e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2009
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
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(I.R.S. Employer |
of Incorporation or Organization)
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes o 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.
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o |
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Smaller Reporting Company o |
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(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
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 23, 2009, was 44,395,067.
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Page |
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Number |
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PART I. Financial Information |
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Item 1. Financial Statements: |
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3 |
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4 |
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5 |
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6 |
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7 |
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17 |
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27 |
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27 |
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28 |
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28 |
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28 |
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29 |
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29 |
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30 |
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30 |
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31 |
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EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
(Unaudited, In Thousands except Per Share Amounts)
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September 30, |
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December 31, |
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2009 |
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2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
7,127 |
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$ |
1,326 |
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Restricted cash |
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5,990 |
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20,517 |
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Accounts receivable-trade, net of allowance of $6,984 and $5,912 |
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37,919 |
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40,433 |
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Materials and supplies |
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9,689 |
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9,404 |
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Prepayments and other current assets |
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6,573 |
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6,515 |
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Deferred income taxes |
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13,933 |
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21,145 |
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Total current assets |
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81,231 |
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99,340 |
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Property, plant and equipment |
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1,425,035 |
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1,392,951 |
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Less: accumulated depreciation and amortization |
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(945,306 |
) |
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(891,899 |
) |
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Property, plant and equipment, net |
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479,729 |
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501,052 |
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Non-current investments |
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855 |
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1,005 |
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Goodwill |
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8,850 |
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8,850 |
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Intangible assets, net |
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24,049 |
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24,118 |
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Debt issuance costs |
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6,614 |
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8,554 |
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Deferred income taxes |
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82,234 |
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105,480 |
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Deferred charges and other assets |
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648 |
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452 |
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Total assets |
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$ |
684,210 |
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$ |
748,851 |
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Liabilities and Stockholders Equity (Deficit) |
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Current liabilities: |
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Current portion of long-term obligations |
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$ |
883 |
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$ |
666 |
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Accounts payable, accrued and other current liabilities |
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59,894 |
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74,028 |
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Advance billings and customer deposits |
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9,736 |
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10,399 |
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Total current liabilities |
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70,513 |
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85,093 |
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Long-term obligations, net of current portion |
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537,228 |
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538,975 |
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Other deferred credits and long-term liabilities |
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30,467 |
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98,693 |
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Total liabilities |
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638,208 |
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722,761 |
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Commitments and contingencies |
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Stockholders equity (deficit): |
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Common stock, $.01 par value; 145,000 authorized, 44,393 and
43,719 issued and outstanding, respectively |
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444 |
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437 |
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Additional paid in capital |
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207,154 |
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231,813 |
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Accumulated deficit |
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(147,082 |
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(188,130 |
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Accumulated other comprehensive loss |
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(14,514 |
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(18,030 |
) |
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Total stockholders equity |
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46,002 |
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26,090 |
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Total liabilities and stockholders equity |
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$ |
684,210 |
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$ |
748,851 |
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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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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Operating revenues |
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91,262 |
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91,285 |
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263,439 |
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264,267 |
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Operating expenses: |
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Cost of services and sales |
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35,318 |
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35,048 |
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101,886 |
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98,745 |
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Selling, general and administrative |
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21,895 |
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25,402 |
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66,846 |
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72,630 |
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Depreciation and amortization |
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23,724 |
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18,790 |
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59,784 |
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54,391 |
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Total operating expenses |
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80,937 |
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79,240 |
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228,516 |
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225,766 |
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Operating income |
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10,325 |
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12,045 |
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34,923 |
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38,501 |
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Other income and expense: |
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Interest expense |
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(9,642 |
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(8,886 |
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(28,284 |
) |
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(25,258 |
) |
Interest income |
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30 |
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532 |
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81 |
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1,541 |
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Other |
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(255 |
) |
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(255 |
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Total other income and expense |
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(9,612 |
) |
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(8,609 |
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(28,203 |
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(23,972 |
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Income before income tax expense |
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713 |
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3,436 |
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6,720 |
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14,529 |
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Income tax expense |
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(388 |
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(1,591 |
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(3,018 |
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(6,275 |
) |
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Income before extraordinary item |
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325 |
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1,845 |
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3,702 |
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8,254 |
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Extraordinary item, net of taxes |
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37,346 |
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37,346 |
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Net income |
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$ |
37,671 |
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$ |
1,845 |
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$ |
41,048 |
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$ |
8,254 |
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Net income per share: |
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Basic |
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Income on continuing operations |
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$ |
0.01 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.19 |
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Extraordinary item |
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0.84 |
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0.85 |
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Net income |
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$ |
0.85 |
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$ |
0.04 |
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$ |
0.93 |
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$ |
0.19 |
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Weighted average shares outstanding |
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44,354 |
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43,603 |
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44,100 |
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43,302 |
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Diluted |
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Income on continuing operations |
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$ |
0.01 |
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$ |
0.04 |
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$ |
0.08 |
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$ |
0.19 |
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Extraordinary item |
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0.82 |
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0.83 |
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Net income |
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$ |
0.83 |
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$ |
0.04 |
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$ |
0.91 |
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$ |
0.19 |
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Weighted average shares outstanding |
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45,136 |
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44,428 |
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44,873 |
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44,306 |
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See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Nine months Ended September 30, 2009
(Unaudited, In Thousands except Per Share Amounts)
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Accumulated |
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Additional |
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Other |
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Common |
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Paid in |
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Accumulated |
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Comprehensive |
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Stockholders |
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Shares |
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Stock |
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Capital |
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Deficit |
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Loss |
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Equity |
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Balance, December 31, 2008 |
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43,719 |
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$ |
437 |
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$ |
231,813 |
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$ |
(188,130 |
) |
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$ |
(18,030 |
) |
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$ |
26,090 |
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Total comprehensive income |
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41,048 |
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3,516 |
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|
44,564 |
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Dividends declared |
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(28,640 |
) |
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(28,640 |
) |
Stock-based compensation |
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3,609 |
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3,609 |
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Tax benefit of convertible bond
call options |
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1,085 |
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1,085 |
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Surrender of 259 shares to cover
withholding
taxes on stock-based compensation |
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(1,823 |
) |
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(1,823 |
) |
Issuance of shares of common stock
pursuant to stock plans, $.01 par |
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674 |
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7 |
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1,110 |
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1,117 |
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Balance, September 30, 2009 |
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44,393 |
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|
$ |
444 |
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$ |
207,154 |
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$ |
(147,082 |
) |
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$ |
(14,514 |
) |
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$ |
46,002 |
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See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
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Nine Months Ended |
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September 30, |
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2009 |
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|
2008 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
41,048 |
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$ |
8,254 |
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Adjustments to reconcile net income to net cash provided (used) by operating activities: |
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Depreciation and amortization |
|
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59,784 |
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54,391 |
|
Gain on extraordinary item, net of taxes |
|
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(37,346 |
) |
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Amortization of debt issuance costs and original issue discount |
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5,205 |
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|
3,640 |
|
Stock-based compensation |
|
|
3,416 |
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|
5,618 |
|
Deferred income taxes |
|
|
3,018 |
|
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|
6,331 |
|
Provision for uncollectible accounts |
|
|
3,632 |
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|
3,616 |
|
Other non-cash expenses |
|
|
1,242 |
|
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|
1,115 |
|
Changes in operating assets and liabilities |
|
|
(6,992 |
) |
|
|
(13,766 |
) |
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|
|
|
|
|
|
Net cash provided by operating activities |
|
|
73,007 |
|
|
|
69,199 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(37,258 |
) |
|
|
(107,900 |
) |
Change in unsettled construction and capital expenditures |
|
|
(9,450 |
) |
|
|
7,933 |
|
Change in unsettled acquisition costs |
|
|
(250 |
) |
|
|
|
|
Net change in short-term investments |
|
|
|
|
|
|
790 |
|
Net change in restricted accounts |
|
|
14,527 |
|
|
|
(54,835 |
) |
Other investing activities |
|
|
150 |
|
|
|
(1,350 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(32,281 |
) |
|
|
(155,362 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(30,185 |
) |
|
|
(2,676 |
) |
Proceeds from the issuance of long-term debt |
|
|
24,500 |
|
|
|
125,000 |
|
Purchase of call options |
|
|
|
|
|
|
(20,431 |
) |
Sale of common stock warrants |
|
|
|
|
|
|
9,852 |
|
Debt issuance costs |
|
|
|
|
|
|
(4,309 |
) |
Payment of cash dividend on common stock |
|
|
(28,534 |
) |
|
|
(27,901 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(1,823 |
) |
|
|
(3,321 |
) |
Proceeds from issuance of common stock |
|
|
1,117 |
|
|
|
944 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(34,925 |
) |
|
|
77,158 |
|
|
|
Change in cash and cash equivalents |
|
|
5,801 |
|
|
|
(9,005 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,326 |
|
|
|
35,208 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
7,127 |
|
|
$ |
26,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
28,371 |
|
|
$ |
23,897 |
|
Income taxes paid |
|
$ |
(669 |
) |
|
$ |
417 |
|
|
|
|
|
|
|
|
|
|
Supplemental Non-cash Transactions: |
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
890 |
|
|
$ |
1,359 |
|
Dividend declared, but not paid |
|
$ |
9,555 |
|
|
$ |
9,386 |
|
Asset retirement obligation |
|
$ |
291 |
|
|
$ |
91 |
|
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. and Subsidiaries (we, our, us, the Company,
ACS Group or ACS), a Delaware corporation, provides wireline, wireless and other
telecommunications and network services to consumer, business and enterprise customers in the State
of Alaska and beyond using its statewide and interstate telecommunications network. The Company was
formed in October of 1998 for the purpose of acquiring and operating telecommunications properties.
The accompanying consolidated financial statements for the Company represent the consolidated
financial position, results of operations and cash flows of ACS Group and the following wholly
owned subsidiaries:
|
|
Alaska Communications Systems Holdings, Inc. (ACS Holdings) |
|
|
|
ACS of Alaska, Inc. (ACSAK) |
|
|
|
ACS of the Northland, Inc. (ACSN) |
|
|
|
ACS of Fairbanks, Inc. (ACSF) |
|
|
|
ACS of Anchorage, Inc. (ACSA) |
|
|
|
ACS Wireless, Inc. (ACSW) |
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
ACS Messaging, Inc. (ACSM) |
|
|
|
ACS Cable Systems, Inc. (ACSC) |
Basis of Presentation
The consolidated financial statements and footnotes included in this Quarterly Report on 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, 2008. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of America (GAAP)
have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange
Commission (SEC). However, the Company believes the disclosures made are adequate to make the
information presented not misleading.
In the opinion of management, the financial statements contain all normal, recurring
adjustments necessary to present fairly the consolidated financial position, results of operations
and cash flows for all periods presented. The results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the results of operations which might be
expected for the entire year or any other interim periods.
Significant Changes in Accounting Practice, Reclassifications and Adjustments
Certain reclassifications have been made to the 2008 and previously reported 2009 financial
statements to conform to the current reporting format. The most significant reclassifications in
the quarter are related to the Companys discontinuance of regulatory accounting under Accounting
Standards Codification (ASC) Topic 980 Regulated Operations (ASC 980). As a result of the
approval of a petition submitted to the Federal Communications Commission (FCC) to be
re-characterized from a rate-of-return carrier to a price-cap carrier, the Company ceased
application of regulatory accounting effective July 1, 2009. See Note 3 Discontinuance of
Regulatory Accounting for a detailed description of these changes.
Restricted Cash
In the nine months ended September 30, 2009, the Company released $8,578 from escrow
representing funds held pending achievement by Tyco Telecommunications (Tyco) of milestones set
forth in the Companys agreement with Tyco for the construction of its Alaska Oregon Network
(AKORN®) fiber optic cable system; settled an outstanding claim against the Crest Communications
Corporation (Crest) selling shareholders and released $4,250 from escrow; released $1,003 upon
the expiration of a contract liability with the State of Alaska; and released $723 from escrow to
apply toward a capital project funded by the Crest selling shareholders.
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 (Cont.)
As of September 30, 2009, $4,790 remained in escrow for the indemnification of the Company in
the event of breach by Crest of certain obligations, representations and warranties specified in
the Companys agreement to purchase Crest. The funds are expected to be released on April 30, 2010.
The remaining balance of $1,200 is held in certificates of deposit as required under the terms
of certain contracts to which the Company is a party. When the restrictions are lifted, the Company
will transfer these funds back into its operating accounts.
Recently Adopted Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) 107-1 and Accounting Principals Board (APB) 28-1 Interim Disclosures about Fair Value of
Financial Instruments (ASC Topic 825 Subtopic 10) requiring companies to disclose the fair value of
financial instruments in interim financial reports. The Company adopted the provisions of this FSP
beginning with the quarter ending September 30, 2009. The disclosure required by this FSP is
included in Note 4 Fair Value Measurements.
Also in April 2009, the FASB issued FSP 115-2 and 124-2 Recognition and Presentation of
Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities (ASC Topic 320
Subtopic 10) requiring additional disclosure related to the impairment of certain debt and equity
securities. The Company adopted the provisions of this FSP with the quarter ending September 30,
2009 however, no additional disclosure was necessary for the Company.
In May 2009, the FASB issued FAS 165 Subsequent Events (ASC Topic 855) requiring companies to
disclose the date to which subsequent events were examined for disclosure. The Company adopted this
pronouncement during the quarter ended June 30, 2009.
In June 2009, the FASB issued FAS 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (ASC Topic 105), which replaces the current
pronouncement system with the Accounting Standards Codification. The Company adopted this
pronouncement beginning with the quarter ended June 30, 2009.
On July 1, 2009, the Company applied the provisions of ASC Topic 980 Subtopic 20,
Discontinuance of Rate-Regulated Accounting (ASC 980-20). See Note 3 Discontinuance of
Regulatory Accounting for a complete discussion.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in the Companys
consolidated financial statements and the accompanying notes, including estimates of probable
losses and expenses. Actual results could differ materially from those estimates.
2. COMPONENTS OF COMPREHENSIVE INCOME
The following table describes the components of comprehensive income, net of tax, for the
three and nine months ended September 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
37,671 |
|
|
$ |
1,845 |
|
|
$ |
41,048 |
|
|
$ |
8,254 |
|
Minimum pension liability adjustment |
|
|
146 |
|
|
|
52 |
|
|
|
437 |
|
|
|
156 |
|
Interest rate swap marked to market |
|
|
679 |
|
|
|
(238 |
) |
|
|
3,079 |
|
|
|
(572 |
) |
Auction rate securities temporary
impairment |
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
38,496 |
|
|
$ |
1,723 |
|
|
$ |
44,564 |
|
|
$ |
7,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
3. DISCONTINUANCE OF REGULATORY ACCOUNTING
Event Requiring Discontinuance
Historically, the Companys incumbent local exchange carrier (ILEC) operations followed the
accounting for regulated enterprises prescribed by ASC 980. This accounting recognizes the economic
effects of rate-making actions of regulatory bodies in the financial statements of the Companys
ILEC operations.
On April 17, 2009 the FCC granted the Companys petition for waiver of certain rules to
facilitate the conversion of the Companys ILECs to price-cap regulation, under which ILECs may
fix interstate rates at any level less than or equal to certain specified amounts. To establish
pricing in accordance with these rules, the Companys ILECs have withdrawn from certain tariffs and
revenue pools administered by the National Exchange Carrier Association (NECA) and jointly filed
with the FCC a new tariff effective as of July 1, 2009. These ILECs also continue to receive
interstate common line support from the universal service fund at the disaggregated per line levels
each received in 2008.
The Company expects average traffic sensitive rates to decrease over time until they are less
than or equal to the cap applicable to such rates. The Companys local and intrastate rates
continue to be subject to a form of rate-of-return regulation enforced by the Regulatory
Commission of Alaska (RCA).
Finally, the Company has experienced continuous and substantial change in the mix of customer
and revenue base away from services generated by regulated rates. The Company does not expect this
trend to reverse in favor of regulated revenues. Thus, as of July 1, 2009, management determined
that it was no longer appropriate to continue to apply ASC 980.
Effect of Discontinuance
Discontinuance of regulatory accounting required the Company to extinguish all of its
previously established jurisdictional assets and liabilities. The Companys jurisdictional assets
accounted for the disparity between State and Federal depreciation rates. Extinguishing these
assets did not affect the Companys statement of operations as the blended rates used to calculate
the assets were determined to approximate the estimated useful lives of the assets. The Companys
jurisdictional liability represented the regulatory equivalent of an asset retirement obligation
(ARO), therefore management assessed its regulatory assets to determine the ARO required under
ASC Topic 410 Asset Retirement and Environmental Obligations (ASC 410) and recorded an ARO
liability of $1,285. The impact of extinguishing the Companys jurisdictional liability net of the
ARO established in accordance with ASC 410, of $63,417 or $37,346 net of tax, was recorded as an
extraordinary gain in the Companys Statement of Operations. In evaluating the Companys
discontinuance of regulatory accounting, management also reviewed fixed asset lives and salvage
values. Management determined that although the asset lives were still appropriate, changes in the
industry and current technology indicated the historical salvage values in place were no longer
appropriate and the original cost of these pools should be fully depreciated. This change has
resulted in an increase in depreciation expense as depreciation recommenced for residual values in
asset classes that had previously been fully depreciated. Additionally, management considered the
issue of impairment to long-lived assets and determined that no such impairment existed.
As a result of the discontinuance of regulatory accounting, the Company has also made certain
reclassifications and adjustments to previously reported 2009 and 2008 financial statements to
conform to current presentation. To effect these reclassifications and adjustments, the Company:
|
§ |
|
eliminated $21,096 and $30,675 of intercompany revenue and expense previously
not eliminated during the six months ended June 30, 2009 and the nine months ended
September 30, 2008, respectively; |
|
|
§ |
|
reclassified $1,143 and $2,493 of bad debt expense from contra revenue to
Selling, General & Administrative (SG&A) expense in the six months ended June 30, 2009
and the nine months ended September 30, 2008, respectively; and |
|
|
§ |
|
classified certain other operating expenses as cost of services and sales or
SG&A expense, as appropriate. |
The reclassifications had no affect on the Companys previously reported operating cash flow,
income before taxes, or net income.
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
4. FAIR VALUE MEASUREMENTS
The Company has developed valuation techniques based upon observable and unobservable inputs
to calculate the fair value of non-short-term monetary assets and liabilities. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect internal
market assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1- Quoted prices for identical instruments in active markets; |
|
|
|
|
Level 2- Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are
observable; and |
|
|
|
|
Level 3- Significant inputs to the valuation model are unobservable. |
The fair values of cash and cash equivalents, net accounts receivable, and payable, other
short-term monetary assets and liabilities and capital leases, approximate carrying values due to
their nature. The fair value of the Companys 2005 senior credit facility, convertible notes, and
other long-term obligations of $508,534 at September 30, 2009, were estimated based on quoted
market prices. The carrying values of these liabilities were $532,272 at September 30, 2009.
Fair Value Measurements on a Recurring Basis
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurements. The Companys assessment of the
significance of a particular input to the fair value measurements requires judgment and may affect
the valuation of the assets and liabilities being measured, as well as their level within the fair
value hierarchy.
The following table presents the balances of assets and liabilities measured at fair value on
a recurring basis as of September 30, 2009 at each hierarchical level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
investments in
auction rate
securities |
|
$ |
855 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(18,687 |
) |
|
$ |
|
|
|
$ |
(18,687 |
) |
|
$ |
|
|
Non-current investments consist of Auction Rate Securities (ARS) that have maturity
dates greater than one year from September 30, 2009. The investments in ARS are included in Level 3
as no active market or significant other observable inputs exist. The Company assigned a value to
its ARS portfolio by reviewing the value assigned to similar securities by brokerages, relative
yields and assessing credit risk. An assessment was also done in which management determined that
the securities were other-than-temporarily impaired, and in 2008, a charge of $245 was taken to the
statement of operations. The fair value of ARS held by the Company at September 30, 2009 decreased
by $150 from the value at December 31, 2008 due to the redemption by an issuer, at face value, in
the quarter ended September 30, 2009. The Company continues to experience redemptions thus no
further impairment was considered necessary.
Derivative contracts, included in other deferred credits and long-term liabilities comprised
of out-of-the-money interest rate swaps that are valued using models based on readily observable
market parameters for all substantial terms of the derivative contracts and thus, are classified
within Level 2.
10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
5. CONVERTIBLE DEBT BIFURCATION
In May 2008, FASB required that convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be accounted for by separating the liability and
equity components of the instruments in a manner that will reflect the entitys non-convertible
debt borrowing rate when interest cost is recognized in subsequent periods. This was required as of
the beginning of an entitys first fiscal year beginning after December 15, 2008, which corresponds
to the Companys fiscal year beginning January 1, 2009, and must be applied retrospectively to all
periods presented. Early adoption was prohibited. The Company has retrospectively applied this to
the $125,000, 5.75% Convertible Notes issued on April 8, 2008, bifurcating the notes into the
liability portion and the equity portion attributable to the conversion feature of the notes. In
doing so, the Company used the discounted cash flow approach to value the debt portion of the
notes. The cash flow stream from the coupon interest payments and the final principal payment were
discounted at 11% to arrive at the valuations. The Company used 11% as the appropriate discount
rate after examining the interest rates for similar instruments issued in the same time frame for
similar companies without the conversion feature.
The effects on the Consolidated Balance Sheets as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As originally |
|
Retrospective |
|
As retrospectively |
|
|
reported |
|
adjustment |
|
applied |
Property, plant and equipment |
|
$ |
1,391,351 |
|
|
$ |
1,600 |
|
|
$ |
1,392,951 |
|
Debt issuance costs |
|
$ |
9,290 |
|
|
$ |
(736 |
) |
|
$ |
8,554 |
|
Non-current deferred income taxes |
|
$ |
114,831 |
|
|
$ |
(9,351 |
) |
|
$ |
105,480 |
|
Long-term obligations, net of current portion |
|
$ |
560,857 |
|
|
$ |
(21,882 |
) |
|
$ |
538,975 |
|
Additional paid in capital |
|
$ |
217,740 |
|
|
$ |
14,073 |
|
|
$ |
231,813 |
|
Accumulated deficit |
|
$ |
(187,452 |
) |
|
$ |
(678 |
) |
|
$ |
(188,130 |
) |
The following table includes selected data regarding the convertible notes as of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2009 |
|
2008 |
Net carrying amount of the equity component |
|
$ |
14,073 |
|
|
$ |
14,073 |
|
Principal amount of the convertible notes |
|
$ |
125,000 |
|
|
$ |
125,000 |
|
Unamortized debt discount |
|
$ |
18,617 |
|
|
$ |
21,882 |
|
Amortization period remaining |
|
41 months |
|
|
50 months |
|
Net carrying amount of the convertible notes |
|
$ |
106,383 |
|
|
$ |
103,118 |
|
The following table details the interest components of the convertible notes contained in the
Companys statement of Operations for the three and nine months ended September 30, 2009 and 2008,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Coupon interest expense |
|
$ |
1,807 |
|
|
$ |
1,808 |
|
|
$ |
5,361 |
|
|
$ |
3,451 |
|
Amortization of the debt discount |
|
|
1,099 |
|
|
|
982 |
|
|
|
3,265 |
|
|
|
1,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total included in interest expense |
|
$ |
2,906 |
|
|
$ |
2,790 |
|
|
$ |
8,626 |
|
|
$ |
5,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. CREST COMMUNICATIONS ACQUISITION
Effective October 30, 2008, the Company closed its purchase of 100% of the outstanding stock
of Crest Communications Corporation. The results of Crests operations have been included in the
Companys consolidated financial statements and further in the wireline segment in the business
segment footnote, since that date. Certain purchase price adjustments are still under review and
therefore the purchase price allocation is subject to refinement.
11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
6. CREST COMMUNICATIONS ACQUISITION
The aggregate purchase price was $64,960, net of $1,072 in cash acquired and inclusive of
$4,169 cash consideration that was placed in an escrow account to be used for the settlement of any
potential claims of misrepresentations, breach of warranties or covenants or for other
indemnifications during the first eighteen months following the closing. During the second quarter
of 2009, a $4,250 settlement was reached regarding claims made by the Company against the selling
shareholders. The funds were appropriately excluded from the purchase price noted above. The funds
had been placed in escrow until the issue was resolved and have now been released. The Company and
Crest have made customary representations, warranties and covenants in the stock purchase
agreement. The Company anticipates that all escrow issues will be resolved prior to the expiration
of the escrow period.
The Internal Revenue Service is currently in the process of auditing the tax returns of Crest
for the years ended December 31, 2006 and 2007. The eventual outcome of the audit is unknown,
however the Crest purchase agreement indemnifies the Company against any tax related claims.
7. STOCK INCENTIVE PLANS
Total compensation cost for share-based payments was $3,416 and $5,618 for the nine months
ended September 30, 2009 and 2008, respectively.
There were 841 and 762 restricted stock grants, inclusive of Performance Share Units, and 775
and 500 stock-settled appreciation rights (SSARs) granted during the nine months ended September
30, 2009 and 2008, respectively. The following table describes the assumptions used for valuation
of equity instruments awarded during the nine months ended September 30, 2009 and 2008,
respectively:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Restricted stock: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0% - 0.25 |
% |
|
|
2.00% - 2.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
|
|
|
|
|
|
|
|
|
Stock Options: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0.25 |
% |
|
|
2.00 |
% |
Dividend yield |
|
|
9.27 |
% |
|
|
6.80 |
% |
Expected volatility factor |
|
|
36.27 |
% |
|
|
32.62 |
% |
Expected option life (years) |
|
|
3.2 |
|
|
|
3.3 |
|
8. 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. In the current
period the Company considered the dilution of earnings per share both on earnings from continuing
operations and on the extraordinary item. The Company includes dilutive stock options based on the
treasury stock method. Potential common share equivalents, which consisted of options, restricted
stock and SSARs granted to employees, and deferred shares granted to directors, resulted in
dilutive earnings per share for the three months and nine months
ended September 30, 2009. Excluded from the calculation were 1,060 options
and SSARs and 562 options and SSARs which were out-of-the-money and therefore
anti-dilutive at September 30, 2009 and September 30, 2008, respectively.
Also excluded from the calculation were shares related to the Companys convertible
debt which were anti-dilutive
for the three and nine month periods ended September 30, 2009 and 2008.
12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
8. EARNINGS PER SHARE (Cont.)
Earnings per share for the three and nine months ended September 30, 2009 and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
$ |
325 |
|
|
$ |
1,845 |
|
|
$ |
3,702 |
|
|
$ |
8,254 |
|
Extraordinary item, net of taxes |
|
|
37,346 |
|
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
37,671 |
|
|
$ |
1,845 |
|
|
$ |
41,048 |
|
|
$ |
8,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
44,354 |
|
|
|
43,603 |
|
|
|
44,100 |
|
|
|
43,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From income before extraordinary item |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.19 |
|
From extraordinary item, net of taxes |
|
|
0.84 |
|
|
|
|
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.85 |
|
|
$ |
0.04 |
|
|
$ |
0.93 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
44,354 |
|
|
|
43,603 |
|
|
|
44,100 |
|
|
|
43,302 |
|
Restricted stock, options and deferred shares |
|
|
782 |
|
|
|
825 |
|
|
|
773 |
|
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
45,136 |
|
|
|
44,428 |
|
|
|
44,873 |
|
|
|
44,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From income before extraordinary item |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.08 |
|
|
$ |
0.19 |
|
From extraordinary item, net of taxes |
|
|
0.82 |
|
|
|
|
|
|
|
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
0.83 |
|
|
$ |
0.04 |
|
|
$ |
0.91 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. RETIREMENT PLANS
Pension benefits for substantially all of the Companys employees are provided through the
Alaska Electrical Pension Fund (AEPF). The Company pays a contractual hourly amount based on
employee classification or base compensation. As a multi-employer defined benefit plan, the
accumulated benefits and plan assets are not determined for, or allocated separately to, the
individual employer. During the second quarter of 2009 the Company received a notice of Zone
Freezing Election from the Joint Board of Trustees of the AEPF. The notice is a one time election
allowable under the
Worker, Retiree and Employer Recovery act of 2008 which freezes the plans zone status for the
2008 plan year at January 1, 2008 values. The notice certified that the plan was in the Green or
Safe Zone for the upcoming plan year. The Company can not accurately project any change in the plan
status in future years given the uncertainty of economic conditions or the effect of actuarial
valuations versus actual performance in the market.
The Company also provides a 401(k) retirement savings plan covering substantially all of its
employees.
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
(Plan) on September 1, 1999. Accrued benefits under the Plan were determined in accordance with
the provisions of the CenturyTel Plan and upon completion of the transfer to the Company, covered
employees ceased to accrue benefits under the CenturyTel Plan. On November 1, 2000, the Plan was
amended to conform early retirement reduction factors and various other terms to those provided by
the AEPF. As a result of this amendment,
13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
9. RETIREMENT PLANS (Cont.)
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, as amended (ERISA). The Company uses a December 31
measurement date for the Plan. The Company made $35 and zero contributions to the Plan in the first
nine months of 2009 and 2008, respectively.
The following table represents the net periodic pension expense for the ACS Retirement Plan
for the three and nine months ended September 30, 2009 and 2008, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest cost |
|
$ |
210 |
|
|
$ |
202 |
|
|
$ |
630 |
|
|
$ |
607 |
|
Expected return on plan assets |
|
|
(182 |
) |
|
|
(258 |
) |
|
|
(547 |
) |
|
|
(774 |
) |
Amortization of loss |
|
|
195 |
|
|
|
37 |
|
|
|
587 |
|
|
|
111 |
|
Amortization of prior service cost |
|
|
51 |
|
|
|
51 |
|
|
|
152 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
274 |
|
|
$ |
32 |
|
|
$ |
822 |
|
|
$ |
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. BUSINESS SEGMENTS
The Companys segments and their principal activities consist of the following:
Wireline - Wireline provides communication services including voice, broadband and data, next
generation Internet protocol (IP) network services, network access, long distance and other
services to consumers, carriers, business and government customers.
Wireless - Wireless products and services include voice and data products, other value-added
services and equipment sales.
The Company also incurs interest expense, interest income and other operating and
non-operating income and expense at the corporate level which are not allocated to the business
segments, nor are they evaluated by the chief operating decision maker in analyzing the performance
of the business segments. These non-operating income and expense items are provided in the
accompanying table under the caption All Other in order to assist the users of these financial
statements in reconciling the operating results and total assets of the business segments to the
consolidated financial statements. Common use assets are held at ACS Holdings and are allocated to
the business segments based on operating revenue. The accounting policies of the segments are the
same as those described in the Summary of Significant Accounting Policies.
With the discontinuance of regulatory accounting as of July 1, 2009, the Company recorded the
elimination of its regulatory assets and liabilities resulting in an extraordinary gain in the
current period. Additionally the Company retrospectively reclassified certain items in the
financial statements to conform to the current presentation. See Note 3 Discontinuance of
Regulatory Accounting for a detailed description of these changes.
14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
10. BUSINESS SEGMENTS (Cont.)
The following tables illustrate selected financial data for each segment as of and for the
three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
69,914 |
|
|
$ |
37,516 |
|
|
$ |
2,337 |
|
|
$ |
(18,505 |
) |
|
$ |
91,262 |
|
Intersegment revenue |
|
|
15,544 |
|
|
|
624 |
|
|
|
2,337 |
|
|
|
|
|
|
|
18,505 |
|
Income (loss) before income tax |
|
|
(1,832 |
) |
|
|
12,056 |
|
|
|
(9,511 |
) |
|
|
|
|
|
|
713 |
|
Income tax (expense) benefit |
|
|
(26,210 |
) |
|
|
(4,890 |
) |
|
|
30,712 |
|
|
|
|
|
|
|
(388 |
) |
Income (loss) before
extraordinary item |
|
|
(28,042 |
) |
|
|
7,166 |
|
|
|
21,201 |
|
|
|
|
|
|
|
325 |
|
Extraordinary item, net of tax |
|
|
37,442 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
37,346 |
|
Net income |
|
|
9,400 |
|
|
|
7,070 |
|
|
|
21,201 |
|
|
|
|
|
|
|
37,671 |
|
Total assets |
|
|
497,303 |
|
|
|
182,466 |
|
|
|
4,441 |
|
|
|
|
|
|
|
684,210 |
|
Capital expenditures |
|
|
8,190 |
|
|
|
6,108 |
|
|
|
2,805 |
|
|
|
|
|
|
|
17,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
67,786 |
|
|
$ |
39,498 |
|
|
$ |
5,551 |
|
|
$ |
(21,550 |
) |
|
$ |
91,285 |
|
Intersegment revenue |
|
|
15,355 |
|
|
|
644 |
|
|
|
5,551 |
|
|
|
|
|
|
|
21,550 |
|
Income (loss) before income tax |
|
|
552 |
|
|
|
11,826 |
|
|
|
(8,942 |
) |
|
|
|
|
|
|
3,436 |
|
Income tax (expense) benefit |
|
|
1,048 |
|
|
|
(5,163 |
) |
|
|
2,524 |
|
|
|
|
|
|
|
(1,591 |
) |
Net income (loss) |
|
|
1,600 |
|
|
|
6,663 |
|
|
|
(6,418 |
) |
|
|
|
|
|
|
1,845 |
|
Total assets |
|
|
552,136 |
|
|
|
235,242 |
|
|
|
14,570 |
|
|
|
(48,145 |
) |
|
|
753,803 |
|
Capital expenditures |
|
|
32,406 |
|
|
|
4,058 |
|
|
|
2,214 |
|
|
|
|
|
|
|
38,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 2009 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
198,908 |
|
|
$ |
109,212 |
|
|
$ |
8,938 |
|
|
$ |
(53,619 |
) |
|
$ |
263,439 |
|
Intersegment revenue |
|
|
42,798 |
|
|
|
1,883 |
|
|
|
8,938 |
|
|
|
|
|
|
|
53,619 |
|
Income (loss) before income tax |
|
|
(1,693 |
) |
|
|
36,875 |
|
|
|
(28,462 |
) |
|
|
|
|
|
|
6,720 |
|
Income tax (expense) benefit |
|
|
(26,680 |
) |
|
|
(15,096 |
) |
|
|
38,758 |
|
|
|
|
|
|
|
(3,018 |
) |
Income (loss) before
extraordinary item |
|
|
(28,373 |
) |
|
|
21,779 |
|
|
|
10,296 |
|
|
|
|
|
|
|
3,702 |
|
Extraordinary item, net of tax |
|
|
37,442 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
37,346 |
|
Net income |
|
|
9,069 |
|
|
|
21,683 |
|
|
|
10,296 |
|
|
|
|
|
|
|
41,048 |
|
Total assets |
|
|
497,303 |
|
|
|
182,466 |
|
|
|
4,441 |
|
|
|
|
|
|
|
684,210 |
|
Capital expenditures |
|
|
23,214 |
|
|
|
8,366 |
|
|
|
6,859 |
|
|
|
|
|
|
|
38,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008 |
|
|
Wireline |
|
Wireless |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
197,789 |
|
|
$ |
109,191 |
|
|
$ |
14,437 |
|
|
$ |
(57,150 |
) |
|
$ |
264,267 |
|
Intersegment revenue |
|
|
40,761 |
|
|
|
1,952 |
|
|
|
14,437 |
|
|
|
|
|
|
|
57,150 |
|
Income (loss) before income tax |
|
|
4,715 |
|
|
|
32,533 |
|
|
|
(22,719 |
) |
|
|
|
|
|
|
14,529 |
|
Income tax (expense) benefit |
|
|
1,053 |
|
|
|
(13,680 |
) |
|
|
6,352 |
|
|
|
|
|
|
|
(6,275 |
) |
Net income (loss) |
|
|
5,768 |
|
|
|
18,853 |
|
|
|
(16,367 |
) |
|
|
|
|
|
|
8,254 |
|
Total assets |
|
|
552,136 |
|
|
|
235,242 |
|
|
|
14,570 |
|
|
|
(48,145 |
) |
|
|
753,803 |
|
Capital expenditures |
|
|
92,183 |
|
|
|
10,662 |
|
|
|
6,505 |
|
|
|
|
|
|
|
109,350 |
|
15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business and has recorded litigation reserves of approximately $250 at
September 30, 2009 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.
12. SUBSEQUENT EVENTS
In January 2009, Nortel Networks (Nortel), a significant Company vendor, filed for
bankruptcy. Nortel supplies many of the Companys critical network elements and the Companys
redundant network operations control center (NOCC) located in the lower 48. In October 2009,
Nortel notified the Company of its rejection, under applicable bankruptcy law, of its agreement
with the Company to provide the NOCC. As a result, Nortel is relieved of its obligation to provide
further NOCC services to the Company. The Company is currently providing redundant NOCC
capabilities by leveraging its operations in Hillsboro, Oregon.
In preparing these financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through November 6, 2009, the date the financial statements
were available to be issued.
16
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Analysts Reports
This Form 10-Q and our future filings 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 (Exchange Act), 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 Item 2 -
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):
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our strongly competitive environment, which comprises national and local wireless and
wireline facilities-based competitors; |
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our ability to manage, integrate, market, maintain and attract sufficient customers to
our Northstar and AKORN® long-haul fiber facilities and our ability to develop attractive
integrated products and services making use of the facility; |
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|
the continued availability of financing in the amounts, at the terms, and subject to the
conditions necessary, to support our future business; |
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|
our ability to generate sufficient earnings and cash flows to continue to make dividend
payments to our stockholders; |
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|
ongoing negotiations with our labor union, the International Brotherhood of Electrical
Workers Local 1547 (IBEW) and the potential outcome of such negotiations; |
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rapid technological developments and changes in the telecommunications industries,
including evolving standards that may not be compatible with our existing
telecommunications systems; |
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changes in revenue resulting from regulatory actions affecting inter-carrier
compensation; |
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regulatory limitations on our services, including our ability to set prices for our
services; |
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other unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps, fishing boats or natural disasters; |
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changes in revenue from Universal Service Funds (USFs); |
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changes in the demand for our products and services market growth rates; |
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changes in interest rates or other general national, regional or local economic
conditions; |
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governmental and public policy changes; |
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unanticipated costs required to fund our postretirement benefit plans; |
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the success of any future acquisitions; and |
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the matters described under Item 1A Risk Factors in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008 and this Quarterly Report on Form 10-Q. |
In light of these risks, uncertainties and assumptions, you should not place undue reliance on
any forward-looking statements. Additional risks that we have not identified or that we 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,
17
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.
Important Changes to Presentation
On July 1, 2009, our incumbent local exchange carrier operations discontinued accounting for
regulated enterprises as prescribed by ASC 980-20, and reassessed certain other related practices.
As a result, we were required to:
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|
recognize an extraordinary item as a result of the extinguishment of all our
jurisdictional assets and liabilities net of the liability representing the
Companys asset retirement obligation in accordance with ASC 410; |
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eliminate all intercompany transactions; |
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reclassify bad debt expense, as a component of SG&A; and |
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make certain other reclassifications in the Consolidated Statement of Operations
to separate operating expenses into cost of services and sales and SG&A. |
The discussion that follows in this Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations, unless otherwise specifically indicated takes these
foregoing changes into account. For more information regarding these matters, please see Notes to
Consolidated Financial Statements Note 3 Discontinuance of Regulatory Accounting.
Overview
We provide leading integrated communications services in Alaska. Our wireline business
comprises one of the most expansive end-to-end IP networks in Alaska, and we operate the largest
local exchange carrier network in the state. We believe our wireless business comprises the most
extensive, reliable wireless network in Alaska with third generation (3G) data transmission
capabilities.
The sections that follow provide information about important aspects of our operations and
investments and include discussions of our results of operations, financial condition and sources
and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent
practicable. The content and organization of the financial and non-financial data presented in
these sections are consistent with information we use in evaluating our own performance and
allocating our resources. We also monitor the state of the economy in general. In doing so, we
compare Alaskan economic activity with broader economic conditions. In general, we believe that the
Alaskan telecommunications market, as well as general economic activity in Alaska, is affected by
certain economic factors, which include:
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activity in the oil and gas markets; |
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tourism levels; |
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military activity; |
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the cost of long-haul telecommunications bandwidth; |
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local customer preferences; |
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average usage of Internet technology; |
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unemployment levels; and |
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housing activity. |
We have observed variances in the factors affecting the Alaskan economy as compared to the
U.S. as a whole. Some factors, particularly the price of oil and gas, may have the opposite effect
on the Alaskan economy than the U.S. economy as a whole. In forecasting the local economic
conditions that affect us, we take particular note of these factors.
18
Strategy
Our results of operations, financial position and sources and uses of cash in the current and
future periods continue to reflect our focus on the following strategic imperatives:
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|
Emphasis on Top-Line Growth: We emphasize revenue growth as well as growth in net cash
provided by operating activities. We devote more resources to higher growth markets such as
wireless, including wireless data, wireline broadband connections, including our long-haul
fiber investment connecting our network to the lower 48, as well as expanded strategic
services to business markets rather than to the traditional wireline voice market. |
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|
Investment with Discipline: We focus on gaining market share in those markets that
contain high revenue producing customers. In our wireline business, we focus on deploying
and selling broadband connections in each market covered by our network. We have targeted
investment in deploying high speed fiber conductivity in and between Alaskas urban
centers. During 2008, we invested heavily in interstate capacity through our purchase of
Crest and construction of AKORN®. We have increasingly targeted enterprise customers.
Revenues from these customers grew 31.5% and 45.5% in 2009 compared with the same three and
nine months ended September 30, 2008, respectively. Sales of advanced IP services and
increases in revenues from agreements with carriers to terminate their Alaskan long
distance traffic, we believe, drove this increase. |
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Profitability Improvement: We seek to increase operating income and margins. In support
of this goal, our capital spending continues to be directed toward growth markets. High
speed evolution data optimized (EVDO) and cutting-edge 3G data services, deployment of
our AKORN® fiber facility coupled with the complementary purchase of Crest, as well as
expanded services to enterprise customers, including Metro Ethernet, are examples of
initiatives designed to tap high growth markets. |
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Process Improvement: While focusing resources on revenue growth and market share gains,
we continually challenge our management team and employees at all levels to lower expenses
and improve the customer experience through process improvements. We expect to invest in
technology-assisted process improvement, including self-service initiatives. We expect
efforts such as call center routing improvements, self-pay kiosk deployment and customer
service tools, to improve our cost structure and maintain or improve operating income
margins. As a result of past successes, we have been able to serve more customers while
maintaining our workforce at or below prior levels. |
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Pay for Performance: We embrace a culture of urgency and accountability. We establish
goals for all of our employees that are tied to the imperatives described above. We seek to
provide our non-represented employees cash incentives and equity compensation that are tied
to these goals. We carefully design executive compensation programs to align executives
and shareholders long-term interests. |
19
RESULTS OF OPERATIONS
All amounts are discussed at the consolidated level after the elimination of affiliate revenue
and expense.
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
The following table summarizes results of operations for the three months ended September 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, |
|
|
2009 |
|
2008 |
|
Change |
|
% Change |
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
21,890 |
|
|
$ |
22,197 |
|
|
$ |
(307 |
) |
|
|
-1.4 |
% |
Wholesale |
|
|
2,836 |
|
|
|
3,452 |
|
|
|
(616 |
) |
|
|
-17.8 |
% |
Access |
|
|
18,426 |
|
|
|
18,251 |
|
|
|
175 |
|
|
|
1.0 |
% |
Enterprise |
|
|
11,218 |
|
|
|
8,531 |
|
|
|
2,687 |
|
|
|
31.5 |
% |
|
|
|
|
|
|
|
Wireline |
|
|
54,370 |
|
|
|
52,431 |
|
|
|
1,939 |
|
|
|
3.7 |
% |
Wireless |
|
|
36,892 |
|
|
|
38,854 |
|
|
|
(1,962 |
) |
|
|
-5.0 |
% |
|
|
|
|
|
|
|
Total operating revenues |
|
|
91,262 |
|
|
|
91,285 |
|
|
|
(23 |
) |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
21,031 |
|
|
|
18,550 |
|
|
|
2,481 |
|
|
|
13.4 |
% |
Selling, general and administrative |
|
|
15,890 |
|
|
|
19,485 |
|
|
|
(3,595 |
) |
|
|
-18.5 |
% |
Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
14,287 |
|
|
|
16,498 |
|
|
|
(2,211 |
) |
|
|
-13.4 |
% |
Selling, general and administrative |
|
|
6,005 |
|
|
|
5,917 |
|
|
|
88 |
|
|
|
1.5 |
% |
Depreciation and amortization |
|
|
23,724 |
|
|
|
18,790 |
|
|
|
4,934 |
|
|
|
26.3 |
% |
|
|
|
|
|
|
|
Total operating expenses |
|
|
80,937 |
|
|
|
79,240 |
|
|
|
1,697 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10,325 |
|
|
|
12,045 |
|
|
|
(1,720 |
) |
|
|
-14.3 |
% |
Operating margin |
|
|
11.3 |
% |
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(9,642 |
) |
|
|
(8,886 |
) |
|
|
(756 |
) |
|
|
8.5 |
% |
Interest income |
|
|
30 |
|
|
|
532 |
|
|
|
(502 |
) |
|
|
-94.4 |
% |
Other |
|
|
|
|
|
|
(255 |
) |
|
|
255 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
|
Total other income and expense |
|
|
(9,612 |
) |
|
|
(8,609 |
) |
|
|
(1,003 |
) |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
713 |
|
|
|
3,436 |
|
|
|
(2,723 |
) |
|
|
-79.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(388 |
) |
|
|
(1,591 |
) |
|
|
1,203 |
|
|
|
-75.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
|
325 |
|
|
|
1,845 |
|
|
|
(1,520 |
) |
|
|
-82.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item, net of taxes |
|
|
37,346 |
|
|
|
|
|
|
|
37,346 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,671 |
|
|
$ |
1,845 |
|
|
$ |
35,826 |
|
|
|
1941.8 |
% |
|
|
|
|
|
|
|
20
Revenue Sources by Segment
We have two reportable business segments, wireline and wireless, which conduct the following
principal activities:
|
|
|
Wireline: We provide communications services including voice, data, broadband,
multi-protocol label switching services, network access, long distance and other services
to consumers, carriers, businesses and government customers throughout Alaska and to and
from Alaska. |
|
|
|
|
Wireless: We provide wireless voice and data services, products, other value-added
services and equipment sales across Alaska. |
Operating Revenue
Wireline
Retail: Declines in retail switched access lines in service in 2009 were concentrated in the
residential market, which we believe was impacted by wireless substitution. Retail revenue
decreased in the three months ended September 30, 2009 over September 30, 2008 primarily due to a
$0.4 million decline in local exchange revenue associated with residential line losses, a $0.4
million decline in long distance sales and a $0.2 million decline in customer premise equipment
(CPE) sales to businesses. These losses were offset, in part, by a $0.7 million release of
company liabilities for deposits made by commercial developers and a $0.2 million increase in
revenue from our existing Internet Service Provider (ISP) subscriber base.
Wholesale: Wholesale revenues decreased due to continued decline in leases of our unbundled
network elements (UNEs). We believe this decline is primarily attributable to the ongoing
migration of lines by our key competitor to its propriety cable telephony plant. We expect that
wholesale revenue will continue to decline.
Access: Access revenue declines from lower lines in service and traffic sensitive activity
levels were offset by $2.5 million of out-of-period settlements in the current period compared to
$1.4 million in the prior year quarter . We expect that access revenues will continue to decline
over time.
Enterprise: Enterprise revenue increased in the third quarter of 2009 primarily due to an
increase in carrier customer data volume. We experienced an increase of $2.5 million in data sales
to other carriers, inclusive of a decline in revenue of $0.4 million resulting from the expiration
of a non-cash capacity exchange agreement with another carrier midway through the quarter.
Additionally, we experienced a $0.6 million increase in data sales to government and commercial
customers. These increases were offset, in part, by a $0.6 million decline in wholesale carrier
voice revenue.
Wireless
Wireless revenue declined in the quarter ended September 30, 2009 as compared to the quarter
ended September 30, 2008. Although we saw increases of $1.9 million in Competitive Eligible
Telecommunications Carrier (CETC) revenue, these increases were offset by a $1.5 million decline
in handset and accessory sales; a $0.7 million decrease in roaming revenue; and a $0.7 million
decrease in recurring service plan revenue.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange
and cable systems operating costs, decreased $1.1 million for the quarter ended September 30, 2009
over September 30, 2008.
Cost of Services and Sales Wireline cost of services and sales increased $2.5 million this
quarter over the prior year quarter ended September 30, due to a $0.7 million increase in service
contracts, $0.5 million increase in labor and $0.4 million increase in land and building charges
which were all primarily related to our new cable operations. We also experienced an increase of
$0.3 million in CPE sales expense, $0.3 million increase in ISP access and leased circuit expenses
and a $0.2 million increase in LD interstate COGS.
Selling, General and Administrative Wireline SG&A expenses decreased $3.6 million, this
quarter over the prior year quarter ended September 30, due to $2.9 million in labor expenses and a
$0.8 million shift in advertising expenses from our wireline to wireless business segment.
21
Wireless:
Cost of Services and Sales Wireless cost of services and sales decreased this quarter over
the prior year quarter ended September 30, due to a $1.3 million reduction in handset, accessory
and data content expenses and a $0.8 million decrease in network costs.
Selling, General and Administrative SG&A expenses remained flat this quarter over the prior
year quarter ended September 30, with an increase of $0.7 million in advertising expense offset by
lower labor expense.
Depreciation and Amortization: Depreciation and amortization expense increased $4.9 million
in the three months ended September 30, 2009 from the same period in the prior year primarily due
to the change in maximum reserve levels on our regulated subsidiary assets. Under regulatory
accounting, a salvage percentage was ascribed to certain asset classes. For example, only 95% of
the original cost of digital switches could be depreciated under regulatory accounting as it was
presumed that 5% of the original cost of the asset could be recovered upon eventual sale. In
connection with our discontinuance of regulatory accounting in accordance with ASC 980-20, we
reassessed these values and determined that with recent technology changes the residual values
previously set by the regulators were no longer appropriate and that the original cost of many
asset pools should be fully depreciated. This change in estimate has resulted in an increase in
expense as depreciation recommences for residual values in asset classes that had previously been
fully depreciated under regulatory rules. We expect the majority of these assets to be fully depreciated by December 31, 2010.
Other Income and Expense: Other income and expense for the three month ended September 30,
2009 is a net expense of $9.6 million. The net increase of $1.0 million in expense over the same
period in the prior year is due to reductions of capitalized interest on fixed assets in the course
of construction following the commercial launch of AKORN® in April 2009 and reduced interest income
due to a reduced amount of excess investible cash.
Income Taxes: Income taxes are currently being calculated using our estimated effective tax
rate for the third quarter of 2009 of 54.5%. At September 30, 2009 we had tax net operating loss
(NOL) carry forwards of approximately $158.6 million. Income tax expense will not involve a
significant cash outflow until these NOLs are exhausted.
Extraordinary Item: Discontinuance of regulatory accounting required us to extinguish all of
our previously established jurisdictional assets and liabilities. As the Companys jurisdictional
liability represented the regulatory equivalent of an asset retirement obligation, we also assessed
our regulatory assets to determine the ARO required under ASC.410. The impact of extinguishing the
Companys jurisdictional liability, net of the portion of the liability representing the Companys
ARO for regulated assets required by ASC 410, was recorded as an extraordinary item, net of taxes.
22
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following table summarizes results of operations for the nine months ended September 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, |
|
|
2009 |
|
2008 |
|
Change |
|
% Change |
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
64,401 |
|
|
$ |
67,138 |
|
|
$ |
(2,737 |
) |
|
|
-4.1 |
% |
Wholesale |
|
|
8,795 |
|
|
|
11,160 |
|
|
|
(2,365 |
) |
|
|
-21.2 |
% |
Access |
|
|
49,396 |
|
|
|
55,701 |
|
|
|
(6,305 |
) |
|
|
-11.3 |
% |
Enterprise |
|
|
33,518 |
|
|
|
23,029 |
|
|
|
10,489 |
|
|
|
45.5 |
% |
|
|
|
|
|
|
|
Wireline |
|
|
156,110 |
|
|
|
157,028 |
|
|
|
(918 |
) |
|
|
-0.6 |
% |
Wireless |
|
|
107,329 |
|
|
|
107,239 |
|
|
|
90 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
Total operating revenues |
|
|
263,439 |
|
|
|
264,267 |
|
|
|
(828 |
) |
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
61,913 |
|
|
|
53,834 |
|
|
|
8,079 |
|
|
|
15.0 |
% |
Selling, general and administrative |
|
|
48,797 |
|
|
|
54,793 |
|
|
|
(5,996 |
) |
|
|
-10.9 |
% |
Wireless: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
39,973 |
|
|
|
44,911 |
|
|
|
(4,938 |
) |
|
|
-11.0 |
% |
Selling, general and administrative |
|
|
18,049 |
|
|
|
17,837 |
|
|
|
212 |
|
|
|
1.2 |
% |
Depreciation and amortization |
|
|
59,784 |
|
|
|
54,391 |
|
|
|
5,393 |
|
|
|
9.9 |
% |
|
|
|
|
|
|
|
Total operating expenses |
|
|
228,516 |
|
|
|
225,766 |
|
|
|
2,750 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
34,923 |
|
|
|
38,501 |
|
|
|
(3,578 |
) |
|
|
-9.3 |
% |
Operating margin |
|
|
13.3 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(28,284 |
) |
|
|
(25,258 |
) |
|
|
(3,026 |
) |
|
|
12.0 |
% |
Interest income |
|
|
81 |
|
|
|
1,541 |
|
|
|
(1,460 |
) |
|
|
-94.7 |
% |
Other |
|
|
|
|
|
|
(255 |
) |
|
|
255 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
|
Total other income and expense |
|
|
(28,203 |
) |
|
|
(23,972 |
) |
|
|
(4,231 |
) |
|
|
17.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
6,720 |
|
|
|
14,529 |
|
|
|
(7,809 |
) |
|
|
-53.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(3,018 |
) |
|
|
(6,275 |
) |
|
|
3,257 |
|
|
|
-51.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item |
|
|
3,702 |
|
|
|
8,254 |
|
|
|
(4,552 |
) |
|
|
-55.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary item, net of taxes |
|
|
37,346 |
|
|
|
|
|
|
|
37,346 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,048 |
|
|
$ |
8,254 |
|
|
$ |
32,794 |
|
|
|
397.3 |
% |
|
|
|
|
|
|
|
23
Operating Revenues
Wireline
Retail: Declines in retail switched access lines in service in 2009 were concentrated in the
residential market which we believe is impacted by wireless substitution. Retail revenue decreased
in the nine months ended September 30, 2009 over September 30, 2008 primarily due to $1.8 million
declines in local exchange revenue associated with residential line losses, a $1.0 million decline
in long distance sales and $0.8 million lower CPE sales to businesses. These losses were offset, in
part, by a $0.9 million increase in revenue from our existing ISP subscriber base and a $0.7
million release of company liabilities for deposits made by commercial developers.
Wholesale: Wholesale revenues decreased due to declines in unbundled network leases and
wholesale local revenue for the reasons described in the quarterly period comparison. We believe
this decrease is primarily attributable to the ongoing migration of lines by our key competitor to
its proprietary cable telephony plant. We expect that wholesale revenue will continue to decline.
Access: Access revenue declines of $6.3 million are inclusive of lower out-of-period
settlements of with $4.9 million in the current period versus $5.6 million in the prior year.
Declines were also driven by lower levels of eligible cost recovery; lines in service; and traffic
sensitive activity levels. We expect that access revenues will continue to decline over time.
Enterprise: Enterprise revenue increased in the first nine months of 2009 primarily due to an
$8.3 million increase in data sales to other carriers and a $2.2 million increase in data sales to
government and commercial customers.
Wireless
In the nine months ended September 30, 2009, wireless revenue remained in line with the period
ended September 30, 2008. We experienced an increase of $4.8 million in CETC revenue offset by a
$1.9 million decline in handset and accessory sales, a $1.3 million decrease in roaming revenue;
and a $0.7 million decrease in recurring service plan revenue.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange
and cable systems operating costs increased by $2.1 million for the nine months ended September 30,
2009 over September 30, 2008.
Cost of Services and Sales Wireline cost of services and sales increased $8.1 million year
over year due to a $3.8 million increase in labor, $1.8 million increase in service contracts and
$1.5 million increase in land and building charges which were all primarily related to our new
cable operations. We also experienced an increase of $1.1 million in ISP access and leased circuit
expenses.
Selling, General and Administrative Costs Wireline SG&A expenses decreased $6.0 million,
year over year, due to $3.3 million in labor expenses and a $1.1 million shift in advertising
expenses from our wireline to wireless business segment. Additionally, the loss on the disposal of
certain property was $0.8 million higher in the prior year.
Wireless:
Cost of Services and Sales Wireless costs of services and sales decreased by $4.9 million
primarily driven by reductions in handset, accessory and data content expense.
Selling, General and Administrative SG&A expenses increased due to $1.2 million in
advertising expense offset by a $0.7 million decrease in labor expenses and a $0.3 million decline
in commissions.
Depreciation and Amortization: Depreciation and amortization expense increased primarily due
to the change in maximum reserve levels on our regulated subsidiary assets as described in the
quarterly period comparison. This change in estimate has resulted in an increase in expense as
depreciation recommences for residual values in asset classes that had previously been fully
depreciated under regulatory rules.
24
Other Income and Expense: Other income and expense for the nine months ended September 30,
2009 is a net expense of $28.2 million. The net increase of $4.2 million from the prior year is due
to reductions of capitalized interest on fixed assets in the course of construction following the
commercial launch of AKORN® in April 2009, and higher interest expense on the $125.0 million, 5.75%
Convertible Notes issued April 8, 2008; offset by a decline in interest income due to a reduced
amount of excess investible cash. Affecting interest expense on the $125.0 million, 5.75%
Convertible Notes was the adoption of FASB FSP 14-1, Accounting for Convertible Debt that may be
Settled in Cash Upon Conversion (ASC Topic 470-20, Debt with Conversion and Other Options) on
January 1, 2009. This required us to separate the debt into the portion of the debt that is related
to the conversion feature and the portion related to the debt feature. The portion of the debt
related to the conversion feature is considered equity and the principal amount of the debt is
discounted by the equity portion. The discount is amortized over the life of the debt as additional
interest expense. For the nine months ended September 30, 2009 and September 30, 2008 this resulted
in an additional $3.3 million and $1.9 million of non-cash interest expense, respectively.
Income Taxes: Income taxes are currently being calculated using our estimated effective tax
rate for the nine months ended September 30, 2009 of 44.9%. At September 30, 2009 we had tax NOL
carry forwards of approximately $158.6 million. Income tax expense will not involve a substantial
cash outflow until these NOLs are utilized.
Extraordinary Item: Discontinuance of regulatory accounting required us to write off all of
our previously held jurisdictional assets and liabilities. As the Companys jurisdictional
liability represented the regulatory equivalent of an asset retirement obligation we also assessed
our regulatory assets to determine the ARO required under ASC 410. The impact of extinguishing the
Companys jurisdictional liability, net of the portion of the liability representing the Companys
ARO for regulated assets required by ASC 410, was recorded as an extraordinary item, net of taxes.
Liquidity and Capital Resources
Our major sources and uses of funds for the nine months ended September 30, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Net cash provided by operating activities |
|
$ |
73,007 |
|
|
$ |
69,199 |
|
Net change in funds held in restricted accounts |
|
$ |
14,527 |
|
|
$ |
(54,835 |
) |
Capital expenditures |
|
$ |
(37,258 |
) |
|
$ |
(107,900 |
) |
Net settlement of capital expenditures payable |
|
$ |
(9,450 |
) |
|
$ |
7,933 |
|
Net borrowings/(repayments) |
|
$ |
(5,685 |
) |
|
$ |
107,436 |
|
Dividends |
|
$ |
(28,534 |
) |
|
$ |
(27,901 |
) |
Sources
We have satisfied our cash requirements in the first nine months of 2009 for operations,
capital expenditures and debt service primarily through internally generated funds. For the nine
months ended September 30, 2009, our net cash flows provided by operating activities were $73.0
million. At September 30, 2009, we had approximately $10.7 million in net working capital. Included
in current assets were approximately $7.1 million in cash and cash equivalents and $6.0 million in
restricted cash. In the first nine months of 2009, $14.6 million cash that had previously been
recorded as restricted cash was released with $4.3 million flowing to us in settlement of an
outstanding claim with the Crest selling shareholders, $0.7 million was released from escrow to
apply toward a capital project funded by the Crest selling shareholders; $1.0 million was released
following the expiration of a contract liability with the State of Alaska; and $8.6 million paid to
Tyco for completion of the AKORN® project. As of September 30, 2009, we had full access to our
$45.0 million revolving credit facility.
Our 2005 Senior Credit Facility contains a number of restrictive covenants and events of
default, including covenants limiting capital expenditures, incurrence of debt and payment of
dividends. Our 2005 Senior Credit Facility also requires that we achieve certain financial ratios
quarterly, and we are currently operating comfortably within these financial ratios. We have
entered into a series of interest swap agreements that have effectively hedged our risk from
changes in the London Inter-Bank Offered Rate (LIBOR) on our entire term loan.
25
On April 8, 2008, we sold $125.0 million aggregate principal amount of 5.75% Convertible Notes
due March 1, 2013. These notes are unsecured obligations, subordinate to our obligations under the
2005 Senior Credit Facility, will pay interest semi-annually and will be convertible upon
satisfaction of certain conditions.
Uses
Our
networks require the timely maintenance of plant and infrastructure. Our historical capital expenditures have been, and
continue to be, significant. Cash outflows for capital expenditures for the nine months ended September 30,
2009 were $46.7 million, inclusive of $9.4 million in net settlements of capital expenditure payables.
New capital acquisition for 2009 totaled $37.3 million of which $10.3 million was expended on the
build-out of our AKORN® facility. We intend to fund
future capital expenditures with cash on hand and net cash generated from operations.
Since October 28, 2004, we have paid quarterly dividends on our common stock. Based on current shares outstanding at October 23, 2009 of approximately 44.4 million shares and our current annual dividend policy of $0.86 per share, maintenance of our current dividend policy would result in $38.2 million cash being paid to common stockholders over the next four quarters. Dividends on our common stock are not cumulative.
We believe that we will have sufficient cash on hand, cash provided by operations and available borrowing capacity under our revolving credit facility to service our debt, pay our quarterly dividends, and fund our operations, capital expenditures and other obligations over the next twelve months. Our ability to meet such obligations will be dependent upon our future financial performance, which is, in turn, subject to
future economic conditions and to financial, business, regulatory and other factors, many of which are beyond our control. See Item 1A-Risk Factors in our Annual Report on Form 10-K for further information regarding these risks.
Legal
We are involved in various claims, legal actions, personnel matters and regulatory proceedings
arising in the ordinary course of business, and have recorded litigation reserves of $0.3 million
against certain claims and legal actions as of September 30, 2009. 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, 2009, we employed 906 regular full-time employees, 11 regular part-time
employees and five full-time temporary employees. Of these employees, approximately 75% are
represented by the IBEW. On August 20, 2009, we announced that we had entered into a new, tentative
three-year agreement with the IBEW, which represents all of our unionized employees. On October 16,
2009, our employees represented by the IBEW voted against ratifying the tentative agreement. Our
existing collective bargaining agreement with the IBEW expires on December 31, 2009.
Recent Developments
None
Critical Accounting Policies and Accounting Estimates
We have identified certain policies and estimates as critical to our business operations and
the understanding of our past or present results of operations. For additional discussion on the
application of these and other significant accounting policies, see Note 1 Summary of Significant
Accounting Policies to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
These policies and estimates are considered critical because they had a material impact, or have
the potential to have a material impact, on our financial statements and because they require
significant judgments, assumptions or estimates.
As of July 1, 2009, we discontinued using the accounting principles prescribed by ASC 980.
Historically, consistent with the application of ASC 980 and industry practice, intercompany
revenues between our regulated local telephone companies and all other subsidiaries were not
eliminated upon consolidation. With the discontinuance of regulatory accounting we now eliminate
intercompany revenue between our regulated local telephone and all other
26
subsidiaries. We have also
revised the statement of operations to distinguish our cost of services and sales from our SG&A
expenses. Previously, bad debt expense related to our regulated entities was accounted for as a
reduction of revenue. As of the date of these statements bad debt expense is now considered an SG&A
expense and has been classified in our income statement as such.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Among the significant estimates affecting the financial statements are those
related to the realizable value of accounts receivable, materials and supplies, long-lived assets,
goodwill and intangible assets, income taxes and network access revenue reserves. Actual results
may differ from those estimates as the collection of those balances is not reasonably assured.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13, Revenue
Recognition Multiple-Deliverable Revenue Arrangements a Consensus of the FASB Emerging Issues
Task Force. The update was issued to clarify the revenue recognition measurement aspects of
arrangements that include multiple deliverables (for example a computer and an operating system).
This update is effective for fiscal years beginning on or after June 15, 2010. We are currently
reviewing the update and the potential impact of its adoption on our financial statements.
In October 2009, the FASB issued ASU No. 2009-14, Software Certain Revenues Arrangements
That Include Software Elements. The update was issued to clarify the accounting for revenue
arrangements that contain tangible products and software and how to segregate the revenue elements
if the software is more than incidental to the product as a whole. This update is effective for
fiscal years beginning on or after June 15, 2010. We are currently reviewing the update and the
potential impact of its adoption on our financial statements.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As of September 30, 2009, we had outstanding debt under our 2005 Senior Credit Facility. This
on-balance sheet financial instrument, to the extent it provides for variable rates of interest,
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 our 2005 Senior 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 terms of these swap
agreements range from December 2009 through December 2011. On April 8, 2008, we sold $125.0 million
aggregate principal amount of our 5.75% Convertible Notes due 2013 in a private placement. The
notes pay interest at a fixed rate and are subordinated to our obligations under our 2005 Senior
Credit Facility as well as certain hedging agreements and other secured debt available under the
credit facility.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an
evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934, as amended. Based on the evaluation, our Chief Executive Officer and our Chief Financial
Officer believe that, as of the end of the period covered by this Quarterly Report on Form 10-Q,
our disclosure controls and procedures were effective at ensuring that the information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded,
processed, summarized, and reported within the time periods specified in the SECs rules and forms
and (ii) accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required
financial disclosure.
27
As of the end of the period covered by this Quarterly Report on Form 10-Q, we made certain
changes to our internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) discussed below that have materially affected or were reasonably likely to materially
affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does
not expect that our disclosure controls and internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision making can be faulty, and
that breakdowns can occur because of a simple error or mistake. Additionally, controls may be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, a control may become
inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls over Financial Reporting
During the quarter covered by the report, we have augmented our internal controls over
financial reporting to assure accurate prospective application of certain accounting principles
adopted as of July 1, 2009, including ASC 410. Further, within our enterprise line of business, we
recognized that the nature of our enterprise transactions, including the pricing and billing of
such transactions; were highly customized by individual customer, and proper review of such
transactions relied heavily on manual attention from personnel. To address this need for additional
resources, we dedicated additional personnel to review our larger enterprise transactions as well
as seek out means to fully automate these processes, if practicable. We believe these changes have
improved the overall internal controls 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.
There have been no material changes to our 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, 2008.
|
|
|
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 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, the Indenture governing our outstanding 5.75% Convertible Notes due March 1, 2013 also
contains a number of restrictive covenants.
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.
28
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None.
|
|
|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
We held our Annual Meeting of Stockholders on June 12, 2009. Our annual meeting was adjourned
without taking any action on proposals 1-5. The reconvened annual meeting was held on July 10,
2009, and a total of 41,525,347 shares were present in person or by proxy at the reconvened annual
meeting. The following matters were considered:
All board nominees were elected as directors with the following vote:
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
Withheld |
Liane Pelletier |
|
|
40,737,134 |
|
|
|
788,213 |
|
Brian Rogers |
|
|
31,770,168 |
|
|
|
9,755,179 |
|
John M. Egan |
|
|
31,769,111 |
|
|
|
9,756,236 |
|
Gary R. Donahee |
|
|
31,788,959 |
|
|
|
9,736,388 |
|
Edward J. Hayes, Jr. |
|
|
40,874,252 |
|
|
|
651,095 |
|
Annette Jacobs |
|
|
41,040,409 |
|
|
|
484,938 |
|
David Southwell |
|
|
41,034,343 |
|
|
|
491,004 |
|
Peter D. Ley |
|
|
40,997,112 |
|
|
|
528,235 |
|
An amendment to our 1999 Stock Incentive Plan was approved extending the term of the plan to
December 31, 2012, allocating an additional 3,500,000 shares to the plan, among other changes with
the following vote:
|
|
|
|
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
Broker non-votes |
16,148,148 |
|
|
13,788,151 |
|
|
|
97,021 |
|
|
|
11,492,027 |
|
An amendment to our 1999 Employee Stock Purchase Plan was approved to extend the term of the
plan to December 31, 2012 and reduce the shares allocated under the plan by 500,000 with the
following vote:
|
|
For |
|
Against |
|
Abstain |
|
Broker non-votes |
30,129,234 |
|
|
948,285 |
|
|
|
77,162 |
|
|
|
10,370,666 |
|
An amendment to our 1999 Non-Employee Directors Stock Compensation Plan was approved extending
the term of the plan to December 31, 2012 and increasing the shares allocated under the plan by
150,000 with the following vote: |
|
For |
|
Against |
|
Abstain |
|
Broker non-votes |
16,548,792 |
|
|
13,457,922 |
|
|
|
112,805 |
|
|
|
11,405,828 |
|
KPMG, LLP was ratified as the companys independent auditors for the year ending December 31,
2009 with the following vote: |
|
For |
|
Against |
|
Abstain |
41,251,819 |
|
|
243,546 |
|
|
|
29,982 |
|
29
|
|
|
ITEM 5. |
|
OTHER INFORMATION. |
None.
(a) Exhibits:
|
31.1 |
|
Certification of Liane Pelletier, Chief Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of David Wilson, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Liane Pelletier, Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of David Wilson, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
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.
|
|
|
|
|
Date: November 6, 2009 |
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
|
|
|
|
/s/ Liane Pelletier
|
|
|
|
Liane Pelletier |
|
|
|
Chief Executive Officer,
Chairman of the Board and President |
|
|
|
|
|
|
|
|
|
|
|
/s/ David Wilson
|
|
|
David Wilson |
|
|
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer) |
|
|
31