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, 2010
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
(State or Other Jurisdiction
of Incorporation or Organization)
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52-2126573
(I.R.S. Employer
Identification No.) |
600 Telephone Avenue, Anchorage, Alaska 99503
(Address of Principal Executive Offices) (Zip Code)
(907) 297-3000
(Registrants Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former three months, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant 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
(Do not check if smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No þ
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 18, 2010, was
44,660,484.
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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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
17,276 |
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$ |
6,271 |
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Restricted cash |
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4,889 |
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5,843 |
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Accounts receivable-trade, net of
allowance of $7,283 and $6,066 |
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39,403 |
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35,414 |
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Materials and supplies |
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7,713 |
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7,109 |
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Prepayments and other current assets |
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5,336 |
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4,489 |
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Deferred income taxes |
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11,036 |
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13,814 |
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Total current assets |
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85,653 |
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72,940 |
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Property, plant and equipment |
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1,432,739 |
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1,416,359 |
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Less: accumulated depreciation and
amortization |
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(1,012,040 |
) |
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(965,470 |
) |
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Property, plant and
equipment, net |
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420,699 |
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450,889 |
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Non-current investments |
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355 |
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|
855 |
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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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21,517 |
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21,517 |
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Debt issuance costs |
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4,019 |
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5,960 |
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Deferred income taxes |
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78,345 |
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113,994 |
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Investment in
unconsolidated affiliate |
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2,060 |
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Other assets |
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3,305 |
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293 |
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Total assets |
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$ |
624,803 |
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$ |
675,298 |
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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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$ |
12,049 |
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$ |
793 |
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Accounts payable, accrued and other
current liabilities |
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61,860 |
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68,651 |
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Advance billings and customer deposits |
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9,150 |
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9,351 |
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Total current liabilities |
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83,059 |
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78,795 |
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Long-term obligations, net of current portion |
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541,614 |
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538,557 |
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Other long-term liabilities |
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15,423 |
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27,906 |
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Total liabilities |
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640,096 |
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645,258 |
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Commitments and
contingencies |
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Stockholders equity
(deficit): |
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Common stock, $.01 par value; 145,000 authorized,
44,658 and
44,484 issued and outstanding,
respectively |
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447 |
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445 |
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Additional paid in capital |
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174,013 |
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198,979 |
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Accumulated deficit |
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(186,893 |
) |
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(157,472 |
) |
Accumulated other comprehensive loss |
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(2,860 |
) |
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(11,912 |
) |
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Total stockholders equity (deficit) |
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(15,293 |
) |
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30,040 |
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Total liabilities and
stockholders equity |
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$ |
624,803 |
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$ |
675,298 |
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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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2010 |
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2009 |
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2010 |
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2009 |
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Operating revenues |
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$ |
89,768 |
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$ |
91,145 |
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$ |
256,747 |
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$ |
263,088 |
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Operating expenses: |
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Cost of services and sales |
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33,157 |
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35,318 |
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97,623 |
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101,886 |
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Selling, general and administrative |
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23,200 |
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21,910 |
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66,022 |
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66,392 |
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Depreciation and amortization |
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18,606 |
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23,724 |
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55,974 |
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59,784 |
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(Gain) loss on disposal of assets, net |
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9 |
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(15 |
) |
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(479 |
) |
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454 |
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Total operating expenses |
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74,972 |
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80,937 |
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219,140 |
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228,516 |
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Operating income |
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14,796 |
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|
10,208 |
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37,607 |
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34,572 |
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Other income and expense: |
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Interest expense |
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(19,723 |
) |
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(9,642 |
) |
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(36,567 |
) |
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|
(28,284 |
) |
Interest income |
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8 |
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30 |
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31 |
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81 |
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Total other income and expense |
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(19,715 |
) |
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(9,612 |
) |
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(36,536 |
) |
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(28,203 |
) |
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Income (loss) before income tax benefit (expense) |
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|
(4,919 |
) |
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|
596 |
|
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|
1,071 |
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|
6,369 |
|
Income tax benefit (expense) |
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|
1,901 |
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|
(340 |
) |
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(30,492 |
) |
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(2,874 |
) |
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Income (loss) before extraordinary item |
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|
(3,018 |
) |
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|
256 |
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|
(29,421 |
) |
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|
3,495 |
|
Extraordinary item, net of taxes |
|
|
|
|
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|
37,346 |
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|
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|
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|
37,346 |
|
|
|
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|
|
|
|
|
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Net income (loss) |
|
$ |
(3,018 |
) |
|
$ |
37,602 |
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|
$ |
(29,421 |
) |
|
$ |
40,841 |
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Net income (loss) per share: |
|
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|
|
|
|
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Basic |
|
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|
|
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|
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|
|
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Income (loss) on continuing operations |
|
$ |
(0.07 |
) |
|
$ |
0.01 |
|
|
$ |
(0.66 |
) |
|
$ |
0.08 |
|
Extraordinary item |
|
|
|
|
|
|
0.84 |
|
|
|
|
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.07 |
) |
|
$ |
0.85 |
|
|
$ |
(0.66 |
) |
|
$ |
0.93 |
|
|
|
|
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|
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|
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|
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|
|
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|
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|
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|
Weighted average shares outstanding |
|
|
44,628 |
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|
|
44,354 |
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|
|
44,564 |
|
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|
44,100 |
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Diluted |
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Income (loss) on continuing operations |
|
$ |
(0.07 |
) |
|
$ |
0.01 |
|
|
$ |
(0.66 |
) |
|
$ |
0.08 |
|
Extraordinary item |
|
|
|
|
|
|
0.82 |
|
|
|
|
|
|
|
0.83 |
|
|
|
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|
|
|
|
|
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Net income (loss) |
|
$ |
(0.07 |
) |
|
$ |
0.83 |
|
|
$ |
(0.66 |
) |
|
$ |
0.91 |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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|
|
|
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|
Weighted average shares outstanding |
|
|
44,628 |
|
|
|
45,136 |
|
|
|
44,564 |
|
|
|
44,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
Nine Months Ended September 30, 2010
(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 (Deficit) |
|
Balance, December 31, 2009 |
|
|
44,484 |
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|
$ |
445 |
|
|
$ |
198,979 |
|
|
$ |
(157,472 |
) |
|
$ |
(11,912 |
) |
|
$ |
30,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total comprehensive income (loss) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
(29,421 |
) |
|
|
9,052 |
|
|
|
(20,369 |
) |
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Dividends declared |
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|
|
|
|
|
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|
(28,818 |
) |
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|
|
|
|
|
|
|
|
(28,818 |
) |
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
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Stock-based compensation |
|
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|
|
|
|
|
|
|
|
2,665 |
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|
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|
|
|
|
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|
2,665 |
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Tax benefit of convertible
bond call options |
|
|
|
|
|
|
|
|
|
|
1,165 |
|
|
|
|
|
|
|
|
|
|
|
1,165 |
|
|
|
|
|
|
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|
|
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|
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Surrender of 39 shares to
cover withholding
taxes on stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Issuance of shares of
common stock
pursuant to stock
plans, $.01 par |
|
|
174 |
|
|
|
2 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
44,658 |
|
|
$ |
447 |
|
|
$ |
174,013 |
|
|
$ |
(186,893 |
) |
|
$ |
(2,860 |
) |
|
$ |
(15,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(29,421 |
) |
|
$ |
40,841 |
|
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
55,974 |
|
|
|
59,784 |
|
Gain on extraordinary item, net of taxes |
|
|
|
|
|
|
(37,346 |
) |
Unrealized loss on ineffective hedge adjustment |
|
|
11,258 |
|
|
|
|
|
Amortization of debt issuance costs and debt discount |
|
|
5,580 |
|
|
|
5,205 |
|
Stock-based compensation |
|
|
2,665 |
|
|
|
3,416 |
|
Deferred income taxes |
|
|
33,273 |
|
|
|
2,874 |
|
Provision for uncollectible accounts |
|
|
2,308 |
|
|
|
3,632 |
|
Other non-cash expenses |
|
|
84 |
|
|
|
1,242 |
|
Changes in operating assets and liabilities |
|
|
(12,267 |
) |
|
|
(6,641 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
69,454 |
|
|
|
73,007 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Investment in construction and capital expenditures |
|
|
(25,040 |
) |
|
|
(37,258 |
) |
Change in unsettled construction and capital expenditures |
|
|
(3,505 |
) |
|
|
(9,450 |
) |
Investment in unconsolidated affiliate |
|
|
(2,060 |
) |
|
|
|
|
Change in unsettled acquisition costs |
|
|
|
|
|
|
(250 |
) |
Net change in non-current investments |
|
|
500 |
|
|
|
150 |
|
Net change in restricted cash |
|
|
954 |
|
|
|
14,527 |
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(29,151 |
) |
|
|
(32,281 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(12,545 |
) |
|
|
(30,185 |
) |
Proceeds from the issuance of long-term debt |
|
|
12,000 |
|
|
|
24,500 |
|
Payment of cash dividend on common stock |
|
|
(28,777 |
) |
|
|
(28,534 |
) |
Payment of withholding taxes on stock-based compensation |
|
|
(326 |
) |
|
|
(1,823 |
) |
Proceeds from issuance of common stock |
|
|
350 |
|
|
|
1,117 |
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(29,298 |
) |
|
|
(34,925 |
) |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
11,005 |
|
|
|
5,801 |
|
Cash and cash equivalents, beginning of period |
|
|
6,271 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
17,276 |
|
|
$ |
7,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
22,816 |
|
|
$ |
28,371 |
|
Income taxes paid, net of refunds |
|
$ |
36 |
|
|
$ |
(669 |
) |
Supplemental Non-cash Transactions: |
|
|
|
|
|
|
|
|
Property acquired under capital leases |
|
$ |
1,295 |
|
|
$ |
890 |
|
Dividend declared, but not paid |
|
$ |
9,617 |
|
|
$ |
9,555 |
|
Additions to ARO asset |
|
$ |
71 |
|
|
$ |
291 |
|
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
|
|
|
|
Crest Communications Corporation (Crest) |
|
|
|
|
Holdings, Inc. (ACS Holdings)
|
|
|
|
WCI Cable, Inc. |
|
|
|
|
ACS of Alaska, Inc. (ACSAK)
|
|
|
|
WCIC Hillsboro, LLC. |
|
|
|
|
ACS of the Northland, Inc. (ACSN)
|
|
|
|
Alaska Northstar Communications, LLC. |
|
|
|
|
ACS of Fairbanks, Inc. (ACSF)
|
|
|
|
WCI Lightpoint, LLC. |
|
|
|
|
ACS of Anchorage, Inc. (ACSA)
|
|
|
|
Worldnet Communications, Inc. |
|
|
|
|
ACS Wireless, Inc. (ACSW)
|
|
|
|
Alaska Fiber Star, LLC. |
|
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
|
|
|
|
ACS Internet, Inc. (ACSI) |
|
|
|
|
|
|
|
|
ACS Messaging, Inc. (ACSM) |
|
|
|
|
|
|
|
|
ACS Cable Systems, Inc. (ACSC) |
|
|
|
|
In addition to the wholly owned subsidiaries, the Company has a 49% interest in TekMate,
LLC (TekMate) which is represented in the Companys consolidated financial statements as an
equity method investment.
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, 2009. 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 consolidated 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, 2010, are not necessarily indicative of the results of operations
which might be expected for the entire year or any other interim periods.
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.
Significant Changes in Accounting Practice, Reclassifications and Correction of Immaterial Errors
As previously reported in the Companys quarterly filing for the three months ended March 31,
2010, the Company identified a cumulative adjustment which reduced wireline revenue by $5,764 and
wireline income tax expense of $2,369 over a five year period beginning January 1, 2005. The
adjustment was determined to be an immaterial error in the calculation of a regulatory liability
payable to the Universal Service Administration Company (USAC) for high cost loop support, and
the related income tax expense. The Company concluded that these errors were not material to any of
its prior period financial statements under the guidance of SEC Staff Accounting Bulletin (SAB)
No. 99 Materiality. Although the errors were and continue to be immaterial to prior periods, because of the
significance of the out-of-period correction in the first quarter of 2010, the Company applied the
guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements, and revised its prior period financial
statements.
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.) |
In addition to an increase of $3,118 in the Companys accumulated deficit on December 31,
2008, the schedules that follow recast the immaterial error to reflect the balances as if they had
been recorded in the proper periods.
The following schedule presents a reconciliation of the effects of the adjustments made to the
Companys previously reported balance sheet line items for December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Deferred income taxes |
|
$ |
111,625 |
|
|
$ |
2,369 |
|
|
$ |
113,994 |
|
Total assets |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
Accounts payable, accrued and
other current liabilities |
|
|
62,887 |
|
|
|
5,764 |
|
|
|
68,651 |
|
Total current liabilities |
|
|
73,031 |
|
|
|
5,764 |
|
|
|
78,795 |
|
Total liabilities |
|
|
639,494 |
|
|
|
5,764 |
|
|
|
645,258 |
|
Accumulated deficit |
|
|
(154,077 |
) |
|
|
(3,395 |
) |
|
|
(157,472 |
) |
Total stockholders equity (deficit) |
|
|
33,435 |
|
|
|
(3,395 |
) |
|
|
30,040 |
|
Total liabilities and stockholders equity |
|
|
672,929 |
|
|
|
2,369 |
|
|
|
675,298 |
|
The following schedule presents a reconciliation of the effects of the adjustments made
to the Companys previously reported quarterly consolidated statements of operations for the three
and nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended |
|
|
Nine Months ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2009 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Operating revenues |
|
$ |
91,262 |
|
|
$ |
(117 |
) |
|
$ |
91,145 |
|
|
$ |
263,439 |
|
|
$ |
(351 |
) |
|
$ |
263,088 |
|
Operating income |
|
|
10,325 |
|
|
|
(117 |
) |
|
|
10,208 |
|
|
|
34,923 |
|
|
|
(351 |
) |
|
|
34,572 |
|
Income before income tax expense |
|
|
713 |
|
|
|
(117 |
) |
|
|
596 |
|
|
|
6,720 |
|
|
|
(351 |
) |
|
|
6,369 |
|
Income tax expense |
|
|
(388 |
) |
|
|
48 |
|
|
|
(340 |
) |
|
|
(3,018 |
) |
|
|
144 |
|
|
|
(2,874 |
) |
Income before extraordinary
item, net of taxes |
|
|
325 |
|
|
|
(69 |
) |
|
|
256 |
|
|
|
3,702 |
|
|
|
(207 |
) |
|
|
3,495 |
|
Net income |
|
|
37,671 |
|
|
|
(69 |
) |
|
|
37,602 |
|
|
|
41,048 |
|
|
|
(207 |
) |
|
|
40,841 |
|
The following schedule presents a reconciliation of the effects of the adjustments made to the
Companys previously reported consolidated statements of cash flows for the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30. 2009 |
|
|
|
As Reported |
|
|
Adj |
|
|
As Revised |
|
Net income |
|
$ |
41,048 |
|
|
$ |
(207 |
) |
|
$ |
40,841 |
|
Deferred income taxes |
|
|
3,018 |
|
|
|
(144 |
) |
|
|
2,874 |
|
Changes in operating assets and liabilities |
|
|
(6,992 |
) |
|
|
351 |
|
|
|
(6,641 |
) |
8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
2. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
The following table describes the components of comprehensive income (loss), net of tax, for
the three and nine months ended September 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
(3,018 |
) |
|
$ |
37,602 |
|
|
$ |
(29,421 |
) |
|
$ |
40,841 |
|
Minimum pension liability adjustment |
|
|
113 |
|
|
|
146 |
|
|
|
339 |
|
|
|
437 |
|
Interest rate swap marked to market |
|
|
447 |
|
|
|
679 |
|
|
|
2,083 |
|
|
|
3,079 |
|
Unrealized loss on ineffective hedge adjustment |
|
|
6,630 |
|
|
|
|
|
|
|
6,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
4,172 |
|
|
$ |
38,427 |
|
|
$ |
(20,369 |
) |
|
$ |
44,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On August 31, 2010, the Company completed the purchase of a 49% interest in TekMate, LLC,
Alaskas largest privately owned information technology services company, for a purchase price of
$2,060. The price paid to acquire the Companys share of the net assets of TekMate differs from the
underlying book value of such net assets. This premium of $1,641 is accounted for as equity method
goodwill and is included within the Investment in unconsolidated affiliates on the balance sheet.
The purchase agreement included a preferred distribution to the sellers of $698 which is payable
from future earnings. When the subsequent earnings of TekMate exceed $698, the Company will begin
to realize its share of TekMates earnings in Revenue on the statement of operations. The
investment represents the Companys maximum exposure to loss as a result of the Companys ownership
interest.
The investment in unconsolidated affiliate is accounted for under the equity method, and
consisted of the following at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Percent owned |
|
|
Investment |
|
TekMate, LLC. |
|
|
49 |
% |
|
$ |
2,060 |
|
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 restricted stock, 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
$546,673 at September 30, 2010 was estimated based on quoted market prices. The carrying values of
these liabilities were $553,663 at September 30, 2010.
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.
9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
4. FAIR VALUE MEASURES (Continued)
The following table presents the balances of assets and liabilities measured at fair value on
a recurring basis as of September 30, 2010 and December 31, 2009, at each hierarchical level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
| |
December 31, 2009 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current investments in
auction rate securities |
|
$ |
355 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
355 |
|
|
$ |
855 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(11,258 |
) |
|
$ |
|
|
|
$ |
(11,258 |
) |
|
$ |
|
|
|
$ |
(14,796 |
) |
|
$ |
|
|
|
$ |
(14,796 |
) |
|
$ |
|
|
Non-current investments consist of Auction Rate Securities (ARS) that have maturity dates
greater than one year from September 30, 2010. The investments in ARS are included in Level 3 as no
active market or significant other observable inputs exist. The Company assigned a value to its ARS
portfolio by reviewing the value assigned to similar securities by brokerages, relative yields and
assessing credit risk. On July 6, 2010 and May 27, 2010, $100 and $400, respectively, of auction
rate securities were redeemed by the issuer at face value.
Interest rate swaps were 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 are classified within Level 2. This balance was reclassified from long term
liabilities to current liabilities at September 30, 2010 when the swaps and related debt were
scheduled to be extinguished in the subsequent quarter.
On October 21, 2010 the Company extinguished its 2005 Senior Secured Credit Facility and
entered into a new credit arrangement. The existing swaps are expected to be settled in December of
2010 and no material difference in the fair value of the interest rate swaps at September 30, 2010
and the time of the settlement is expected. See Note 10, Subsequent Events, for more information on
this transaction.
5. STOCK INCENTIVE PLANS
Total compensation cost for share-based payments was $2,665 and $3,416 for the nine months
ended September 30, 2010 and 2009, respectively. Included in accrued compensation expense was $50
and $74 associated with employee stock purchase plan (ESPP) shares yet to be awarded for the
three months ended September 30, 2010 and 2009, respectively.
There were 770 and 841 restricted stock units granted during the nine months ended September
30, 2010 and 2009, respectively. There were no stock-settled appreciation rights (SSARs) granted
during the nine months ended September 30, 2010 and 775 granted in the nine months ended September
30, 2009.
The following table describes the assumptions used for valuation of equity instruments awarded
during the nine months ended September 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Restricted stock: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
0.00 |
% |
|
|
0.00% 0.25 |
% |
Quarterly dividend |
|
$ |
0.215 |
|
|
$ |
0.215 |
|
Expected per annum, forfeiture rate |
|
|
0.00% 6.47 |
% |
|
|
0.00% 5.47 |
% |
Stock Options: |
|
|
|
|
|
|
|
|
Risk free rate |
|
|
|
|
|
|
0.25 |
% |
Dividend yield |
|
|
|
|
|
|
9.27 |
% |
Expected volatility factor |
|
|
|
|
|
|
36.27 |
% |
Expected option life (years) |
|
|
|
|
|
|
3.2 |
|
10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
6. EARNINGS PER SHARE
Earnings per share are based on the weighted average number of
shares of common stock and dilutive potential common share equivalents outstanding. Basic earnings
per share includes no dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution of securities that could share in the earnings of an entity.
The Company includes dilutive stock options based on the treasury stock method. Due to the
Companys net losses for the three and nine months ended September 30, 2010, 2,764 and 2,551
potential common share equivalents, which consisted of options, restricted stock and SSARs granted
to employees, and deferred shares granted to directors, were anti-dilutive. Also excluded from the
calculation were shares related to the Companys convertible debt which were anti-dilutive for the
three and nine month periods ended September 30, 2010 and 2009.
Earnings per share for the
three and nine months ended September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
$ |
(3,018 |
) |
|
$ |
256 |
|
|
$ |
(29,421 |
) |
|
$ |
3,495 |
|
Extraordinary item, net of taxes |
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
37,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares |
|
$ |
(3,018 |
) |
|
$ |
37,602 |
|
|
$ |
(29,421 |
) |
|
$ |
40,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
44,628 |
|
|
|
44,354 |
|
|
|
44,564 |
|
|
|
44,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on continuing operations |
|
$ |
(0.07 |
) |
|
$ |
0.01 |
|
|
$ |
(0.66 |
) |
|
$ |
0.08 |
|
Extraordinary item, net of taxes |
|
|
|
|
|
|
0.84 |
|
|
|
|
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.07 |
) |
|
$ |
0.85 |
|
|
$ |
(0.66 |
) |
|
$ |
0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
44,628 |
|
|
|
44,354 |
|
|
|
44,564 |
|
|
|
44,100 |
|
Restricted stock, options and deferred shares |
|
|
|
|
|
|
782 |
|
|
|
|
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding |
|
|
44,628 |
|
|
|
45,136 |
|
|
|
44,564 |
|
|
|
44,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) on continuing operations |
|
$ |
(0.07 |
) |
|
$ |
0.01 |
|
|
$ |
(0.66 |
) |
|
$ |
0.08 |
|
Extraordinary item, net of taxes |
|
|
|
|
|
|
0.82 |
|
|
|
|
|
|
|
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(0.07 |
) |
|
$ |
0.83 |
|
|
$ |
(0.66 |
) |
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. 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. 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.
11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts)
7. RETIREMENT PLANS (Continued)
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, 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 zero and $35 contributions to the Plan in the three
and nine months of 2010 and 2009, respectively. No additional contribution is expected in the
remainder of 2010.
The following table represents the net periodic pension expense for the ACS Retirement Plan
for the three and nine months ended September 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest cost |
|
$ |
201 |
|
|
$ |
210 |
|
|
$ |
604 |
|
|
$ |
630 |
|
Expected return on plan assets |
|
|
(207 |
) |
|
|
(182 |
) |
|
|
(620 |
) |
|
|
(547 |
) |
Amortization of loss |
|
|
159 |
|
|
|
195 |
|
|
|
478 |
|
|
|
587 |
|
Amortization of prior service cost |
|
|
33 |
|
|
|
51 |
|
|
|
97 |
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
186 |
|
|
$ |
274 |
|
|
$ |
559 |
|
|
$ |
822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. 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 consumer, carrier, 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.
12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
8. BUSINESS SEGMENTS (Continued)
The following tables illustrate selected financial data for each segment as of and for the
three months ended September 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 |
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
66,160 |
|
|
$ |
39,091 |
|
|
$ |
1,747 |
|
|
$ |
(17,230 |
) |
|
$ |
89,768 |
|
Intersegment revenue |
|
|
15,145 |
|
|
|
338 |
|
|
|
1,747 |
|
|
|
|
|
|
|
17,230 |
|
Income (loss) before income tax benefit (expense) |
|
|
1,819 |
|
|
|
12,043 |
|
|
|
(18,781 |
) |
|
|
|
|
|
|
(4,919 |
) |
Income tax benefit (expense) |
|
|
(130 |
) |
|
|
(4,949 |
) |
|
|
6,980 |
|
|
|
|
|
|
|
1,901 |
|
Net income (loss) |
|
|
1,689 |
|
|
|
7,094 |
|
|
|
(11,801 |
) |
|
|
|
|
|
|
(3,018 |
) |
Total assets |
|
|
451,222 |
|
|
|
172,019 |
|
|
|
1,562 |
|
|
|
|
|
|
|
624,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009 |
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
69,797 |
|
|
$ |
37,516 |
|
|
$ |
2,337 |
|
|
$ |
(18,505 |
) |
|
$ |
91,145 |
|
Intersegment revenue |
|
|
15,544 |
|
|
|
624 |
|
|
|
2,337 |
|
|
|
|
|
|
|
18,505 |
|
Income (loss) before income tax benefit (expense) |
|
|
(1,949 |
) |
|
|
12,056 |
|
|
|
(9,511 |
) |
|
|
|
|
|
|
596 |
|
Income tax benefit (expense) |
|
|
(26,162 |
) |
|
|
(4,890 |
) |
|
|
30,712 |
|
|
|
|
|
|
|
(340 |
) |
Net income (loss) from continuing operations |
|
|
(28,111 |
) |
|
|
7,166 |
|
|
|
21,201 |
|
|
|
|
|
|
|
256 |
|
Extraordinary item, net of taxes |
|
|
37,442 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
37,346 |
|
Net income |
|
|
9,331 |
|
|
|
7,070 |
|
|
|
21,201 |
|
|
|
|
|
|
|
37,602 |
|
Total assets |
|
|
498,693 |
|
|
|
183,326 |
|
|
|
4,512 |
|
|
|
|
|
|
|
686,531 |
|
The following tables illustrate selected financial data for each segment as of and for the nine
months ended September 30, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010 |
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
192,294 |
|
|
$ |
107,376 |
|
|
$ |
4,636 |
|
|
$ |
(47,559 |
) |
|
$ |
256,747 |
|
Intersegment revenue |
|
|
41,702 |
|
|
|
1,221 |
|
|
|
4,636 |
|
|
|
|
|
|
|
47,559 |
|
Income (loss) before income tax benefit (expense) |
|
|
2,759 |
|
|
|
32,678 |
|
|
|
(34,366 |
) |
|
|
|
|
|
|
1,071 |
|
Income tax expense |
|
|
(159 |
) |
|
|
(13,436 |
) |
|
|
(16,897 |
) |
|
|
|
|
|
|
(30,492 |
) |
Net income (loss) |
|
|
2,600 |
|
|
|
19,242 |
|
|
|
(51,263 |
) |
|
|
|
|
|
|
(29,421 |
) |
Total assets |
|
|
451,222 |
|
|
|
172,019 |
|
|
|
1,562 |
|
|
|
|
|
|
|
624,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009 |
|
|
|
Wireline |
|
|
Wireless |
|
|
All Other |
|
|
Eliminations |
|
|
Total |
|
Operating revenues |
|
$ |
198,557 |
|
|
$ |
109,212 |
|
|
$ |
8,938 |
|
|
$ |
(53,619 |
) |
|
$ |
263,088 |
|
Intersegment revenue |
|
|
42,798 |
|
|
|
1,883 |
|
|
|
8,938 |
|
|
|
|
|
|
|
53,619 |
|
Income (loss) before income tax benefit (expense) |
|
|
(2,044 |
) |
|
|
36,875 |
|
|
|
(28,462 |
) |
|
|
|
|
|
|
6,369 |
|
Income tax benefit (expense) |
|
|
(26,536 |
) |
|
|
(15,096 |
) |
|
|
38,758 |
|
|
|
|
|
|
|
(2,874 |
) |
Net income (loss) from continuing operations |
|
|
(28,580 |
) |
|
|
21,779 |
|
|
|
10,296 |
|
|
|
|
|
|
|
3,495 |
|
Extraordinary item, net of taxes |
|
|
37,442 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
37,346 |
|
Net income |
|
|
8,862 |
|
|
|
21,683 |
|
|
|
10,296 |
|
|
|
|
|
|
|
40,841 |
|
Total assets |
|
|
498,693 |
|
|
|
183,326 |
|
|
|
4,512 |
|
|
|
|
|
|
|
686,531 |
|
13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
9. 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 $835 at
September 30, 2010 against certain current claims and legal actions. The Company believes that the
disposition of these matters will not have a material adverse effect on the Companys consolidated
financial position, results of operations or cash flows.
On April 19, 2010, the Internal
Revenue Service (the Service) issued a Notice of Proposed Adjustment (the NOPA) with respect to
the 2006, 2007 and 2008 taxable years of Crest Communications Corporation (Crest), which was
acquired by the Company on October 30, 2008. Crest had acquired certain entities out of bankruptcy
in 2002. The original majority stockholder of these entities, an Australian insurance company, AMP,
had made certain advances to the entities. These entities entered into bankruptcy in 2001, and the
bankruptcy court approved a plan which effectively subordinated these advances to all other
creditors. Upon acquiring the entities in 2002, Crest characterized the advances as equity for tax
purposes. The Service is now asserting that characterization of the AMP advances as equity was
incorrect, and that Crest had additional income due to the cancellation of debt. The cancellation
of indebtedness income at the amounts set out in the NOPA could result in a charge to income tax
expense of approximately $67,000, $28,000 of which would be a result of additional taxes payable
and $39,000 of which would be a result of the reduction in recognized deferred tax assets.
The Company believes there are errors within the adjustments asserted by the Service. If the
Service accepts the corrections the Company believes are appropriate, but still prevails on the
underlying issue, the result is expected to be a receivable from the IRS for the overpayment of
Alternative Minimum Tax of $2,743, a charge to income tax expense of approximately $29,683, and a
net reduction in recognized deferred tax assets. The Company believes it is more likely than not
that it will prevail on the factual errors included in the NOPA; however it is unable to say it is
more likely than not it will prevail on the underlying debt vs. equity issue. Therefore, in
accordance with the guidance in ASC Topic 740, Income Taxes the Company recorded $29,683 in
additional income tax expense, and $2,743 receivable, pending resolution with the IRS.
The additional income tax expense is made up of two components: the first representing $11,018
for the tax effect of losing net operating losses (NOLs) while the remaining $18,665 represents a
deferred tax liability for the difference in outside basis in certain Crest subsidiaries. Through
enforcing indemnification rights, preserving the corporate structure of the Crest subsidiaries and
other proactive steps, it should be possible to mitigate most or all of the cash impact of the
$18,665 deferred tax liability for as long as the Company remains a going concern. ASC 740 requires
recognition of a deferred tax liability for outside basis differences. An outside basis difference
represents the amount by which the book basis of an investment in a domestic subsidiary for
financial reporting purposes exceeds the tax basis in such subsidiary. If under applicable tax law,
the outside basis difference in a domestic subsidiary can be recovered tax-free and the Company
expects to avail itself of such law, the outside tax basis difference is not a temporary difference
since no taxes are expected to result upon its reversal. However, for certain Crest subsidiaries,
the cancellation of debt created a difference in outside basis that the Company cannot recover in a
tax-free manner and as such, a deferred liability was established.
The Stock Purchase Agreement (SPA) underlying the Companys acquisition of Crest provides
for indemnification for the Company by the former stockholders (Selling Stockholders) of Crest.
This indemnity was entered into with the intent to mitigate the impact on the Company of potential
tax exposure items such as those raised by the NOPA. The Company and the selling stockholders
intend to contest all issues raised by the NOPA through various avenues of appeal. However, should
the appeals process fail to overturn the NOPA; should the Company be unable to preserve the
corporate structure of the Crest subsidiaries; and should the Company prove unable to effectively
enforce the indemnification provisions in the SPA, this could have a material effect on the
Companys consolidated financial position, results of operations and cash flows.
10. SUBSEQUENT EVENTS
On October 21, 2010, the Company entered into a new $470,000 bank
credit facility (the 2010 Senior Secured Credit Facility) which consists of a drawn term loan of
$440,000 and an undrawn revolver of $30,000. The 2010 Senior Secured Credit Facility generated net
proceeds of approximately $2,413 after repaying in full, and retiring, the Companys
2005 Senior Secured Credit Facility and deducting fees and expenses associated with the debt
issuance of approximately $6,670. The $440,000 term loan generally bears interest at LIBOR plus
4.0% per annum or 5.5%, whichever is greater, has a term of six years and shall be repayable in
quarterly installments equal to 0.25% of the original principal amount of the term loan, with the
remainder to be paid on the term maturity date. The revolver has a term of five years and to the
extent it is drawn, also generally bears interest at LIBOR plus 4.0% per annum or 5.5%, whichever
is greater, and, to the extent
14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited, In Thousands except Per Share Amounts
10. SUBSEQUENT EVENTS (Continued)
undrawn, has commitment fees equal to 0.625% per annum. The term
loan matures on October 21, 2016 and the revolver matures on October 21, 2015 and both are
collateralized by substantially all assets of the Company.
In addition to the approximately $6,670 of fees and expenses inclusive in the refinancing
transaction, we also recorded a liability of $512 for debt issuance costs not settled in the
transaction. The total $7,182 in debt issuance costs will be amortized to interest expense over the
term of the 2010 Senior Secured Credit Facility, using the straight line method which approximates
the effective interest method. The $440,000 term portion of the facility was recorded net of a 1.0%
discount, or $4,400, of the debt issuance. The discount is being accreted to interest expense using
the straight line method which approximates the effective interest method. The credit agreement
requires that we maintain certain financial ratios. Specifically it requires the senior secured to
adjusted EBITDA ratio not exceed 4.4:1.00, the total leverage to adjusted EBITDA ratio not exceed
5.25:1.00, and the adjusted EBITDA to fixed charges ratio not exceed 2.75:1.00. Further, the credit
agreement calls for a suspension of dividends if, for the most recently ended period of four
consecutive fiscal quarters, the total leverage ratio is equal to or greater than 5.00:1.00.
In connection with the 2010 Senior Secured Credit Facility, the Company entered into forward
floating-to-fixed interest rate swaps and a buy back of the 1.5% LIBOR floor, as a component of its
cash flow hedging strategy. The notional amounts of the swaps are $192,500, $115,500 and $77,000,
respectively with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a 4%
LIBOR spread. The swaps begin on June 30, 2012 and continue through September 30, 2015. In order to
protect against extreme movements in LIBOR prior to the start of the swaps, the Company has
acquired an interest rate cap at a cost of $119 for the period between January 1, 2001 and June 30,
2012, capping LIBOR at 3% on a notional principle amount of $385,000.
The net proceeds of the 2010 Senior Secured Credit Facility were used to repay in full, and
retire, the 2005 Senior Secured Credit Facility. As a result, the Company will incur a charge of
approximately $2,182 by of writing off unamortized debt issuance costs in association with the
early extinguishments of debt during the fourth quarter of 2010.
At September 30, 2010, due to the expected extinguishment of debt coincident with the new debt
transaction, three interest rate swaps with a total notional balance of $207,900 ceased to be
highly effective, and as such, the Company discontinued prospective hedge accounting and concluded
it was appropriate to reclassify amounts previously recorded in accumulated other comprehensive
income related to the affected derivatives. The amount reclassed in the third quarter of 2010 from
Other comprehensive income to the Interest expense line of the Consolidated Statements of
Operations, as a result of the hedges becoming ineffective, was $11,258. The Company expects to
settle this amount with cash on hand during the fourth quarter of 2010.
15
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 substantial debt which requires us to dedicate a substantial portion of our cash
flow from operations to payments on our debt; |
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our ability to generate sufficient earnings and cash flows to continue to make dividend
payments to our stockholders; |
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our ability to keep pace with rapid technological developments and changing standards in
the telecommunications industry, including our ability to obtain new devices, spectrum,
bandwidth, and other network elements; |
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our ability to develop attractive integrated products and services making use of our
substantial investments in fiber optic cable facilities, including our AKORN® and Northstar
fiber optic cables that connect Alaska to the Lower 48 states; |
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unanticipated damage to one or more of our high capacity cables resulting from
construction or digging mishaps, fishing boats or natural disasters; |
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changes in general industry and market conditions, and structural declines within the
telecommunications industry; |
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changes in overall national, regional or local economic conditions; |
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governmental and public policy changes, including changes in our revenues resulting from
regulatory actions affecting inter-carrier compensation or changes in revenue from
Universal Service Funds (USFs); |
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the availability of future financing in the amounts, at the terms, and subject to the
conditions necessary, to support our business and pursue growth opportunities; |
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unanticipated costs required to fund our postretirement benefit plans; |
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the success or failure of any future acquisitions; |
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the outcome of on-going IRS audits; 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, 2009, and subsequent Quarterly Reports 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.
16
Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree with any statement
or report issued by an analyst irrespective of the content of the statement or report. To the
extent that reports issued by securities analysts contain any projections, forecasts or opinions,
such reports are not our responsibility.
Important Changes to Presentation
As previously reported in our quarterly filing for the three months ended March 31, 2010,
management identified a cumulative adjustment which reduced wireline revenue by $5.8 million and
wireline income tax expense by $2.4 million over a five year period beginning January 1, 2005. The
adjustment was determined to be an immaterial error in the calculation of a regulatory liability
payable to USAC for high cost loop support, and the related income tax expense. Management
concluded that these errors were not material to any of its prior period financial statements under
the guidance of SAB No. 99 Materiality. Although the errors were and continue to be immaterial to
prior periods, because of the significance of the out-of-period correction in the first quarter of
2010, we applied the guidance of SAB No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in the Current Year Financial Statements, and revised our prior
period financial statements.
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 adjustments into account.
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, including regulatory activity; |
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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.
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 and wireline broadband, including our interstate MPLS
network comprising redundant long-haul undersea fiber optic cables and other managed data services to businesses.
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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
reliable and redundant data connectivity in each market covered by our network underpinned
by high-speed fiber links within and between Alaskas urban centers. We have increasingly
targeted commercial and government customers of all sizes that demand managed or other
sophisticated data solutions. In our wireless business, we have directed resources towards
enhancing and expanding our 3G coverage and marketing wireless plans that encourage
customer adoption of smart phones and mobile plans. |
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Process Improvement to Achieve Operational Excellence: While focusing resources on
revenue growth and market share gains, we continually challenge our management team and
employees at all levels of the organization to lower expenses and improve the customer
experience through process improvements. We expect to continue to invest in
technology-assisted process improvement. We expect efforts such as deploying enhanced
self-service tools to customers on our web site 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 tied to these
goals. We design executive compensation programs carefully to align executives and
stockholders long-term interests. |
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Continuous Enhancement of Products and Services: We intend to continue to
introduce new services that draw upon our core competencies that we believe will be
attractive to our target customers. In considering new services, we look for market
opportunities that we believe present significant growth opportunities such as, our
investments in our AKORN and Northstar fiber optic cable systems and our first-to-market
deployment of 3G wireless services. In July, we launched a new suite of services that make
use of our data centers in Anchorage, Alaska and Hillsboro, Oregon. In addition we recently
acquired a 49% interest in TekMate, LLC., Alaskas largest privately-owned information
technology services company. With this investment and a partnership operating agreement, we
believe we will bring broader managed IT solutions and professional services to the market. |
We aim to create value for our shareholders by carefully investing cash flows generated by the
business in specific opportunities and transactions that support these imperatives. Under our
current $0.86 per share annual dividend policy, the company returned approximately $28.8 million in
cash dividends to our stockholders during the nine months ended September 30, 2010.
18
RESULTS OF OPERATIONS
All amounts are discussed at the consolidated level after the elimination of affiliate revenue
and expense.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
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Three Months ended September 30, |
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2010 |
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2009 |
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Change |
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% Change |
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Operating revenues: |
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Retail |
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$ |
20,650 |
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$ |
21,967 |
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$ |
(1,317 |
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-6.0 |
% |
Wholesale |
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2,248 |
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2,836 |
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(588 |
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-20.7 |
% |
Access |
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16,108 |
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18,003 |
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(1,895 |
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-10.5 |
% |
Enterprise |
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12,009 |
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11,447 |
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562 |
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4.9 |
% |
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Wireline |
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51,015 |
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54,253 |
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(3,238 |
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-6.0 |
% |
Wireless |
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38,753 |
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36,892 |
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1,861 |
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5.0 |
% |
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Total operating revenues |
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89,768 |
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91,145 |
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(1,377 |
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-1.5 |
% |
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Operating expenses: |
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Wireline |
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Cost of services and sales |
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18,998 |
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21,031 |
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(2,033 |
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-9.7 |
% |
Selling, general and administrative |
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17,166 |
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15,890 |
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1,276 |
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8.0 |
% |
Wireless |
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Cost of services and sales |
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14,159 |
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14,287 |
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(128 |
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-0.9 |
% |
Selling, general and administrative |
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6,034 |
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6,020 |
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14 |
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0.2 |
% |
Depreciation and amortization |
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18,606 |
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23,724 |
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(5,118 |
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-21.6 |
% |
Loss on disposal of assets |
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9 |
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(15 |
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24 |
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-160.0 |
% |
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Total operating expenses |
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74,972 |
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80,937 |
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(5,965 |
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-7.4 |
% |
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Operating income |
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14,796 |
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10,208 |
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4,588 |
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44.9 |
% |
Operating margin |
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16.5 |
% |
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11.2 |
% |
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Other income and expense: |
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Interest expense |
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(19,723 |
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(9,642 |
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(10,081 |
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104.6 |
% |
Interest income |
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8 |
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30 |
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(22 |
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-73.3 |
% |
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Total other income and expense |
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(19,715 |
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(9,612 |
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(10,103 |
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105.1 |
% |
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Income (loss) before income tax benefit (expense) |
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(4,919 |
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596 |
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(5,515 |
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-925.3 |
% |
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Income tax benefit (expense) |
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1,901 |
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(340 |
) |
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2,241 |
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-659.1 |
% |
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Income (loss) before extraordinary item |
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(3,018 |
) |
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256 |
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(3,274 |
) |
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-1278.9 |
% |
Extraordinary item, net of taxes |
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37,346 |
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(37,346 |
) |
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-100.0 |
% |
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Net income (loss) |
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$ |
(3,018 |
) |
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$ |
37,602 |
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$ |
(40,620 |
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-108.0 |
% |
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Revenue Sources by Segment
We have two reportable business segments, wireline and wireless, which conduct the following
principal activities:
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Wireline: We provide communications services including voice, data, broadband,
multi-protocol label switching services, network access, long distance and other services
to consumer, carrier, business and government customers throughout Alaska and to and from
Alaska. |
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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 during 2010 were concentrated in
the residential market which we believe was impacted by wireless substitution and the turndown of
payphone lines as part of a business rationalization initiative. Retail revenue decreased $1.3
million in the three months ended September 30, 2010 over September 30, 2009, primarily due to a
$0.7 million decline in local exchange revenue associated with residential line losses, a $0.5
million net decrease in revenue associated with the prior year policy change and release of company
liabilities for commercial developer deposits, and a $0.4 million decline in long distance sales.
These losses were offset, in part, by a $0.3 million increase in revenue from our Internet Service
Provider (ISP) subscriber base.
Wholesale: Wholesale revenues decreased $0.6 million from the prior year quarter 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 and the decision of another competitor, and wholesale customer, to exit the
market. We expect wholesale revenue will continue to decline.
Access: Access revenue declined $1.9 million from the prior year quarter primarily due to
higher out-of-period settlements in 2009.
Enterprise: Enterprise revenue increased $0.6 million from the prior year quarter with higher
data revenue of $0.9 million net of $0.3 million from an expired capacity exchange agreement in
2009, offset in part, by a $0.4 million reduction in carrier voice revenue.
Wireless
Wireless revenue increased $1.9 million in the three months ended September 30, 2010, as
compared to the prior year period ended September 30, 2009, driven by a $3.1 million increase in
roaming revenue, which benefited from the expansion of our 3G data network; and a $1.0 million
increase in Competitive Eligible Telecommunications Carrier (CETC) revenue. These increases were
offset, in part, by a decrease of $1.7 million in recurring service plan revenue attributable to
lower subscribers and a $0.5 million decline in handset and accessory sales.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange
and cable systems operating costs, decreased $0.8 million for the quarter ended September 30, 2010
over September 30, 2009.
Cost of Services and Sales Wireline cost of services and sales decreased $2.0 million due to
declines of $1.9 million in labor resulting from the overall reduction in our general work force,
$0.5 million in maintenance contracts, $0.2 million in ISP access and leased circuits, and $0.1
million in land and building related charges. These decreases are partially offset by increases of
$0.5 million in LD COGS and $0.2 million in advanced network services expense.
Selling, General and Administrative Wireline SG&A expenses increased $1.3 million driven by
a $1.0 million increase in labor costs for higher cash and stock compensation expense, and
increases of $0.8 million in advertising associated with our re-branding initiative and $0.4
million in legal, IT and other consulting costs. Offsetting these increases was a $0.8 million
decrease in bad debt expense in the current year.
Wireless
Cost of Services and Sales Wireless cost of services and sales decreased $0.1 million
primarily due to a $0.4 million decrease in network costs, partially offset by a $0.2 million
increase in handset, accessory and data content expenses.
Selling, General and Administrative SG&A expenses remained flat with a decrease in
advertising expense of $0.3 million offset by an increase in labor expense.
Depreciation and Amortization: Depreciation and amortization expense decreased $5.1 million
in the three months ended September 30, 2010, from the same period in the prior year, due primarily
to a number of pooled asset classes reaching their maximum depreciable lives and a reduction in
depreciable value in the assets purchased from Crest Communications resulting from the reallocation
of purchase price from fixed assets to deferred tax assets under purchase accounting. These
declines were partially offset by the acceleration of depreciation on certain Wireless assets and
other additions to our asset base.
20
Other Income and Expense: Other income and expense for the three months ended September 30,
2010 is a net expense of $19.7 million. The net increase of $10.1 million in expense over the same
period in the prior year is primarily due to the discontinuance of hedge accounting on our interest
rate swaps which, in anticipation of our October 2010 refinancing of our
2005 Senior Credit Facility, resulted in an $11.3 million increase in interest expense. See
Note 10, Subsequent Events for more information on this transaction.
Income Taxes: For the three months ended September 30, 2010 our estimated effective tax
rate was 38.62%. At September 30, 2010 we had federal tax NOL carry
forwards of approximately $143.4 million. Income tax expense will not involve a significant cash
outflow until these NOLs are exhausted.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
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Nine Months ended September 30, |
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2010 |
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2009 |
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Change |
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% Change |
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Operating revenues: |
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Retail |
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$ |
62,012 |
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$ |
64,480 |
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$ |
(2,468 |
) |
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-3.8 |
% |
Wholesale |
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|
7,280 |
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|
8,795 |
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(1,515 |
) |
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-17.2 |
% |
Access |
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45,774 |
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|
48,237 |
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(2,463 |
) |
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-5.1 |
% |
Enterprise |
|
|
35,526 |
|
|
|
34,247 |
|
|
|
1,279 |
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|
3.7 |
% |
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|
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|
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|
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Wireline |
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150,592 |
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|
|
155,759 |
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|
(5,167 |
) |
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|
-3.3 |
% |
Wireless |
|
|
106,155 |
|
|
|
107,329 |
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|
|
(1,174 |
) |
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|
-1.1 |
% |
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|
|
|
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|
|
|
|
|
|
|
|
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Total operating revenues |
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|
256,747 |
|
|
|
263,088 |
|
|
|
(6,341 |
) |
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|
-2.4 |
% |
|
|
|
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|
|
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|
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|
|
|
|
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|
|
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|
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Operating expenses: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireline |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales |
|
|
57,327 |
|
|
|
61,913 |
|
|
|
(4,586 |
) |
|
|
-7.4 |
% |
Selling, general and administrative |
|
|
49,143 |
|
|
|
48,766 |
|
|
|
377 |
|
|
|
0.8 |
% |
Wireless |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cost of services and sales |
|
|
40,296 |
|
|
|
39,973 |
|
|
|
323 |
|
|
|
0.8 |
% |
Selling, general and administrative |
|
|
16,879 |
|
|
|
17,626 |
|
|
|
(747 |
) |
|
|
-4.2 |
% |
Depreciation and amortization |
|
|
55,974 |
|
|
|
59,784 |
|
|
|
(3,810 |
) |
|
|
-6.4 |
% |
(Gain) loss on disposal of assets |
|
|
(479 |
) |
|
|
454 |
|
|
|
(933 |
) |
|
|
-205.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
219,140 |
|
|
|
228,516 |
|
|
|
(9,376 |
) |
|
|
-4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
37,607 |
|
|
|
34,572 |
|
|
|
3,035 |
|
|
|
8.8 |
% |
Operating margin |
|
|
14.6 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(36,567 |
) |
|
|
(28,284 |
) |
|
|
(8,283 |
) |
|
|
29.3 |
% |
Interest income |
|
|
31 |
|
|
|
81 |
|
|
|
(50 |
) |
|
|
-61.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(36,536 |
) |
|
|
(28,203 |
) |
|
|
(8,333 |
) |
|
|
29.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
1,071 |
|
|
|
6,369 |
|
|
|
(5,298 |
) |
|
|
-83.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(30,492 |
) |
|
|
(2,874 |
) |
|
|
(27,618 |
) |
|
|
961.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item |
|
|
(29,421 |
) |
|
|
3,495 |
|
|
|
(32,916 |
) |
|
|
-941.8 |
% |
Extraordinary item, net of taxes |
|
|
|
|
|
|
37,346 |
|
|
|
(37,346 |
) |
|
|
-100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(29,421 |
) |
|
$ |
40,841 |
|
|
$ |
(70,262 |
) |
|
|
-172.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Operating Revenue
Wireline
Retail: Declines in retail switched access lines in service during 2010 were concentrated in
the residential market which we believe was impacted by wireless substitution. Retail revenue
decreased $2.5 million in the nine months ended September 30, 2010 over September 30, 2009,
primarily due to a $1.8 million decline in local exchange revenue associated with residential line
losses and a $0.8 million decline in long distance sales and a $0.5 million net decrease in revenue
associated with the prior year policy change and release of company liabilities for commercial
developer deposits in 2009. These losses were offset, in part, by a $0.8 million increase in
revenue from our existing ISP subscriber base.
Wholesale: Wholesale revenues decreased $1.5 million over the prior year due to continued
decline in leases of our UNEs. We believe this decline is primarily attributable to the ongoing
migration of lines by our key competitor to its propriety cable telephony plant and the decision of
another competitor, and wholesale customer, to exit the market. We expect wholesale revenue will
continue to decline.
Access: Access revenue declined $2.5 million over the prior year primarily due to higher
out-of-period settlements in 2009.
Enterprise: Enterprise revenue increased $1.3 million with higher data revenue of $2.8
million net of $1.8 million from an expired capacity exchange agreement in 2009, offset in part by
a $1.6 million reduction in carrier voice revenue.
Wireless
Wireless revenue declined $1.2 million in the nine months ended September 30, 2010, as
compared to the prior year period ended September 30, 2009, driven by a decrease of $5.2 million in
recurring service plan revenue attributable to lower subscribers and a $1.2 million decline in
handset and accessory sales. These decreases were offset, in part, by a $5.0 million increase in
roaming revenue, which benefited from the expansion of our 3G data network; and a $0.4 million
increase in CETC revenue.
Operating Expense
Wireline: Wireline operating expenses, which include local telephone, Internet, interexchange
and cable systems operating costs, decreased $4.2 million for the nine months ended September 30,
2010 over September 30, 2009.
Cost of Services and Sales Wireline cost of services and sales decreased $4.6 million due to
declines of $4.8 million in labor resulting from the overall reduction in our general work force,
$1.1 million in maintenance contracts, $0.6 million in ISP access and leased circuits, $0.5 million
in land and building related charges, and $0.2 million in paystation maintenance expense. These
decreases are partially offset by increases of $1.9 million in LD COGS and $1.0 million in advanced
network services expense.
Selling, General and Administrative Wireline SG&A expenses increased $0.4 million primarily
driven by increases of $0.8 million in advertising expense tied to our re-branding initiative, the
non-recurrence of $0.8 million in favorable property tax and legal settlements in 2009, and $0.5
million legal and IT consulting costs. Offsetting these increases were $1.1 million decrease in
labor costs, and a $0.6 million decrease in bad debt expense due to improved collection efforts in
the current year.
Wireless:
Cost of Services and Sales Wireless cost of services and sales increased $0.3 million with a
$1.7 million increase in handset, accessory and data content expenses partially offset by a $1.6
million decrease in network costs.
Selling, General and Administrative SG&A expenses decreased $0.7 million due primarily to a
decrease in advertising.
Depreciation and Amortization: Depreciation and amortization expense decreased $3.8 million
in the nine months ended September 30, 2010, from the same period in the prior year, due primarily
to a number of pooled asset classes reaching their maximum depreciable lives and a reduction in
depreciable value in the assets purchased from Crest Communications resulting from the reallocation
of purchase price from fixed assets to deferred tax assets under purchase accounting. These
declines were partially offset by the acceleration of depreciation on certain Wireless assets and
other additions to our asset base.
Gain/Loss on Disposal of Assets: The disposal of certain property resulted in a net gain of
$0.5 million in the nine months ended September 30, 2010, while the prior year period reflects a
$0.5 million net loss due to the disposal of certain wireless network equipment.
22
Other Income and Expense: Other income and expense for the nine months ended September 30,
2010 is a net expense of $36.5 million. The net increase of $8.3 million in expense over the same
period in the prior year is primarily due to the discontinuance of hedge accounting on our interest
rate swaps which, in anticipation of our October 2010 refinancing of our 2005 Senior Credit
Facility, resulted in a $11.3 million increase in interest expense, and a $1.7 million increase
associated with the reduction of capitalized interest in the current year on fixed assets under
construction following the commercial launch of AKORN in April of 2009. Offsetting these increases
was a reduction in cash interest following the expiration of certain out-of-the-money swaps.
Income Taxes: For the nine months ended September 30, 2010 our effective tax
rate was 75.53%, exclusive of the $29.7 million
additional income tax expense recorded for the effects of the on-going Crest IRS audit in the
second quarter. See PART II, Item 1, Legal Proceedings for more information on the IRS issue. At
September 30, 2010 we had federal NOL carry forwards of approximately $143.4 million. Income tax
expense will not involve a significant cash outflow until these NOLs are exhausted.
Liquidity and Capital Resources
Our major sources and uses of funds for the nine months ended September 30, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
69,454 |
|
|
$ |
73,007 |
|
Net change in funds held in restricted accounts |
|
$ |
954 |
|
|
$ |
14,527 |
|
Capital expenditures |
|
$ |
(25,040 |
) |
|
$ |
(37,258 |
) |
Net settlement of capital expenditures payable |
|
$ |
(3,505 |
) |
|
$ |
(9,450 |
) |
Net borrowings (repayments) |
|
$ |
(545 |
) |
|
$ |
(5,685 |
) |
Dividends |
|
$ |
(28,777 |
) |
|
$ |
(28,534 |
) |
Interest paid |
|
$ |
(22,816 |
) |
|
$ |
(28,371 |
) |
Sources
We have satisfied our cash requirements in the first nine months of 2010 for operations,
capital expenditures and debt service primarily through internally generated funds and additional
borrowing against our revolving credit agreement. For the nine months ended September 30, 2010, our
net cash flows provided by operating activities were $69.5 million. At September 30, 2010, we had
approximately $2.6 million in net working capital. Included in current assets were approximately
$17.3 million in cash and cash equivalents and $4.9 million in restricted cash. As of September 30,
2010, we had access to $45.0 million under our revolving credit facility, representing 100% of
available capacity.
Subsequent to quarter end on October 21, 2010, we entered into a new $470.0 million bank
credit facility which consists of a drawn term loan of $440.0 million and an undrawn revolver of
$30.0 million. The 2010 Senior Secured Credit Facility generated net proceeds of approximately $2.4
million after paying of the existing 2005 Senior Secured Credit Facility and deducting fees and
expenses associated with the debt issuance of approximately $6.7 million. The $440.0 million term
loan generally bears interest at LIBOR plus 4.0% per annum or 5.5%, whichever is greater, has a
term of six years and shall be repayable in quarterly installments equal to 0.25% of the original
principal amount of the term loan, with the remainder to be paid on the term maturity date. The
revolver, to the extent it is drawn, also generally bears interest at LIBOR plus 4.0% per annum or
5.5%, whichever is greater, and, to the extent undrawn, has commitment fees equal to 0.625% per
annum. The term loan matures on October 21, 2016 and the revolver matures on October 21, 2015 and
both are collateralized by substantially all assets of the Company.
In addition to the approximately $6.7 million of fees and expenses inclusive in the
refinancing transaction, we also recorded a liability of $0.5 million of debt issuance costs not
settled in the transaction. The total $7.2 million in debt issuance costs will be amortized to
interest expense over the terms of the 2010 Senior Secured Credit Facility using the straight line
method which approximates the effective interest method. The $440.0 million term portion of the
facility was recorded net of a 1.0% discount, or $4.4 million, of the debt issuance. The discount
is being accreted to interest expense using the straight line method which approximates the
effective interest method. The credit agreement requires that we maintain certain financial ratios.
Specifically it requires the senior secured ratio not exceed 4.4:1.00, the total leverage ratio not
exceed 5.25:1.00 and the fixed charges not exceed 2.75:1.00. Further, the credit agreement calls
for a suspension of dividends if, for the most recently ended period of four consecutive fiscal
quarters, the total leverage ratio is equal to or greater than 5.00:1.00.
23
In connection with the 2010 Senior Secured Credit Facility, we entered into forward
floating-to-fixed interest rate swaps and a buy back of the 1.5% LIBOR floor, as a component of our
cash flow hedging strategy. The notional amounts of the swaps are $192.5, $115.5 and $77.0,
respectively with interest rates of 6.463%, 6.470% and 6.475%, respectively, inclusive of a 4%
LIBOR spread. The swaps begin on June 30, 2012 and expire September 30, 2015. In order to protect
against extreme movements in LIBOR prior to the start of the swaps, we acquired an interest rate
cap at a cost of $0.1 million for the period between January 1, 2001 and June 30, 2012, capping
LIBOR at 3% on a notional principle amount of $385,000.
The net proceeds of the 2010 Senior Secured Credit Facility were used to repay in full, and
retire, the 2005 Senior Secured Credit Facility on October 21, 2010. The Company will incur a
charge of approximately $2.2 million as a result of writing off unamortized debt issuance costs in
association with these early extinguishments of debt during the fourth quarter of 2010.
Additionally, we expect to pay $11.3 million for the final disposition of the ineffective swaps
with cash on hand during the fourth quarter of 2010.
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, 2010 were $28.5 million, inclusive of $3.5
million in net settlements of capital expenditure payables. 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 18, 2010 of approximately 44.7 million and our current annual
dividend policy of $0.86 per share, maintaining our current dividend policy would result in $38.4
million 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 and cash provided by operations 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 $0.8 million
against certain claims and legal actions as of September 30, 2010. 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. See also Part II, Item 1, Legal Proceedings.
Employees
As of September 30, 2010, we employed 812 regular full-time employees, 12 regular part time
employees and 11 temporary employees. Approximately 74% of our employees are represented by the
International Brotherhood of Electrical Workers, Local 1547 (IBEW). Our Master Collective
Bargaining Agreement with the IBEW, as amended, that governs the terms and conditions of employment
for all IBEW represented employees working for us in the state of Alaska expires on December 31,
2012. Management considers employee relations to be good.
Recent Developments
See Part II, Item 1. Legal Proceedings
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, 2009.
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.
24
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, intangible assets, investment in unconsolidated affiliates, deferred 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 Financial Accounting Standards Board (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 (e.g. a computer
and an operating system). This update is effective for fiscal years beginning on or after June 15,
2010. We do not expect the adoption of this pronouncement to have a material effect on our
financial statements.
In October 2009, the FASB issued ASU No. 2009-14, Software Certain Revenues Arrangements
That Include Software Elements. The update was issued to clarify the accounting for revenue
arrangements that contain tangible products and software and how to segregate the revenue elements
if the software is more than incidental to the product as a whole. This update is effective for
fiscal years beginning on or after June 15, 2010. We do not expect the adoption of this
pronouncement to have a material effect on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2010, we had outstanding debt under our 2005 Senior Credit Facility which
was subsequently refinanced in October of 2010 under our 2010 Senior Credit Facility. Our credit
facility exposes us to risk from changes in interest rates, specifically from changes in LIBOR, or,
in certain cases, the prime rate, which are used to determine the interest rates that are
applicable to borrowings under the credit facility. In order to manage this risk, we have entered
into a series of forward floating-to-fixed interest rate swap agreements and a buy back of the 1.5%
LIBOR floor that effectively fixes LIBOR on $385.0 million of the outstanding balance. These
forward swaps begin June 30, 2012 and expire on September 30, 2015. We also purchased an interest
rate cap that effectively caps LIBOR at 3.0% from January 1, 2011 and June 30, 2012. On September
30, 2010, we also had outstanding $125.0 million aggregate principal amount of our 5.75%
Convertible Notes due 2013. The notes pay interest at a fixed rate and are subordinated to our
obligations under our 2010 Senior Credit Facility as well as certain hedging agreements and other
secured debt available under our senior 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.
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.
25
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.
There was no change in our internal controls over financial reporting that occurred in the
third quarter of 2010 that has materially affected, or is reasonably likely to materially affect,
our 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.
On April 19, 2010, the Internal Revenue Service issued a Notice of Proposed Adjustment with
respect to the 2006, 2007, and 2008 taxable years of Crest Communications Corporation which we
acquired on October 30, 2008. When Crest acquired certain entities out of bankruptcy in 2002, it
characterized certain contributions made by the prior owners of these entities as equity rather
than debt for tax purposes. The Service is now asserting that characterization of the AMP advances
as equity was incorrect, and that Crest had additional income due to the cancellation of debt. We
and the former stockholders who sold Crest to the Company are vigorously disputing the Services
position on the characterization of the contributions. We and the Selling Stockholders are also
vigorously asserting that the Service made significant errors in the calculation of taxes due
because it failed to recognize that these entities made certain check-the-box elections under
Treas. Reg. 301.7701-3. Finally, while we are indemnified by the Selling Stockholders under the
terms of our Stock Purchase Agreement for damages related to tax claims for the periods at issue,
we do not know if there will be any disputes over the extent of the indemnity coverage or funding
of these claims. For more information, see Note 9, Commitments and Contingencies under Part I
above.
ITEM 1A. RISK FACTORS
The telecommunications industry in Alaska is extremely competitive. We face increasing competition
for a small number of customers from national wireless carriers that have entered or will enter our
market. New market entrants will make it more difficult for us to attract and retain customers. We
may also lose roaming revenues from carriers that enter the Alaskan market.
We face strong competition from wireless competitors. Our principal competitor, AT&T, is one
of the largest wireless service providers in the U.S. AT&T also has more Alaskan customers than we
do. In addition, Verizon Wireless has announced that it has entered into an agreement with Triad
700 L.L.C. to acquire the C-Block wireless spectrum license covering Alaska that Triad won during
the Federal Communications Commissions Auction 73 in 2008. Verizon Wireless currently holds no
other spectrum in Alaska, and we expect it to use the spectrum to deploy fourth-generation, or 4G,
wireless services in Alaska. Verizon Wireless has said it plans to deploy 4G service based on
Long-term Evolution, or LTE technology, over C-Block, 700 MHz, spectrum, generally; although we
cannot predict when Verizon Wireless would choose to deploy service in Alaska. We also cannot
predict whether Verizon Wireless will build its own facilities in Alaska or provide service through
a local partner. If Verizon Wireless partners with a local provider that currently competes with
us, both Verizon Wireless and such local competitor would gain strength in our market.
As large national carriers, both AT&T and Verizon Wireless have vastly greater access to
financial, technical and other resources than we do. They have greater access to popular devices
and greater market power to obtain these devices on more favorable terms than we do. AT&T and
Verizon Wireless, thus, may be able to offer lower prices, additional products, services, features
or other incentives that we cannot match. Larger competitors, such as AT&T and Verizon Wireless
may also be in a position to respond more quickly to new technologies and be able to undertake more
extensive marketing campaigns. Moreover, AT&T and Verizon Wireless operate their own nationwide
network, whereas we rely on roaming agreements with other carriers to provide coverage outside
Alaska, and conversely, provide revenue to us for our coverage in Alaska. Our reliance on these
agreements could adversely affect our ability to maintain competitive pricing or roaming revenues,
which would have a material adverse effect on our financial results.
Growing competitive pressures from national carriers in our wireless business segment could
have a material adverse effect on our business, operating results, margins and financial condition.
26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Working capital restrictions and other limitations on the payment of dividends
Similar to our 2005 Senior Credit Facility, our new 2010 Senior Secured Credit Facility
entered into on October 21, 2010, contains a number of restrictive covenants and events of default,
including covenants limiting capital expenditures, incurrence of debt, and the payment of
dividends. Said credit facility also requires that we maintain certain financial ratios. In
addition, the Indenture governing our outstanding 5.75% Convertible Notes also contains a number of
restrictive covenants.
In addition, our board of directors may at any time, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(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. |
27
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 1, 2010 |
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ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
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/s/ Liane Pelletier
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Liane Pelletier |
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Chief Executive Officer,
Chairman of the Board and President |
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/s/ David Wilson
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David Wilson |
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Chief Financial Officer, Executive Vice President
(Principal Accounting Officer) |
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