline to 43,087 on September 30,
2007, from 63,134 on September 30, 2006.
Local network service revenue decreased $1.1 million, or 5.3%, for the three months ended
September 30, 2007 compared to the three months ended September 30, 2006:
|
|
|
Revenue from retail lines dropped to $11.3 million from $11.5 million in the
prior year. Retail ARPU increased 1.9% over the prior year, driven by a mix shift
toward business lines and an increase in feature revenue. These increases were
offset by a 3.8% decline in retail local access lines. |
|
|
|
|
Revenue from wholesale and UNE lines declined by $0.8 million to $3.5 million
primarily driven by a 31.8% decline in lines offset in part by increased rates. |
Network access revenue is based on a regulated return on rate base and recovery of allowable
expenses associated with the origination and termination of toll calls for our retail and resale
customers. Network access revenue increased $1.2 million, or 5.5%, for the three months ended
September 30, 2007, compared to the same period in 2006. The increase was driven by positive
settlements with the National Exchange Carrier Association (NECA) and the Universal Service
Administrative Company (USAC) regarding our cost studies. Absent this type of settlement, network
access revenue would have decreased $1.7 million, compared to the same period in 2006. We expect
that network access revenue will decline as a component of local telephone revenue for the
foreseeable future due to the reduction in allowable expenses and the continued shift of voice
traffic to wireless networks.
20
Deregulated and other revenue increased $0.6 million or 12.0%. The increase is primarily the
result of a $0.5 million increase in non-eliminated intercompany rent billings.
Internet. Internet revenue increased $1.4 million, or 22.0%, for the three months ended
September 30, 2007 compared to the three months ended September 30, 2006, primarily as a result of
growth in data sales to businesses and DSL subscribers, which increased 10.8% to 46,239 at
September 30, 2007 from 41,744 at September 30, 2006. Also contributing to the increase was a
capacity exchange agreement with another carrier resulting in approximately $0.8 million in both
revenue and COGS. These increases were partially offset by a decline in our dial up customer base.
Interexchange. Interexchange revenue increased $1.5 million, or 33.7%, for the three months
ended September 30, 2007, compared to the three months ended September 30, 2006. Long distance
subscribers increased by 4.1% to 64,511 at September 30, 2007 from 61,984 at September 30, 2006.
The increase is attributable to $1.4 million of revenue earned from private line sales to a Lower
48 based carrier.
Wireless
Wireless revenue increased $5.7 million, or 18.2%, to $37.2 million for the three months ended
September 30, 2007 compared to $31.4 million for the three months ended September 30, 2006. This
increase is due primarily to the following:
|
|
|
growth in average subscribers of 12.7% to 142,866 from 126,731 for the three months
ended September 30, 2007 and 2006, respectively; |
|
|
|
|
an increase in quarterly average revenue per unit, or (ARPU), of 5.5% to $64.11
from $60.77 for the three months ended September 30, 2007 and 2006, respectively,
primarily as a result of increased plan revenue, feature revenue, wireless data
revenue, roaming revenue, regulatory surcharges and receipt of competitive eligible
telecommunications carriers (CETC) funding which added $10.89 and $9.82 to wireless
ARPU in the third quarter of 2007 and 2006, respectively; |
|
|
|
|
higher phone and accessory sales in the three months ended September 30, 2007
resulting in $2.5 million of handset revenue compared to $2.2 million for the three
months ended September 30, 2006; and |
|
|
|
|
higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $6.3 million from $5.5 million for the three
months ended September 30, 2007 and 2006, respectively. |
Operating Expense
Operating expense increased $6.9 million, or 9.3%, to $81.3 million for the three months ended
September 30, 2007, from $74.4 million for the three months ended September 30, 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, increased $2.7
million, or 6.2%, for the three months ended September 30, 2007. The increase is primarily
attributable to activity supporting our Internet service offerings including $1.0 million in ISP
access and circuit expense and $0.4 million in DSL COGS. Additionally, we saw a $0.9 million
increase in advertising expenses and an increase of $1.0 million in labor costs primarily
attributable to our performance based incentive compensation programs. 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.
21
Wireless
Wireless expense increased $3.0 million, or 18.2%, for the three months ended September 30,
2007 compared to the three months ended September 30, 2006. The increase is primarily attributable
to $1.9 million in costs associated with expanding our wireless footprint and a $0.9 million
increase in employee sales and service costs to support our growing customer base.
Depreciation and Amortization. Depreciation and amortization expense increased $1.1 million,
or 7.8%, for the three months ended September 30, 2007 compared to the three months ended September
30, 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.
Loss on Disposal of Assets. The loss on disposal of assets increased $0.1 million from
September 30, 2006 due to retirements in the current quarter arising from our continued process
improvement initiatives.
Other Income and Expense
Other expense increased by $0.4 million and was attributable to costs associated with the
redemption of our 9 7/8 Senior Notes due 2011.
Income Taxes
In the three months ended September 30, 2007, we generated taxable income which was offset by
net operating loss carry forwards. We did, however, incur an alternative minimum tax charge of $0.2
million for the same period. We have 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.
Net Income
The increase in net income is primarily a result of the factors discussed above.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Operating Revenue
Operating revenue increased $25.5 million, or 9.9%, for the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006. Wireline revenue increased 3.5%, while
wireless revenue increased 23.3% compared to the corresponding period in 2006.
Wireline
The following table summarizes our consolidated wireline revenue by category:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Local network service |
|
$ |
58,728 |
|
|
$ |
60,427 |
|
Network access |
|
|
67,848 |
|
|
|
68,205 |
|
Deregulated and other |
|
|
16,873 |
|
|
|
14,991 |
|
|
|
|
|
|
|
|
Local telephone |
|
|
143,449 |
|
|
|
143,623 |
|
Internet |
|
|
22,768 |
|
|
|
18,619 |
|
Interexchange |
|
|
15,192 |
|
|
|
12,952 |
|
|
|
|
|
|
|
|
Total wireline revenue |
|
$ |
181,409 |
|
|
$ |
175,194 |
|
|
|
|
|
|
|
|
22
Local Telephone. Local telephone revenue, which consists of local network service, network
access, and deregulated and other revenue decreased $0.2 million, or 0.1%, for the nine months
ended September 30, 2007 compared to the same period in 2006. While we saw a decline in our local
network service and access revenue, we had an offsetting increase in deregulated and other revenue.
Consistent with the U.S. telecommunications industry trend, we experienced a loss of local
telephone access lines as customers migrated to broadband Internet services reducing demand for
second lines, migrated to cable telephony, or replaced landline service with wireless service. Our
primary competitor is deploying cable telephony and continues to switch its wholesale and UNE lines
over to its own network. We have seen wholesale and UNE lines decline to 43,087 on September 30,
2007, from 63,134 on September 30, 2006.
Local network service revenue decreased $1.7 million, or 2.8%, for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006:
|
|
|
Revenue from retail lines remained at $34.2 million for both 2007 and 2006. Retail
ARPU increased 2.7% over the prior year, driven by a mix shift toward business lines
and an increase in feature revenue. This increase was offset by a 3.8% decline in
retail local access lines. |
|
|
|
|
Revenue from wholesale and UNE lines declined by $2.2 million to $11.2 million
primarily driven by a 31.8% decline in lines, offset in part by increased rates. |
Network access revenue is based on a regulated return on rate base and recovery of allowable
expenses associated with the origination and termination of toll calls for our retail and resale
customers. Network access revenue decreased $0.4 million, or 0.5%, for the nine months ended
September 30, 2007 compared to the same period in 2006. This decrease was driven by a reduction in
allowable expenses and the continued shift of voice traffic to wireless networks, offset by
positive settlements of $3.5 million with NECA and $1.9 million with USAC regarding our cost
studies. We experienced similar offsetting settlements in 2006. We expect that network access
revenue will decline as a component of local telephone revenue for the foreseeable future.
Deregulated and other revenue increased $1.9 million or 12.6%. The increase is primarily the
result of an increase of $1.0 million in voice mail revenue related to a large customer contract
and a $1.1 million increase in non-eliminated intercompany rent billings.
Internet. Internet revenue increased $4.1 million, or 22.3%, for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006, primarily as a result of
growth in data sales to businesses and DSL subscribers, which increased 10.8% to 46,239 at
September 30, 2007 from 41,744 at September 30, 2006. Also contributing to the increase was a
capacity exchange agreement with another carrier resulting in approximately $1.6 million in both
revenue and COGS and a $0.7 million increase in revenue generated from our terrestrial fiber.
Interexchange. Interexchange revenue increased $2.2 million, or 17.3%, for the nine months
ended September 30, 2007 compared to the nine months ended September 30, 2006. Long distance
subscribers increased by 4.1% to 64,511 at September 30, 2007 from 61,984 at September 30, 2006.
The increase is also attributable to $1.4 million of revenue earned from private line sales to a
Lower 48 based carrier.
Wireless
Wireless revenue increased $19.3 million, or 23.3%, to $102.2 million for the nine months
ended September 30, 2007 compared to $82.9 million for the nine months ended September 30, 2006.
This increase is due primarily to the following:
|
|
|
growth in average subscribers of 14.1% to 139,444 from 122,195 for the nine months
ended September 30, 2007 and 2006, respectively; |
|
|
|
|
an increase in quarterly average ARPU of 6.7% to $62.11 from $58.19 for the nine
months ended September 30, 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
$10.36 and $9.37 to wireless ARPU for the nine months ended September 30, 2007 and 2006,
respectively;
|
23
|
|
|
higher phone and accessory sales in the nine months ended September 30, 2007
resulting in $6.8 million of handset revenue compared to $5.8 million for the nine
months ended September 30, 2006; and |
|
|
|
|
higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $14.0 million from $11.0 million for the nine
months ended September 30, 2007 and 2006, respectively. |
Operating Expense
Operating expense increased $15.1 million, or 6.8%, to $236.1 million for the nine months
ended September 30, 2007, from $221.0 million for the nine months ended September 30, 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 increased $7.4
million, or 5.8%, for the nine months ended September 30, 2007. The increase is primarily the
result of activity supporting our Internet service offerings including: $2.1 million in ISP access
and circuit expense, a $1.1 million increase in advertising expenses and $1.2 million in DSL COGS.
Additionally, we saw a $0.9 million increase in state and federal surcharges and $1.1 million in
expenses associated with CPE contracts during the year. These expense increases 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. Also, in 2006 we benefited from a $1.0
million vendor credit for services provided in prior years.
Wireless
Wireless expense increased $8.0 million, or 17.6%, for the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006. Major components include: an increase of
$1.2 million in handset, accessory and data content expense; $5.3 million in network costs
associated with an expanded wireless footprint; and a $1.8 million increase in employee sales and
service costs to support our growing customer base.
Depreciation and Amortization. Depreciation and amortization expense increased $0.7 million,
or 1.5%, for the nine months ended September 30, 2007 compared to the nine months ended September
30, 2006. The change is due to an increase in the depreciable asset base partially offset by a
number of asset classes reaching their maximum depreciable lives.
Loss on Disposal of Assets. The loss on disposal of assets decreased $1.0 million from
September 30, 2006 due to mass retirements in the prior year arising from our process improvement
initiatives.
Other Income and Expense
Other income and expense decreased $1.3 million in the nine months ended September 30, 2007
compared to the nine months ended September 30, 2006. The decline is primarily attributable to a
number of large prior year non-recurring transactions. These transactions included a $9.7 million
loss on the extinguishment of debt, offset by a $6.7 million gain on the liquidation of the Rural
Telephone Bank, and a $2.0 million gain on the purchase of the Alaska terrestrial assets from Crest
Communications, LLC.
Income Taxes
In the nine months ended September 30, 2007, we generated taxable income which was offset by
net operating loss carry forwards. We did, however, incur an alternative minimum tax charge of $0.3
million for the same period. We have 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.
Net Income
The increase in net income is primarily a result of the factors discussed above.
24
LIQUIDITY AND CAPITAL RESOURCES
Sources
We have satisfied our cash requirements in the first three quarters of 2007 for operations,
capital expenditures and debt service primarily through internally generated funds. For the nine
months ended September 30, 2007, our net cash flows provided by operating activities were $77.7
million. At September 30, 2007, we had approximately $23.7 million in net working capital,
approximately $41.8 million in cash and cash equivalents and $2.6 million in restricted cash. As of
September 30, 2007, we had $45.0 million of remaining capacity under our revolving credit facility,
representing 100% of available capacity.
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. We have entered
into a series of interest swap agreements that have effectively hedged London Inter-Bank Offered
Rate (LIBOR) on our entire term loan.
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 has required significant capital. The implementation of our interexchange network
and data services strategy is also capital intensive. New capital acquisition for 2007 totaled
$39.6 million of which $27.4 million was expended on recurring maintenance capex requirements; $8.6
million was expended on wireless footprint expansion and capacity augmentation in the major tourist
corridors where we receive a seasonal influx of visitors during the summer months; and $3.5 million
was expended on the construction of a long haul fiber facility which once complete will provide
telecommunication connectivity between the Lower 48 states and Alaska. We intend to fund future
capital expenditures, including our long haul fiber build to the Lower 48 states which we estimate
will cost approximately $95 million, with cash on hand; through internally generated cash flows;
borrowings under our revolving credit facility; and incremental debt.
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.
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. In August 2007, we paid
$4.2 million, exclusive of accrued interest, to redeem the final $4.0 million outstanding of our 9
7/8% senior unsecured notes at their first call date.
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 30, 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 October 26, 2007 of approximately 42.8 million shares, and
our current dividend of $0.86 per share, our current annual dividend commitment is $36.8 million.
Dividends on our common stock are not cumulative.
We believe that we will have sufficient cash provided by operations, and available borrowing
capacity under our revolving credit facility and our 2005 senior 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.
25
Outlook
We expect that, overall, the demand for telecommunications services in Alaska will grow,
particularly as a result of:
|
|
|
increasing demand for wireless voice and data services following the launch of
our CDMA 1xRTT network and our deployment of CDMA EV-DO services; |
|
|
|
|
growth in demand for DSL and Internet access services due to higher business and
consumer bandwidth needs; |
|
|
|
|
increasing demand for private network services by government and business
customers on a statewide basis on either a circuit switched or IP basis; and |
|
|
|
|
our committed $95 million investment in long haul fiber connectivity between the
Lower 48 and Alaska. |
We believe that we will be able to capitalize on this demand through our diverse service
offerings on our owned circuit switched and IP facilities; new sales and marketing initiatives
directed toward basic and enhanced voice, and data services; our ability to provide customers an
integrated bundle of telecommunication services including local telephone, wireless, Internet, long
distance, messaging and video entertainment; and demand from Lower 48 based carriers, government
agencies, and large enterprise customers with a presence in Alaska, for long haul fiber
connectivity from the Lower 48 to Alaska that provides route and carrier diversity, the benefits of
the latest technology, the longest available cable life of 25 years, and the end to end solutions
that our in state network is best placed to deliver.
Consistent with the U.S. telecommunications industry, we continue to experience losses in
local telephone access lines as customers cancel second lines, replace wireline services with
wireless, and migrate to cable telephony. Our primary wholesale and UNE customer has announced
plans to migrate most of its customers to its own cable telephony plant during the next three years
and has begun to provide service in a number of our more rural markets that were not previously
subject to competition. We anticipate that these local access line loss trends will continue.
The telecommunications industry is extremely competitive, and we expect competition to
intensify in the future. As an Incumbent LEC (ILEC), we face competition from resellers local
providers who lease our UNEs and from providers of local telephone services over separate
facilities. Moreover, we anticipate that existing and emerging wireless technologies will
increasingly compete with LEC services. Similarly, we expect local and interexchange service
competition will continue to come from cable television providers and voice over IP providers. In
wireless services, we currently compete with at least one other wireless provider in each of our
wireless service areas. In the highly competitive business for Internet access services, we
currently compete with a number of established online service companies, interexchange carriers and
cable companies. In the interexchange market, we face competition from two major interexchange
providers and believe we currently have less than 5% of total revenue in Alaska.
The telecommunications industry is subject to continuous technological change. We expect that
new technological developments in the future will generally serve to enhance our ability to provide
service to our customers. However, these developments may also increase competition or require us
to make significant capital investments to maintain our leadership position in Alaska.
Recent Developments
On October 23, 2007, we entered into a definitive Supply Agreement with Tyco
Telecommunications, a business unit of Tyco Electronics (Tyco), to construct a long haul fiber
facility that connects Alaska and the Pacific Northwest. The fiber facility, which is comprised of
both terrestrial and undersea elements, will originate in Anchorage, Alaska and terminate in
Florence, Oregon, where it will interconnect with diverse facilities linked to Seattle and
Portland. Connectivity between Anchorage and Homer, Alaska will be provided by diverse terrestrial
routes plus an undersea interlink in Alaskas Cook Inlet from Anchorage to Nikiski. The major
undersea portion of the system will be comprised of a 4 fiber pair system connecting Homer, with
the mid-coastal Oregon town of Florence. We expect that this fiber facility will be available
commercially in early 2009. We estimate the total cost of the system, including the undersea
portions of the project and the complementary terrestrial system work to be approximately $95
million, $86 million of which is attributable to the Supply Agreement with Tyco. We expect to fund
the construction of the fiber facility as and when payments become due under the Supply Agreement
with our current cash on hand, available $45 million revolving credit facility, future cash
generated from operations and incremental debt. We cannot assure you; however, that our investment
in this fiber facility will generate
26
sufficient revenue at acceptable cost, and our success is subject to various risks and
uncertainties, many of which are outside of our control. Please see Item 1ARisk Factors for
further information on these risks and uncertainties.
On May 1, 2007 the Federal-State Joint Board on Universal Service recommended to the FCC an
interim, emergency cap on the amount of high-cost support that CETCs may receive for each state
based on the average level of CETC support distributed in that state in 2006. We are waiting for
FCC action on this Joint Board recommendation prior to completing our analysis of its impacts on
the Company.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2007, our 2005 senior credit facility was outstanding. This on-balance
sheet variable interest rate financial instrument exposes 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 the credit facility.
In order to manage this risk, we have entered into a series of floating-to-fixed interest rate swap
agreements that effectively fix LIBOR on the entire outstanding balance on the 2005 senior credit
facility. The term of these swap agreements ranges from December 2009 through December 2011.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures, as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and
procedures are effective at the reasonable assurance level to ensure that information we are
required to disclose in reports that we file or submit under the Securities Exchange Act of 1934
(i) is recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are
designed to provide reasonable assurance that such information is accumulated and communicated to
our management. Our disclosure controls and procedures include components of our internal control
over financial reporting. Managements assessment of the effectiveness of our disclosure controls
and procedures is expressed at the level of reasonable assurance because a control system, no
matter how well designed and operated, can provide only reasonable, not absolute, assurance that
the control systems objectives will be met.
Changes in Internal Control over Disclosure and Reporting
There were no changes to the Companys internal control over financial reporting during the
quarter ended September 30, 2007, that materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are involved in various claims, legal actions, personnel matters and regulatory proceedings
arising in the ordinary course of business. 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.
ITEM 1A. Risk Factors
Other than as described below, there have been no material changes to the Companys risk
factors as previously disclosed in Item 1A Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 and subsequent Quarterly Reports on Form 10-Q. The risk
factors described below should be read in conjunction with those previously disclosed risk factors.
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We recently announced entering into an agreement to build a undersea fiber facility between Alaska
and the Lower 48. We may not successfully or timely construct and integrate the fiber facility
into our existing network, and we may be unable to operate it profitably.
Realization of the anticipated benefits of our fiber facility will depend on our ability to
successfully integrate it into our existing businesses and operations and attract significant
customers to our fiber network. We will 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 facility by the first quarter of 2009 and at
expected costs of approximately $95 million; |
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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 the facility; |
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attract a sufficient volume of traffic on the fiber facility to make it profitable; |
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offer products and services that use the fiber facility that are attractive to our
target customers; |
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secure customers ahead of completion of the construction of the fiber facility; |
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preserve key customer, supplier and other important relationships and resolve
potential conflicts that may arise; and |
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obtain financing for the investment on acceptable terms and generate sufficient
revenues to maintain increased indebtedness. |
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 the fiber facility.
We will incur significantly more debt to support construction of the fiber facility, or we may be
unable to secure the financing required, which could require us to curtail or suspend the project.
We estimate that upfront capital expenditures required to construct the fiber facility will be
approximately $95 million, which we would seek to finance, in part, through additional debt. We
cannot assure you that any additional financing will be available on acceptable terms, or at all.
If we fail to obtain financing, we could be required to curtail our current plans. Conversely, if
we successfully obtain sufficient financing, current risks related to our substantial debt,
including our ability to service the debt and adhere to financial covenants attached to our debt,
would intensify.
We may not be able to generate sufficient cash flow from operation of the fiber facility to meet
our increased debt service obligations and costs of operations and maintenance.
Our principal sources of liquidity are cash flow generated from operations and borrowings
under our revolving credit facility. We estimate that the annual cash costs following
construction, inclusive of financing costs, would amount to $10 million annually. Our ability to
generate cash flows from operation of the new fiber facility and make payments on our additional
debt and operational and maintenance expense associated with the facility, will depend on our
future financial performance.
A failure to generate sufficient cash flows from operation of our fiber facility, or changes
in economic conditions, increased competition, rapid development of new technologies, or difficulty
in maintaining the current complex technology comprising the fiber facility, or other events, could
increase our need for additional or alternative sources of liquidity. If we are unable to obtain
the liquidity we require, we will be forced to adopt an alternative strategy that may include
actions such as reducing or eliminating dividend payments, acquisitions and capital expenditures.
We may also need to sell significant assets, restructure or refinance our debt, or seek equity
capital. We cannot assure you that any of these alternative strategies could be consummated on
satisfactory terms, if at all, or that they would yield sufficient funds to pay additional ongoing
expense as a result of our investment and its financing.
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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 maintains of the underlying data transport
technology, and its associated costs, than we do. These competitors may adopt more aggressive
pricing policies than we anticipate or offer customers more attractive terms than we can. We expect
price competition to greatly increase as we deploy our fiber facility. We cannot, however, predict
with any certainty our competitors response to our entry into this market nor the prevailing
market prices that will result.
If the market opportunity for our fiber facility is smaller than we believe it is, our returns may
be adversely affected and our overall business may suffer.
We estimate the current addressable market to be approximately $200 million for our proposed
fiber facility. We cannot assure you, however, that this number is correct. We have generally
estimated the volume of traffic carried by our competitors currently and have further estimated
market growth, which may occur upon deployment of our fiber facility and over time, as the demand
for bandwidth generally increases. Our estimations are based on many assumptions that may
ultimately be incorrect. If our estimates of the size of the potential market or the number of
enterprise and carrier customers that may use our fiber facility prove to be incorrect, the market
opportunity for our fiber facility may be smaller than we believe it is. In that event, our
prospects for generating revenue may be adversely affected, and our business may suffer.
Deploying a new submarine fiber facility may subject us to claims by another supplier that we have
a contractual obligation to acquire a substantial amount of additional capacity from that supplier.
In the past, we have committed to and completed large, scheduled purchases of a substantial
amount of fiber capacity from another supplier under a master purchase agreement. From time to
time, we have interpreted terms of this agreement differently from this supplier, including which
provisions and version of the contract, if any, is controlling. This has led to a history of disagreements. We
believe this supplier may claim that the operation of our new fiber facility triggers certain
purchase obligations in our agreement, and it may pursue a claim against us.
We cannot, however, predict whether this supplier will make any claim against us. If it does,
we would vigorously defend ourselves, and we would assert any and all counterclaims available to
us. In doing so, however, we would incur substantial legal expenses, and we may not ultimately
prevail. If we are found to be in breach of an obligation, we could be forced to make purchases
beyond our needs or be ordered to pay monetary damages, which may have a material
adverse effect on our financial condition, results of operations and cash flows.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Working capital restrictions and other limitations on the payment of dividends
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 the payment
of dividends. Such credit facility also requires that we maintain certain financial ratios.
In addition, our board of directors may, in its absolute discretion, amend or repeal our
dividend policy which may result in the decrease or discontinuation of dividends. 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 Delaware law or other
applicable law, and other factors that our board of directors may deem relevant.
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ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Our Board of Directors has approved an amended compensation plan for independent directors
effective January 1, 2008. Under the amended compensation plan, we will provide cash compensation
to the independent directors consisting of a $20,000 annual retainer payable in quarterly
installments, plus additional annual retainers of $5,000 to the chair of the Audit Committee and
$10,000 to the Lead Director. The independent directors will also receive quarterly grants of 500
shares of our common stock or equivalents to be granted on the last trading day of each quarter,
which vest immediately.
In addition, our directors will continue to be paid $1,500 ($750 for telephonic attendance) for
each board of directors and/or committee meeting attended in person, except for audit committee
meetings. The audit committee members will continue to be paid $2,500 for each audit committee
($1,250 for telephonic attendance).
Independent directors may elect to receive all or a portion of their cash retainer and meetings
fees in common stock or equivalents. The stock based compensation component of directors
compensation is provided under the Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Stock Compensation Plan.
On November 7, 2007,
we executed an amended and restated employment agreement with Leonard Steinberg, our Vice President, General Counsel and Corporate Secretary. The restated agreement provides for a five-year employment period comprising a minimum annual base salary of $220,000 and a target annual cash incentive payment
equal to his base salary, subject to company and individual performance. The agreement provides
severance benefits to Mr. Steinberg in the event he is terminated without cause or
otherwise terminates his employment for good reason, as defined in the agreement.
The cash severance benefits provided to Mr. Steinberg comprises an amount equal to one times (1x) his annual base
salary plus one times (1x) his annual target cash incentive. In addition, the company is
required to provide relocation expenses of up to $50,000 and reimbursement for the cost of
continuing health insurance under COBRA for the twelve (12) months following termination of
employment. In addition, any outstanding shares of restricted stock or equivalent units subject
to performance acceleration provisions held by Mr. Steinberg prior to termination shall vest
ratably, if the company achieves its performance goals during the subsequent 12-month
period following Mr. Steinbergs termination, to the extent his employment period coincides
with the performance period giving rise to the vesting event. Further, in the event
Mr. Steinberg is terminated without cause or otherwise terminates his employment for good reason
in connection with a change of control of the company, in addition to the foregoing severance
benefits, any and all equity compensation granted to Mr. Steinberg, including restricted stock,
equivalent units, and options, will immediately vest.
ITEM 6. Exhibits
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31.1
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Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of David Wilson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
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32.1
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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. |
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32.2
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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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.
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Date: November 9, 2007 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
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/s/ Liane Pelletier
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Liane Pelletier |
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Chief Executive Officer,
Chairman of the Board and President |
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/s/ David Wilson
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David Wilson |
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Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer) |
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