e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-28167
Alaska Communications Systems Group, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
52-2126573 |
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
600 Telephone Avenue
|
|
99503-6091 |
Anchorage, Alaska
|
|
(Zip Code) |
(Address of principal executive offices) |
|
|
(907) 297-3000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Title of each class
|
|
Name of each exchange on which registered |
|
|
|
Common Stock, Par Value $.01 per Share
|
|
The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the shares of all classes of voting stock of the registrant held
by non-affiliates of the registrant on June 30, 2006 was approximately $520 million computed upon
the basis of the closing sales price of the Common Stock on that date. For purposes of this
computation, shares held by directors (and shares held by any entities in which they serve as
officers) and officers of the registrant have been excluded. Such exclusion is not intended; nor
shall it be deemed, to be an admission that such persons are affiliates of the registrant.
As of February 26, 2007, there were outstanding 42,349,801 shares of Common Stock, $.01 par
value, of the registrant.
Documents Incorporated by Reference
Portions of Registrants definitive proxy statement for its annual stockholders meeting to
be held on June 18, 2007 are incorporated by reference in Part III of this Form 10-K
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2006
2
PART I
Item 1. Business
Forward Looking Statements and Analysts Reports
This Form 10-K and future filings by Alaska Communications Systems Group, Inc. and its
consolidated subsidiaries (we, our, us, the Company and ACS Group) on Forms 10-K, 10-Q
and 8-K and the documents incorporated therein by reference include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these provisions. All
statements other than statements of historical fact are forward-looking statements for purposes
of federal and state securities laws, including statements about anticipated future operating and
financial performance, financial position and liquidity, growth opportunities and growth rates,
pricing plans, acquisition and divestiture opportunities, business prospects, strategic
alternatives, business strategies, regulatory and competitive outlook, investment and expenditure
plans, financing needs and availability and other similar forecasts and statements of expectation
and statements of assumptions underlying any of the foregoing. Words such as aims, anticipates,
believes, could, estimates, expects, hopes, intends, may, plans, projects,
seeks, should and variations of these words and similar expressions are intended to identify
these forward-looking statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from our historical experience
and our present expectations or projections. Forward-looking statements by us are based on
estimates, projections, beliefs and assumptions of management and are not guarantees of future
performance. Such forward-looking statements may be contained in this Form 10-K under Business,
Risk Factors, Managements discussion and analysis of financial condition and results of
operations, and elsewhere in this Form 10-K. 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):
|
|
|
rapid technological developments and changes in the telecommunications industries; |
|
|
|
|
our competitive environment; |
|
|
|
|
changes in revenue from Universal Service Funds; |
|
|
|
|
changes in revenue resulting from regulatory actions affecting intercarrier
compensation; |
|
|
|
|
regulatory limitations on our ability to change our pricing for communications
services; |
|
|
|
|
possible widespread or lengthy failures of our system or network cables,
particularly our non-redundant systems, including our primary fiber-link
connecting Alaska and the lower 48-states, which would cause significant delays or
interruptions of service and loss of customers; |
|
|
|
|
other unanticipated damage to one or more of our high capacity cables resulting
from construction or digging mishaps or natural disasters; |
|
|
|
|
the possible future unavailability of Statement of Financial Accounting
Standards (SFAS), No. 71, Accounting for the Effects of Certain Types of
Regulation, to our wireline subsidiaries; |
|
|
|
|
our ability to bundle our products and services; |
|
|
|
|
changes in the demand for our products and services; |
|
|
|
|
changes in general industry and market conditions and growth rates; |
|
|
|
|
changes in interest rates or other general national, regional or local economic
conditions; |
|
|
|
|
governmental and public policy changes; |
|
|
|
|
our ability to generate sufficient earnings and cash flows to continue to make
dividend payments to our stockholders; |
|
|
|
|
the continued availability of financing in the amounts, at the terms, and
subject to the conditions necessary to support our future business; |
|
|
|
|
the success of any future acquisitions; |
|
|
|
|
changes in accounting policies or practices adopted voluntarily or as required
by accounting principles generally accepted in the United States; and |
|
|
|
|
the matters described under Risk Factors. |
In light of these risks, uncertainties and assumptions, you should not place undue reliance on
any forward-looking statements. Additional risks that we may currently deem immaterial or that are
not currently known to us could also cause the forward-looking events discussed in this Form 10-K
not to occur as described. Except as otherwise required by applicable
3
securities laws, we undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of
new information, future events, changed circumstances or any other reason after the date of this
Form 10-K.
Investors should also be aware that while we do, at various times, communicate with securities
analysts, it is against our policy to disclose to them any material non-public information or other
confidential information. Accordingly, investors should not assume that we agree with any statement
or report issued by an analyst irrespective of the content of the statement or report. To the
extent that reports issued by securities analysts contain any projections, forecasts or opinions,
such reports are not our responsibility.
Our Company ACS
Headquartered in Anchorage, we provide customer-focused, facilities-based, integrated
telecommunications services. We operate the largest local telephone network in Alaska. We believe
we offer strong growth opportunities premised on a customer-focused marketing strategy targeted at
a growing customer base using products and assets matching the highest growth segments of the
industry. We seek to offer our customers a one-stop-shop for their telecommunication needs, while
reducing our back office costs.
We own and operate our infrastructure for local and long distance telephone, Internet, and
wireless services. Currently, no other Alaskan provider owns such an infrastructure. We also
operate the only statewide wireless network using code division multiple access (CDMA) technology
through which we offer very high speed mobile data using third
generation, or 3G, Evolution Data Optimized (EV-DO) technology. In addition, we offer satellite television through our partnership with DISH Network.
Using our diverse product mix, we bundle our products to gain market share and increase our share
of our customers telecommunications spending. We believe this strategy, combined with a strong
financial foundation and a dividend program, provides us with a strong position for future growth.
ACS Group is a Delaware corporation, incorporated in October 1998. We began operations in May
1999 when we completed the acquisition and integration of four local telephone companies in Alaska.
Each of these companies had been operating in its local market for over 50 years. Since 1999, we
have built our network and service capabilities under a single brand name, Alaska Communications
Systems (ACS) and as an integrated company, we have provided the leading facilities-based
telecommunications services in Alaska. Using our strong ACS brand name and state of the art
network, we have generated stable revenues and cash flow since 2000 and increased our market share
in two of the highest growth areas of telecommunications: wireless and Internet services.
Our Market Alaska
We target our products and services at a growing customer base with strong telecommunications
spending habits. For the three year period from 2003 to 2005, the average median household income
in Alaska was 22.4% higher than the average in the rest of the United States, and Alaskans spent 33%
more on communications services than other Americans. According to the U.S. Census Bureau, over the
five years ending 2006, the Alaskan population has increased 6.0%,
nearly 20% higher than the
national average. Additionally, Alaska has lower-than-U.S. average wireless service penetration,
which provides us with opportunities to quickly move into new markets.
We have successfully grown our retail relationships. As of December 31, 2006, we served
446,438 retail relationships. A retail relationship refers to one service provided to one
customer, and therefore, a customer may, and often does, engage with us in multiple retail
relationships. The following table sets forth our retail relationship growth since December 31,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Local |
|
|
194,815 |
|
|
|
199,341 |
|
|
|
206,209 |
|
Wireless |
|
|
130,971 |
|
|
|
112,854 |
|
|
|
94,232 |
|
Internet |
|
|
56,657 |
|
|
|
53,245 |
|
|
|
47,553 |
|
Long Distance |
|
|
63,995 |
|
|
|
56,317 |
|
|
|
47,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446,438 |
|
|
|
421,757 |
|
|
|
395,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
Despite the further potential for growth in our market, we believe that Alaskas large
geographic size and isolated markets of both major metropolitan areas and small, dense population
clusters reduces the likelihood of entry by new competitors offering integrated, facilities-based
services. As a result, we believe our already strong market presence will continue to contribute to
our stability and growth and provide us with an advantage relative to other telecommunications
markets.
Our Services At a Glance
We have provided a summary of the services we provide below. For a more detailed discussion of
our services, please see, Products, Services and Revenue Sources below.
Local telephone. We provide local telephone service to approximately 253,000 access lines,
representing approximately 57% of the local access lines in Alaska. We generate local telephone
revenue from providing local telephone service to consumer and business customers and by providing
access to our network and back office functions to other telecommunications companies. At December
31, 2006, approximately 50% of our retail access lines served residential consumers and 50% served
business customers.
Wireless. We provide statewide mobile and fixed voice and data communications services to
approximately 134,000 wireless subscribers throughout Alaska. Our wireless networks have a covered
population of approximately 542,000, representing approximately 81% of the states population,
according to the 2006 U.S. Census Bureau estimates. We serve approximately 24.7% of our covered
population. In 2005 and 2006, we aggressively expanded our CDMA 1xRTT and EV-DO network, which
features advanced mobile data services. We expect to substantially complete our expansion of this
network in 2007. We also provide wireless services using our time division multiple access (TDMA)
digital network which we maintain for subscribers who have not yet upgraded to CDMA.
Internet. We provide Internet access services to approximately 57,000 subscribers, including
high-speed digital subscriber line (DSL) service to approximately 44,000 subscribers. Our DSL
service is currently available to approximately 75% of our local telephone access lines. As part of
our Internet services, we also provide advanced IP-based private networks to large enterprise and
governmental customers in Alaska.
Interexchange. We offer long distance and interexchange private-line services primarily as a
facilities-based carrier to approximately 64,000 long distance customers.
Video. We offer customers in Alaska satellite video entertainment through our partnership
with the DISH network.
For the fiscal year ended December 31, 2006, 54.9%, 33.0%, 7.2% and 4.9% of our revenues came
from local telephone, wireless, Internet, and interexchange services, respectively. For more
detailed information, please see Products, Services and Revenue Sources below.
Competitive Strengths and Business Strategy
We seek to maintain and grow our cash flow and investor returns as the premier
telecommunications services provider in Alaska. While the communications marketplace converges and
competition continues to enter the market, we plan to achieve our goals through the following
principal strategies:
Use our existing strong competitive position to grow our retail relationships. We believe we
already have the leading competitive position in Alaska.
|
|
|
We are the incumbent local telephone company in all of Alaskas major
population centers and more than 70 other communities; |
|
|
|
|
We are the only provider of mobile broadband wireless service, and the second
largest wireless communications services provider; and |
|
|
|
|
We are the largest provider of DSL services and the second largest provider of
Internet access services. |
We build upon this leading competitive position with an eye to the future of communications,
and we seek to offer the most advanced products and services to our large customer base.
5
Develop and offer new products targeted at the highest-growth markets. We currently offer
products in two of the highest-growth telecommunications markets: wireless and Internet. In each
of these markets, we own and operate our networks. We believe our facilities-based strategy places
us in an advantageous position relative to our competitors who do not offer similar
facilities-based services in each of these high-growth markets. Our primary competitor, General
Communication, Inc. (GCI) offers facilities-based cable Internet services that compete directly
with our high-speed DSL services. Further, GCI has begun deploying cable telephony, through which
it provides facilities-based local telephone service. However, GCI primarily resells wireless
services through a partnership with Dobson Cellular Systems, Inc. (Dobson), our main wireless
competitor. Dobson operates only wireless facilities. Thus, among our primary competitors, we
believe we offer the optimal mix of products designed to help us benefit from high-growth areas in
the industry. We expect to continue developing new products in these high-growth areas to enhance
our competitive position.
Maintain advanced networks and facilities. We have designed our wireless and wireline
networks to accommodate developing products and technology. We operate a Multi-Protocol Label
Switching over Asynchronous Transfer Mode (MPLS/ATM) network. Because our advanced MPLS/ATM
network uses standard protocols, we can offer our customers a complete suite of integrated
telecommunications services, while achieving significant operating efficiencies. The enhanced
products that converge over our MPLS core network include the following:
|
|
|
virtual private networks and lines; |
|
|
|
|
voice over Internet Protocol services; |
|
|
|
|
transparent local area networks (LANs) and proprietary LANs and wide area
networks (WAN); |
|
|
|
|
high speed Internet access; |
|
|
|
|
managed services; and |
|
|
|
|
video conferencing. |
In addition, we provide the only statewide mobile broadband wireless service, and we are the
second largest provider of Internet access service in Alaska. We aim to provide wireless service
primarily through our state-of-the-art CDMA 1xRTT and EV-DO wireless network. This state-of-the-art
network currently serves 95% of our wireless subscribers, and we anticipate 100% of our subscribers
will be served by our CDMA network by year-end 2007. In addition to our CDMA network, we maintain a
secondary TDMA digital network for our non-CDMA subscribers. Our growing CDMA network has allowed
us to expand our wireless network coverage and to offer a wider range of wireless and mobile
broadband data services. We believe our expanded wireless services, compared to our competitors,
will allow us to capture new retail relationships and win back wireline subscribers with integrated
offerings.
Offer integrated, customer-focused services. We believe we offer the leading portfolio of
integrated communications services to Alaskans, including local telephone, wireless, Internet, long
distance, messaging, video entertainment, and other services. We believe that offering our
customers bundled packages results in customer subscription to a greater number of our products and
services and is a key component of our success. Bundling allows our customers a one stop shopping
experience, fewer billing statements, and greater value for price across a number of services. In
2005, we began our ON ACS program, through which we offer discounts to customers subscribing to
both our local telephone and wireless services at prescribed service levels. Our ON ACS program, as
well as our bundled offerings, allows us to use our advanced CDMA 1xRTT and EV-DO wireless network
and our high-speed DSL service to gain long distance and local telephone subscribers.
Recruit and maintain a strong, experienced management team. We have a highly experienced
senior management team with an average of approximately 13 years of experience in the local
telecommunications industry and a proven track record of operating and managing integrated
telecommunications companies. Our executive management team has broad experience in the
telecommunications industry and understands the dynamics of the Alaskan markets and our customers.
Liane Pelletier joined us in October 2003 as CEO and President and became Chairperson of our board
of directors on January 1, 2004. Before joining us, Liane worked
for 17 years at Sprint Corporation, most recently as a member of the Executive Management
Committee and as Chief Integration Officer. David Wilson, who was previously Chief Financial
Officer of Triumph Communications and DIRECTV Broadband, joined us as our Chief Financial Officer
in March 2004. In addition, in 2003, David C. Eisenberg joined us from Sprint as Senior Vice
President, Corporate Strategy, Development and Marketing and in February 2004, Sheldon Fisher
joined us from Sprint as Senior Vice President, Sales and Service. Most recently, in August 2006,
Anand Vadapalli, joined us as Senior Vice President, Network and IT Operations. Prior to joining
us, Anand served as the Vice President, Information Technology at Valor Telecom.
6
Review and improve internal processes to increase efficiency. We formed and continue to
maintain Process Improvement Teams. The goal of these teams is to remedy known inefficiencies in
various areas of our company. To date, the teams have improved our customer service by reducing set
up times for DSL, shortening wait time for customer calls allowing more time for problem resolution
and sales, and designing clearer billing statements, which resulted in fewer customer complaints
and inquiries. Our teams have also increased the accuracy of forecasting for service procurement,
reduced time required to provision circuits, and designed a company-wide product development
process through which all new products undergo rigorous analysis, troubleshooting, and testing
before they enter the market.
Products, Services and Revenue Sources
We generate revenue from the provision of local telephone, wireless, Internet, and
interexchange services. The following table sets forth the components of our consolidated revenues
for the years ended December 31, 2006, 2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the Year Ended December 31, (in millions) |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Revenue by Source: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local network service |
|
$ |
80.2 |
|
|
|
22.9 |
% |
|
$ |
86.5 |
|
|
|
26.5 |
% |
|
$ |
91.7 |
|
|
|
30.3 |
% |
Network access |
|
|
90.9 |
|
|
|
26.0 |
|
|
|
92.4 |
|
|
|
28.3 |
|
|
|
97.5 |
|
|
|
32.2 |
|
Deregulated and other revenue |
|
|
21.0 |
|
|
|
6.0 |
|
|
|
23.9 |
|
|
|
7.3 |
|
|
|
22.0 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
|
192.1 |
|
|
|
54.9 |
|
|
|
202.8 |
|
|
|
62.0 |
|
|
|
211.2 |
|
|
|
69.8 |
|
Wireless |
|
|
115.6 |
|
|
|
33.0 |
|
|
|
86.2 |
|
|
|
26.4 |
|
|
|
56.7 |
|
|
|
18.7 |
|
Internet |
|
|
25.2 |
|
|
|
7.2 |
|
|
|
21.7 |
|
|
|
6.6 |
|
|
|
20.2 |
|
|
|
6.7 |
|
Interexchange |
|
|
16.9 |
|
|
|
4.9 |
|
|
|
16.1 |
|
|
|
4.9 |
|
|
|
14.6 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
349.8 |
|
|
|
100.0 |
% |
|
$ |
326.8 |
|
|
|
100.0 |
% |
|
$ |
302.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone
We are the largest local exchange carrier in Alaska. We provide local telephone service
through our four local telephone companies. Our local telephone revenue consists of local network
service, network access (including universal service revenue), and deregulated and other revenue,
each of which we describe below.
Local network service
Our local network services consist of basic local network service and competitive local
network service.
Basic local network service. Basic local network service enables customers to make and
receive telephone calls within a defined exchange area. We provide basic retail local services to
consumer and business customers, generally for a fixed monthly charge. The amount that can be
charged to a customer for basic local services is determined by rate proceedings governed by the
Regulatory Commission of Alaska (RCA). We generally charge business customers higher rates to
recover a portion of the costs of providing local service to consumers, as is customary in the
industry. Our basic local service also includes non-recurring charges to customers for installation
and recurring charges for enhanced features such as call waiting, caller identification, and call
forwarding.
Competitive local network service. We provide interconnection to our basic local service and
lease unbundled network elements (UNEs) to our competitors. We report revenues for these services
as local network service revenues. As of November 26, 2004, the RCA authorized us to increase the
Unbundled Network Element loop (UNE-L) rate for our Anchorage service area to $18.64
retroactively to June 2004. In the Fairbanks and Juneau service areas, the RCA authorized us to
increase UNE loop rates to $23.00 and $18.00, respectively, as of January 1, 2005. We provided
approximately 57,800 lines to competitors in the Anchorage,
Fairbanks and Juneau service areas on either a wholesale or UNE basis as of December 31, 2006.
Beginning on December 28, 2006, the Federal Communications Commission (FCC) authorized us to
increase our UNE loop rates on new UNEs in substantially all of the Anchorage service area to
$23.00. Effective January 1, 2008, all UNE loop rates will increase to $23.00.
7
The table below sets forth the number of access lines as of December 31, 2006, 2005 and 2004.
The number of access lines shown represents all revenue producing access lines connected to both
retail and wholesale customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Retail access lines |
|
|
194,815 |
|
|
|
199,341 |
|
|
|
206,209 |
|
Wholesale access lines |
|
|
11,226 |
|
|
|
13,966 |
|
|
|
16,590 |
|
Unbundled network elements |
|
|
46,626 |
|
|
|
57,578 |
|
|
|
70,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total local telephone access lines |
|
|
252,667 |
|
|
|
270,885 |
|
|
|
293,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network access
We charge interexchange carriers for network access services for originating and terminating
long distance or toll calls on our network. We also receive universal service revenue, which we
report as network access revenue. We describe these components of network access revenue below.
Intrastate access charges. We generate intrastate access revenue when an intrastate long
distance call carried by an interexchange carrier originates and/or terminates on one of our local
telephone networks. We also provide billing and collection services for interexchange carriers
through negotiated agreements for certain types of toll calls placed by our local customers. Our
subsidiaries, ACS of Anchorage, Inc. (ACSA), ACS of Alaska, Inc. (ACSAK) and ACS of Fairbanks,
Inc. (ACSF) operate under their own tariffs for intrastate access. In non-competitive areas, our
subsidiary, ACS of the Northland, Inc. (ACSN) participates in a mandatory statewide tariff and
access charge pooling arrangement that is administered by the Alaska Exchange Carriers Association
(AECA). The RCA regulates access charges for our intrastate services.
Interstate access charges. We generate interstate access revenue when a long distance call
involving another state originates and/or terminates on one of our local telephone networks. The
FCC regulates interstate access charges. All our local telephone companies, except ACSA,
participate in a nationwide tariff and access charge pooling arrangement administered by the
National Exchange Carrier Association (NECA). ACSA participates in the NECA common line tariff,
but has its own interstate access tariff for traffic sensitive and special access services. We also
categorize as interstate access revenue common line revenues billed to the end user for the
FCC-mandated interstate charges.
Universal service revenue. We currently receive federal universal service revenue in some of
our local telephone service areas. Universal service revenue supplements the amount of local
service revenue we receive to ensure that basic local service rates for customers in high cost
rural areas are not significantly higher than rates charged in lower cost urban and suburban areas.
Deregulated and other revenue
Deregulated and other revenues consist of billing and collection contracts, space and power
rents, pay telephone service, deregulated customer premise equipment sales (CPE), regulated
directory listing revenue, and other miscellaneous telephone revenue. We seek to capitalize on our
local presence and network infrastructure by offering these additional services to customers and
interexchange carriers.
Wireless
We provide statewide mobile voice and data communications services throughout Alaska. We are
the only statewide provider to offer CDMA and EV-DO. We believe CDMA provides better capacity for
voice and data communications than other commercial mobile technologies because it allows more
subscribers to connect at any given time. Our CDMA network provides our customers with improved
voice call quality, security, average mobile data speeds of 60-80kbps over 1xRTT and multiples of
this over EV-DO, and other enhanced services, such as wireless email, web, digital picture taking/sending,
assisted-GPS position location applications, video and audio streaming.
8
We estimate our wireless network footprint covers approximately 542,000 or 81%, of Alaskas
approximately 670,000 residents, including all major population centers and highway and ferry
corridors. Our EV-DO mobile wireless broadband service, enables high speed data connectivity with
speeds that burst up to 2mbps in Anchorage, Fairbanks, Juneau, and a few other popular areas
throughout Alaska. While using our EV-DO network, our customers do not need to locate a WiFi Hot
Spot to obtain wireless broadband service. We also operate a TDMA digital network in substantially
all of our service areas for our customers who have not yet upgraded to CDMA.
Our wireless segment generates revenue through subscriber access charges, airtime usage, toll
charges, connection fees, roaming revenues, and enhanced features, such as short messaging
services. A subscriber may purchase services separately or may purchase rate plans that package
these services in different ways to fit different calling patterns and desired features.
We have eligible telecommunications carrier (ETC) status in a significant portion of our
rural wireless service area. By obtaining ETC status, we become eligible to receive universal
service funded support for wireless subscribers residing in the areas covered by this designation.
Subscribers. The table below sets forth the annual growth in the number of our wireless
subscribers served and our total covered population as of December 31, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Estimated covered population |
|
|
541,940 |
|
|
|
523,827 |
|
|
|
482,251 |
|
Ending subscribers |
|
|
133,988 |
|
|
|
117,537 |
|
|
|
100,657 |
|
Ending penetration |
|
|
24.7 |
% |
|
|
22.4 |
% |
|
|
20.9 |
% |
We believe there are opportunities to improve coverage and subscription rates of our wireless
operations throughout Alaska. We also believe that the market for wireless services will continue
to grow.
Licenses. We own 800 megahertz B side cellular licenses which cover the major population
centers in Alaska, including Anchorage, Fairbanks, Juneau, and the Kenai Peninsula. We also own
several 10 megahertz E Block PCS licenses covering the entire state including Anchorage, Fairbanks
and Juneau and 10 megahertz F Block PCS licenses covering Fairbanks and Juneau.
Internet
We offer high-speed DSL service over our access lines in our major local telephone service
territories. Approximately 75% of our access lines in these major local telephone service
territories have the capability to provide DSL service. We also offer dial-up Internet service. We
charge customers either a flat rate for unlimited use or a measured rate based on usage.
Interexchange
We currently serve approximately 64,000 long distance customers who have selected us as their
preferred interexchange carrier. We believe our interexchange revenue represents less than 5% of
total interexchange revenues in Alaska. We own fiber capacity for high-speed links
within Alaska and for transportation of call traffic outside Alaska. We also resell the services of
other long distance carriers.
Video entertainment
We partner with the DISH Network, a leading satellite television provider, to offer our
customers video entertainment. Our agreement with DISH Network will terminate in December 2007 if
it is not extended.
9
Seasonality
We believe our wireless revenue is materially impacted by seasonal factors. Wireless revenue,
particularly roaming revenue, declines in the winter months and increases in the summer months due
to Alaskas northern latitude and the wide swing in available daylight and changes in weather
patterns between summer and winter and their effect on business, tourism and subscriber calling
patterns. Our other business segments experience similar seasonal effects, but we do not believe
these effects are material.
Sales and Marketing
We market our products and services under the Alaska Communications Systems and ACS
brands, subject to regulatory and strategic business considerations. Key components of our sales
and marketing strategy include:
|
|
|
establishing name recognition of the ACS brand across all product and service
offerings; |
|
|
|
|
making, buying and using ACS products and services easier than ever; |
|
|
|
|
marketing all of our offerings to each consumer to obtain a greater percentage
of each consumers telecommunications services expenditures; |
|
|
|
|
providing convenient and valuable bundles of products and services; |
|
|
|
|
centralizing marketing functions to optimize impact and efficiency; |
|
|
|
|
improving quality and reliability of customer service; |
|
|
|
|
developing and delivering to the market new products and services driven by a
view of total customer needs; |
|
|
|
|
driving greater productivity from direct sales efforts; and |
|
|
|
|
teaming sales and service for a complete and seamless customer experience. |
We use our position as an integrated, one-stop provider of telecommunications services with
strong positions in local telephone, wireless, Internet and interexchange markets. By pursuing a
marketing strategy that facilitates integration, cross-selling, and packaging of our products and
services, we believe we can increase penetration of new product offerings, improve customer
retention rates, increase our share of our customers overall telecommunications expenditures, and
achieve continued revenue and operating cash flow growth.
Network and Technology
As of December 31, 2006, we owned host switches serving approximately 253,000 access lines.
All of our access lines are served by digital switches provided predominantly by Nortel Networks
Corporation. Our switches are linked through a combination of extensive aerial, underground and
buried cable, including fiber-optic cable and digital microwave and satellite links. We have 100%
single-party services, or services of one customer per access line, and believe substantially all
of our major switches have current generic software upgrades installed which allows for the full
range of enhanced customer features, such as call waiting, caller identification, and call
forwarding.
We have integrated numerous network elements to offer a variety of services and applications
that meet the increasingly sophisticated needs of our customers. These elements include Signal
System 7 signaling networks, voice messaging platforms, digital switching, DSL and, in some
communities, integrated service digital network access. As the telecommunications industry
experiences significant changes in technology, customer demand and competition, we intend to
introduce additional enhancements.
Technicians located at our network operating control center in Anchorage operate and monitor
our wireline and wireless networks seven days a week, 24 hours a day. Our customer care call center
and walk-in facilities in Anchorage and Fairbanks and additional walk-in customer care facilities
in Juneau, Sitka, Kenai/Soldotna, Kodiak, North Pole and Homer sell and service all of our product
lines. All of these facilities offer extended business hours to efficiently handle customer
inquiries and orders for service.
Our wireless operations consist of five digital switching centers, approximately 194 cell
locations, which in certain cases include multiple base stations, and three repeaters covering
80.9% of Alaskas population and substantially all major population centers and highway corridors
in the state plus one analog switch and cell site covering Barrow, Alaska. We link our switching
and cell site infrastructure primarily by our proprietary fiber, wireline and digital microwave
connections. We have constructed and are continuing to enhance and expand our commercial wireless
voice and data CDMA 1xRTT and EV-DO networks. Our CDMA network consists of two Nortel digital CDMA
switches and 172 cell sites as of December 2006. We also operate a
10
TDMA network for our customers
who have not yet upgraded to CDMA. Our TDMA wireless voice network consists of three Ericsson
digital switches, one analog switch serving Barrow, Alaska, and approximately 105 base stations
using our 800 megahertz B side cellular licenses. Our TDMA network covers the major population
centers in Alaska, including Anchorage, Fairbanks, Juneau and the Kenai Peninsula. We plan to
continue to expand our CDMA 1xRTT and EV-DO networks and migrate our TDMA subscribers onto our CDMA
network. Our CDMA network was initially deployed using our 10 megahertz E and F Block PCS spectrum,
but we expect to eventually deploy CDMA technology over our 800 megahertz B side cellular licenses
and phase out TDMA service in the future.
Our facilities-based long distance network connects the major population center of Anchorage,
Fairbanks, Juneau and the Kenai Peninsula to each other primarily over owned fiber-optic facilities
or Indefeasible Rights of Use (IRU) capacity. We own IRU fiber-optic capacity connecting Alaska
to the rest of the world via Seattle, Washington.
Competition
Local telephone service
Our local telephone services operations may be subject to any of several types of competition:
|
|
|
facilities-based competition from providers with their own local service
network; |
|
|
|
|
resale competition from resale interconnection, or providers who purchase local
service from us at wholesale rates and resell these services to their customers; |
|
|
|
|
competition from UNE interconnection, that is, providers who lease UNEs from
us; and |
|
|
|
|
alternatives to local service networks, including wireless, IP, satellite and
cable telephony. |
In September 1997, GCI and AT&T Alascom, the two largest long distance carriers in Alaska,
began providing competitive local telephone services in Anchorage. GCI competes principally through
UNE interconnection using the facilities of our local telephone subsidiary, ACSA, and increasingly
over its own facilities. AT&T Alascom competes primarily by reselling ACSAs services. Competition
is based upon price and pricing plans, types of services offered, customer service, billing
services, and quality and reliability of service. GCI has focused principally on advertising
discount plans for bundled services. AT&T Alascoms strategy has been to resell ACSAs service as
part of a package of local and long distance services. As a result, in Anchorage, ACSA had only
approximately 48% competitive market share as of December 31, 2006. We expect GCI and AT&T Alascom
to continue to compete with us for local telephone business in many of our markets.
As of December 31, 2006, we estimate that we had approximately 68% market share in Fairbanks.
GCI has competed in Fairbanks primarily through reselling services and through UNE interconnection.
Similar trends are being experienced by ACSAK in our Juneau market where, as of December 31, 2006,
we had approximately 60% market share.
We expect increasing competition from providers of various services that bypass our network.
Long distance companies may construct, modify, or lease facilities to transmit traffic directly
from a user to a long distance company. Cable television companies may modify their networks to
partially or completely bypass our local network. GCI commenced deployment of cable telephony in
2004 and continues to migrate its customers served using our UNEs off of our network and onto its
own cable system. This migration of our network will result in a significant reduction of revenue
for us, as GCI would no longer be leasing our facilities to serve those customers.
In addition, while wireless telephone services have historically complemented traditional
local exchange carrier (LEC) services, we anticipate that existing and emerging wireless
technologies may increasingly compete with LEC services. For example, we have deployed CDMA 1xRTT
and EV-DO wireless services in certain of our markets. Our principal wireless competitor, Dobson,
is deploying GSM wireless services. Both CDMA and GSM technologies may serve as a satisfactory
wireless alternative to traditional LEC wireline services. At this time we cannot predict the
impact of the growth in wireless networks on our share of the local market. Technological
developments in wireless telephone features, digital microwave, and other wireless technologies are
expected to further permit the development of alternatives to traditional wireline services.
Further, the FCCs requirement that incumbent local exchange carriers (ILECs), such as us, offer
wireline-to-wireless number portability may also increase the competition ILEC companies face from
wireless carriers.
11
Wireless services
The wireless telecommunications industry has experienced rapid technological change, an
increasing pace of improvements in the capacity and quality of digital technology, shorter cycles
for new products and enhancements, and changes in consumer preferences and expectations. We believe
that demand for wireless telecommunications services will likely increase as equipment costs and
service rates continue to decline and equipment becomes more convenient and functional. Wireless
providers compete over price, quality, network coverage, packaging features, and brand reputation.
There are six PCS licensees in each of our wireless service areas. We hold B side cellular licenses
for Alaskas major communities and PCS licenses covering the entire state, including Anchorage,
Fairbanks, Juneau, and the Kenai Peninsula. We currently compete with at least one other
facilities-based wireless provider in each of our wireless service areas, including Dobson and
Alaska DigiTel, LLC (Alaska DigiTel). We also face competition from GCI, which is a branded
reseller of Dobson. In addition, Dobson, our main wireless competitor, also provides some coverage
on its own network in multiple states outside Alaska. We believe that the unique and vast terrain
and the high cost of a PCS system build-out, however, make additional competitive entry into
markets outside of Anchorage difficult.
Competition, for simpler wireless voice service has forced carriers such as us to reduce
prices. We seek to offset this impact by bringing new higher-margin services to market, developing
products for targeted market segments, and using our advantage in market share and geographical
coverage to attract new customers and offer new services to existing customers. We continuously
evaluate new services in order to differentiate us from our competitors, produce additional
revenues, and increase margins.
Internet services
We offer DSL services in Anchorage, Fairbanks, Juneau, Kenai/Soldotna, Homer, Kodiak, and
Sitka, Alaska for both consumers and businesses. The market for Internet access services is highly
competitive in most markets in the state. Few significant barriers restrict entry into the market,
and we expect that competition will intensify in the future. We primarily compete with GCI in the
market for Internet access services.
In addition to GCI, we currently compete with a number of established online services
companies, interexchange carriers, and cable television operators. Competition is particularly
intense for broadband services. The number of cable modems deployed by GCI is approximately two
times the number of DSL modems deployed by us. Further, the addition of wireless broadband to the
mix of options available to consumers may reduce the demand for DSL. We believe that our ability to
compete successfully will depend upon a number of factors, including the reliability and security
of our network infrastructure, the ease of access to the Internet, particularly broadband access,
and our competitors prices.
Interexchange services
The long distance telecommunications market is highly competitive. We believe we currently
have less than 5% of total interexchange revenues in Alaska. Competition in the long distance
market is primarily on price, although service bundling, branding, customer service, billing
services, and quality also play a role in customers choices. We currently offer long distance
service to customers located primarily in the more populated communities within our service
territory. AT&T Alascom and GCI are currently the two major competing long distance providers in
Alaska. We also face competition from wireless service providers for long distance customers. In
addition, new carriers offering voice over Internet protocol services may lead to a reduction in
traditional long distance telephone service customers. Further, we also compete with prepaid
calling cards that reduce traditional reliance on long distance telephone service and also deprive
us of revenue obtained from the use of our interexchange facilities. We provide traditional 1+
direct long distance dialing, toll-free services, calling cards, and private line services for data
and voice applications. We have also introduced flat-fee long distance programs. These programs
allow customers to purchase interstate minutes of use in blocks of time for a single monthly fee.
We expect to continue offering products of this nature in the future.
Video entertainment
We resell the DISH Network in Alaska. DISH Networks primary competitor is GCI, the cable
provider in most of Alaska. GCI holds a dominant position in the video entertainment sector. Our
current agreement with DISH Network became effective August 2003 and either will be renegotiated or
will terminate in December 2007.
12
Employees
As of January 31, 2007, we employed approximately 986 regular full-time employees, 7 regular
part time employees and 8 full time temporary employees. 78.3% of our employees are represented by
the International Brotherhood of Electrical Workers, Local 1547 (IBEW). Management considers
employee relations to be good with both the represented and non-represented workforce. On November
2, 1999, the IBEW membership for our company ratified the terms of a Master Collective Bargaining
Agreement that governs the terms and conditions of employment for all IBEW represented employees
working for us in the State of Alaska. The November 1999 agreement, which was due to expire on
December 31, 2006, provided for wage increases up to 4% in specified years based on the annual
increases in the consumer price index for Anchorage as reported by the U.S. Department of Labor
CPI-U. The agreement limits the increases in our health and welfare contributions for represented
employees to 4% annually. On February 23, 2005, the membership of the IBEW ratified an extension to
the collective bargaining agreement through 2009 and accepted certain modifications to the
agreement.
Non-represented employees qualify for wage increases based on individual and company
performance, and key employees are also eligible for performance-based incentives. We provide a
total benefits package, including health, welfare, and retirement components that we believe is
competitive in our market.
Website Access to Reports
Our investor relations website Internet address is www.alsk.com. The information on our
website is not incorporated by reference in this annual report on Form 10-K. We make available,
free of charge, on our investor relations website, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available as
soon as reasonably practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
Regulation
The following summary of the regulatory environment in which our business operates does not
describe all present and proposed federal, state and local legislation and regulations affecting
the telecommunications industry in Alaska. Some legislation and regulations are currently the
subject of judicial review, legislative hearings and administrative proposals which could change
the manner in which this industry operates. We cannot predict the outcome of any of these matters
or their potential impact on our business. Regulation in the telecommunications industry is subject
to rapid change, and any such change may have an adverse effect on us.
Overview
The telecommunications services we provide and from which we derive a large majority of our
revenue are subject to extensive federal, state and local regulation. Our LEC subsidiaries are
regulated common carriers and have the right to set maximum rates at a level that allows us to
recover the reasonable costs incurred in the provision of regulated telecommunications services and
to earn a reasonable rate of return on the investment required to provide these services. Because
they face competition, however, most of our LEC subsidiaries may not be able to realize their
allowed rates of return.
In establishing rates for regulated services, our LEC subsidiaries first determine their
aggregate costs and then allocate those costs between regulated and non-regulated services, then
separate the regulated costs between the state and federal jurisdictions, and finally among their
various interstate and intrastate services. This process is governed primarily by the FCCs rules
and regulations. The FCC is considering whether to modify or eliminate the current jurisdictional
separations process. This decision could indirectly increase or reduce earnings of carriers subject
to jurisdictional separations rules by affecting the way regulated costs are divided between the
federal and state jurisdictions, if rates in both jurisdictions are not adjusted accordingly.
Maximum rates for regulated services are regulated by the FCC for interstate services and by the
RCA for intrastate services.
At the federal level, the FCC generally exercises jurisdiction over services of
telecommunications common carriers, such as us, that provide, originate or terminate interstate or
international communications and related facilities. The FCC does not directly regulate enhanced
services and has preempted inconsistent state regulation of enhanced services. Our wireless
services use FCC radio-frequency licenses and are subject to various FCC regulations, including
enhanced 911(E911) and number portability requirements. The RCA generally exercises jurisdiction
over services and facilities used to provide, originate or terminate communications between points
in Alaska. In addition, pursuant to the federal Telecommunications Act of 1996 (Telecommunications
Act) federal and state regulators share responsibility for implementing and enforcing policies
intended to
13
foster competition in local telecommunications services. In particular, state
regulatory agencies have substantial oversight over the provision by ILECs of interconnection and
non-discriminatory network access to competitive local exchange carriers (CLECs). Local
governments often regulate the public rights-of-way necessary to install and operate networks.
These local governments may require communications services providers to obtain licenses or
franchises regulating their use of public rights-of-way, and may require carriers to obtain
construction permits and abide by building and land use codes.
Federal regulation
We must comply with the Communications Act of 1934, as amended (Communications Act) and
regulations promulgated there under which require, among other things, that communications carriers
offer interstate services at just, reasonable and nondiscriminatory rates and terms. The amendments
to the Communications Act contained in the Telecommunications Act significantly changed and are
expected to continue to change the regulation of the telecommunications industry. The
Telecommunications Act promotes competition in local telecommunications services by removing
barriers to entry, imposing interconnection and network access requirements, and making universal
service support explicit and portable. We must obtain FCC approval before we transfer control of
any of our common carrier subsidiaries or our radio frequency licenses or authorizations, make such
an acquisition, or discontinue an interstate service.
Interconnection with local telephone companies and access to other facilities
In order to ensure access to local facilities and services at reasonable rates the
Communications Act imposes a number of access and interconnection requirements on LECs. Generally,
a LEC must: not prohibit or unreasonably restrict the resale of its services; provide for telephone
number portability, so customers may keep the same telephone number if they switch service
providers; ensure that customers are able to route their calls to telecommunications service
providers without having to dial additional digits; provide access to their poles, ducts, conduits
and rights-of-way on a reasonable, non-discriminatory basis; and, when a call originates on its
network, compensate other telephone companies for terminating or transporting the call.
Most ILECs have the following additional obligations under the Communications Act: negotiate
in good faith with any carrier requesting interconnection; provide interconnection for the
transmission and routing of telecommunications at any technically feasible point in its network on
just, reasonable and non-discriminatory rates, terms and conditions; provide access to UNEs, such
as local loops, switches and trunks, or combinations of UNEs at nondiscriminatory, cost-based
rates; offer retail local telephone services to resellers at discounted wholesale rates; provide
notice of changes in information needed for another carrier to transmit and route services using
its facilities; and provide physical collocation, which allows a CLEC to install and maintain its
network termination equipment in an ILECs central office, or to obtain functionally equivalent
forms of interconnection.
Our ACSN ILEC subsidiary enjoys a statutory exemption as a rural carrier from the
interconnection requirements imposed on most ILECs. The RCA may terminate the exemption, if it
determines the interconnection is technically feasible, not unduly economically burdensome and
consistent with universal service. The Telecommunications Act does not, however, preclude
facilities-based competition, and the RCA has granted GCI, subject to certain conditions, approval
to provide local exchange telephone service in the Glacier State and Sitka study areas of ACSN. New
facilities-based local exchange service competition may reduce our revenues and returns.
On April 18, 2004, ACSF and ACSAK entered into a settlement agreement with GCI in which ACSF
and ACSAK waived their claim to the rural exemption in exchange for GCIs agreement to pay
increased UNE loop rates.
To implement the interconnection requirements of the Telecommunications Act, the FCC adopted
rules requiring, among other provisions, that ILECs price UNEs based on forward-looking economic
costs using the total element long-run incremental cost methodology. In February 2005 the FCC
released an order eliminating the obligation of ILECs to provide access to switching as a UNE, as
well as the obligation to provide the combination of UNEs known as the UNE platform (UNE-P).
These changes did not affect the obligations of ACSF or ACSAK under their agreement with GCI, which
remains in effect until January 1, 2008. Currently, the FCC is reexamining its pricing standard for
UNEs and may reconsider other aspects of its rules.
In September 2005, ACSA filed a petition seeking FCC forbearance from our requirement to lease
UNEs to our competitors in Anchorage at regulated rates. Also in September 2005, the FCC
established precedent for granting relief similar to that sought by ACSA by granting forbearance
relief to Qwest in its Omaha market due to substantial inter-modal competition in that market. On
December 28, 2006, the FCC conditionally and partially granted ACSA forbearance from the obligation
to lease UNEs to our competitors at regulated rates. This forbearance was limited to five wire
centers within the Anchorage service area of ACSA. Even where relief was granted, however, the FCC
has required ACS to lease loops
14
and sub-loops at commercially negotiated rates, or if there is no
commercial agreement, at the rates for these UNEs in Fairbanks. A one-year transition period was
part of the FCCs Order. On February 9, 2007, ACSA and GCI independently filed appeals of the FCCs
Order.
Congress may consider legislation that may further modify the Communications Act and the FCC
and the RCA frequently considers modifications of their rules. We cannot predict the outcome of any
such of any action taken by the Congress, the FCC or the RCA.
Interstate access charges
The FCC regulates the prices that ILECs charge for the use of their local telephone facilities
in originating or terminating interstate transmissions. Our ILECs interstate access charges are
developed using a cost-of-service methodology, based on our authorized maximum rate of return. NECA
develops averaged access rates for participating ILECs, including our ILECs, based on the costs of
these carriers. All our ILECs participate in NECAs tariff for non-traffic sensitive costs, which
are primarily loop costs. While ACSA files its own traffic sensitive access tariff, which covers
primarily switching costs, our other ILECs participate in NECAs traffic sensitive access tariff.
Participants in a NECA tariff charge averaged access rates, pool their revenues, and distribute the
revenues on the basis of each individual carriers costs. The NECA tariffs reduce the cost burden
on individual ILECs of filing tariffs and also spread some of the risks of providing interstate
access services. None of our ILECs has chosen the FCCs price cap method for its interstate access
charges.
In 2001, the FCC adopted an order implementing certain proposals of the Multi-Association
Group (MAG) to reform the access charge system for rural ILECs. Among other things, the MAG plan
reduces usage sensitive access charges on long distance carriers and shifts a portion of cost
recovery to subscriber line charges, which are paid by end users, and new explicit universal
service support. The FCC also implemented a freeze on jurisdictional cost separations factors that
expired in June of 2006, but the separations factor freeze was extended indefinitely in May of
2006. The FCC is currently considering various proposals for further reform. These proposals may
result in the elimination of interstate and intrastate access charges paid by long distance
carriers, and the requirement that carriers such as ACSA, ACSF, ACSAK and ACSN recover those
interstate and intrastate costs from a combination of end-user charges and universal service
support. Various groups of carriers and regulators are developing new proposals for replacements to
the MAG plan to submit to the FCC. We cannot predict what changes the FCC may adopt or
when they may adopt them.
Federal Universal Service Support
The Communications Act requires the FCC to establish a universal service program to ensure
that affordable, quality telecommunications services are available to all Americans. The program at
the federal level has several components, including one that pays support to LECs serving areas for
which the costs of providing basic telephone service are higher than the national average. The
Telecommunications Act requires the FCC to make universal service support explicit, expand the
types of communications carriers that are required to pay universal support, and allow competitive
providers including CLECs and wireless carriers to be eligible for universal service support,
including where they serve customers formerly served by ILECs.
In May 2001, the FCC adopted a proposal from the Rural Task Force to reform universal service
support for rural areas. As adopted, for an interim period, eligible rural carriers will continue
to receive support based on a modified embedded cost mechanism. While the modified embedded cost
mechanism remains in place in 2007, the FCC has indicated that, it will develop a comprehensive
plan for high-cost support mechanisms for rural and non-rural carriers which may rely on
forward-looking costs. In June, 2004, the Federal-State Joint Board sought comment on certain
reforms, such as the proper definition to use in determining whether a carrier should be supported
under the rural mechanism (as opposed to the non-rural mechanism based on forward-looking
costs), the basis on which support levels for rural carriers (both ILECs and CLECs) should be
calculated. These issues remain pending before the Joint Board, which has not offered a definitive
proposal to reform universal service support. If it does so, the FCC would have one year to act on
these recommendations. In addition, members of Congress have indicated that they may seek enactment
of legislation addressing universal service reform, including legislation to limit growth of
explicit universal service support funds. We are unable to predict whether and to what extent we
would be eligible to receive any federal high-cost support under such a plan.
15
Universal service funds are only available to carriers that are designated as ETCs, by a
state regulatory commission for carriers subject to state jurisdiction, or by the FCC, for other
carriers not subject to state jurisdiction. On March 17, 2005, the FCC adopted new and more
stringent guidelines concerning the designation of competitive carriers as ETCs (CETCs) for
designations that it makes under its jurisdiction. Although the new guidelines are not binding on
state commissions, several parties have asked the FCC to require states to follow them on
reconsideration. The RCA has commenced a state rulemaking proceeding to consider possible changes
prompted by the FCC guidelines. We do not anticipate any impact on the eligibility of our ILECs to
receive universal service support as a result of these rule changes.
Under current FCC regulations, the total amount of federal universal service funds available
to all ILEC ETCs is subject to a yearly cap. In any year where the cap is reached, the per access
line rate at which ILECs can recover Universal Service Fund payments may decrease. In each of the
last few years, the cap has effectively decreased Universal Service Fund (USF) payments.
We also expect the FCC to act in 2007 to reform the current funding mechanism for the
universal service support funds. Today, our operating subsidiary companies are required to
contribute to the federal USF a percentage of their revenue earned from interstate and
international services. The FCC is currently considering whether to replace this funding mechanism
with one based on flat-rated, per-line contributions, capacity-based contributions, or some
combination of these or other proposals. We cannot predict how the outcome of this proceeding may
affect our contribution obligations.
Interstate long distance services
FCC regulation of the rates, terms or facilities of our interstate long distance services is
relatively light. However, we must comply with the general requirement that our charges and terms
be just, reasonable and non-discriminatory. Also, we must comply with FCC rules regarding
unauthorized switching of a customers long distance service provider, or slamming; the FCC has
levied substantial fines on some carriers for slamming. In addition, ACSLD must post the rates,
terms and conditions of its service on its Internet web site and engage in other public disclosure
activities.
The FCC required that ILECs that provide interstate long distance services originating from
their local exchange service territories must have long distance affiliates which maintain separate
books of account and acquire any services from their affiliated ILECs at tariff rates, terms and
conditions.
On December 8, 2004, Congress enacted a new law requiring, through 2009, the purchase and sale
of interstate wholesale switched service elements at rates equivalent to the rates set forth in
AT&T Alascoms Tariff 11, subject to annual downward adjustments specified in the statute. Rural
telephone companies, or companies that are affiliated with and under the control of rural telephone
companies, are exempt from the requirement to purchase services at such rates.
Wireless services
The FCC regulates the licensing, construction, operation, acquisition and sale of personal
communications services and cellular systems in the United States. All cellular and personal
communications services licenses have a 10-year term, at the end of which they must be renewed.
Licenses may be revoked for cause, and license renewal applications may be denied if the FCC
determines that renewal would not serve the public interest. In addition, all personal
communications services licensees must satisfy certain coverage requirements. Licensees that fail
to meet the coverage requirements may be subject to forfeiture of the license.
Federal law preempts state and local regulation of the entry of, or the rates charged by, any
provider of commercial mobile radio services (CMRS) which includes personal communications
services and cellular services. The FCC does not regulate such rates; however, the FCC imposes a
variety of other regulatory requirements on CMRS operators. For example, CMRS operators must be
able to transmit 911 calls from any qualified handset without credit check or validation, and are
required to provide the location of the 911 caller within an increasingly narrow geographic range.
CMRS operators are also required to provide 911 service for individuals with speech and hearing
disabilities, or TTY service. The FCC granted ACS a waiver allowing a limited extension of time to
comply with the FCCs E911 requirements: (1) that all new handset activations are location-capable;
and (2) that 95% of all subscribers have location-capable handsets. Consistent with the FCCs
order, all new ACS Wireless, Inc, (ACSW) handset activations have been location-capable since
January 1, 2006. Further, ACSW met the FCCs deadline of having 95% of all subscribers using
location-capable handsets prior to January 31, 2007.
16
FCC regulations also require us to maintain our analog network operations as we transition to
our new CDMA wireless network. In December 2006, the FCC granted ACSW a limited waiver of that
requirement, allowing ACSW to turn down seven remote and very high cost analog cell sites.
The FCC also requires that if a LEC customer wants to retain a telephone number while changing
to a CMRS service provider (such as ACSW), the LEC must have the capability to allow this
wireline-to-wireless number portability within six months of a bona fide request, where the
requesting CMRS carriers coverage area overlaps the geographic location of the LEC rate center to
which the number is assigned (unless the LEC can provide specific evidence demonstrating that doing
so is not technically feasible). These number portability rules are expected to increase the level
of competition among CMRS service providers, but also to increase the ability of CMRS providers to
win customers from LECs. This rule has had little impact on our LECs, but we cannot predict the net
impact of these new rules on us over the long-term.
Internet services
We provide Internet access services as an Internet service provider (ISP). The FCC has
classified such services as information services, so they are not subject to various regulatory
obligations that are imposed on common carriers, such as paying access charges or contributing to
USF. On September 23, 2005, the FCC announced a policy of ensuring neutral access to and operation
of the Internet. SBC and Verizon, the two largest ILECs, have agreed to conduct their businesses in
compliance with the FCC policy as a condition of the FCCs approval of their acquisitions of AT&T
and MCI, respectively. There may be new legislation or further FCC action to address access to the
Internet, and we cannot predict the impact of any such actions on our results or operations. Also,
the FCC generally preempts state and local regulation of information services.
In October 2005, the FCC determined that ILECs are no longer required to lease high-speed
Internet access service transmission capability to their competitors, and re-affirmed its finding
that provision of high-speed transmission service bundled with Internet access services is an
information service not subject to common carrier regulation, whether that access is provided via
cable modem, DSL services, or otherwise. This decision gives us more flexibility in how we offer
and price our DSL services. However, for carriers subject to rate-of-return regulation, like the
ACS ILECs, the FCC left uncertain whether loop cost allocations would change if they decide to
offer the underlying transmission capability on a non-common carrier basis. We currently provide
high-speed Internet access transmission capability on a common carrier basis under a stand-alone
FCC tariff for ACSA and the NECA tariff for our non-Anchorage LECs. We are considering whether to
offer it as non-common carrier service.
In February 2004, the FCC determined that entirely Internet-based voice over Internet Protocol
(VoIP) service is an information service and exempt from such regulatory obligations. This
finding applied only to VoIP services that do not connect to the public (circuit) switched
telephone network. Also in February 2004, the FCC launched a comprehensive rulemaking to determine
the appropriate types of regulation, including such matters as intercarrier compensation and
contributions to USF, to which ISPs offering or enabling different types of IP services, including
VoIP, should be subject. In November 2004, the FCC decided that some VoIP services are exempt from
certain state regulations. While VoIP services and high-speed Internet access services generally
are not subject to common carrier regulation, the FCC has determined in recent decisions that these
services are subject to certain public safety requirements. For example, in May 2005, the FCC found
that 911 requirements apply to VoIP. Further, in August 2005, the FCC found that the Communications
Assistance for Law Enforcement Act (CALEA) requires providers of both high-speed Internet access
services and some VoIP services to ensure that their networks have certain capabilities that
facilitate the conduct of electronic surveillance by law enforcement agencies. The FCC has required
ISPs including ACSI to be capable of CALEA compliance by May 2007, but we cannot be certain ACSI
will meet this deadline. The FCC has also determined that a component of VoIP revenues is subject
to USF contributions. Where VoIP providers are unable to specifically identify their interstate
traffic, a safe harbor factor is applied.
Other federal regulations
We are subject to various other federal regulations and statutes, including those concerning
the use of customer proprietary network information (CPNI) in marketing services, and
implementing capabilities to be used by law enforcement officials in executing court authorized
electronic surveillance. CPNI generally includes information a carrier has regarding the
telecommunications services to which its customer subscribes and the customers use of those
services. In February, 2006, the FCC initiated a rulemaking to determine if it should strengthen
its rules governing carrier use and
17
disclosure of CPNI. Other FCC initiatives that may impact our regulated subsidiaries include
access to poles, ducts, conduits and rights-of-way, Truth-in-Billing requirements, EEO reporting,
hearing aid compatibility requirements, and anti-slamming rules. These requirements may impose
costs on us and limit our business opportunities.
State regulation
Telecommunication companies are required to obtain certificates of public convenience and
necessity from the RCA prior to operating as a public utility in Alaska. The RCA must approve
amendments to and transfers of such certificates. In addition, RCA approval is required if an
entity acquires a controlling interest in any of our certificated subsidiaries, if we acquire a
controlling interest in another intrastate utility, or if we discontinue an intrastate service. The
RCA also regulates rates, terms and conditions for local, intrastate access and intrastate long
distance services, supervises the administration of the Alaska Universal Service Fund (AUSF) and
decides on ETC status for purposes of the federal USF. Furthermore, pursuant to the
Telecommunications Act and the FCCs rules, the RCA decides various aspects of local network
interconnection offerings and agreements.
Interconnection
The Telecommunications Act specifies that resale and UNE rates are to be negotiated among the
parties subject to approval by the state regulatory commission, or, if the parties fail to reach an
agreement, arbitrated by the state regulatory commission. We have entered into interconnection
agreements with TelAlaska Long Distance, Inc., Level 3, and numerous other entities, including GCI.
On January 7, 2005, GCI filed suit in federal court seeking reversal of the RCAs 2004 order
approving the interconnection agreement between GCI and ACSA. GCI claims that the pricing
methodology the RCA used to determine the rates we charge GCI under the interconnection agreement
did not comply with the FCCs pricing methodology regulations and requests the court direct the RCA
to retroactively reduce the rates we charge GCI under this agreement. ACSA also challenged the
RCAs decision, in part, asserting that the RCA unreasonably delayed reaching a final, legal UNE
loop rate, that the temporary UNE loop rate set by the RCA did not comply with federal law, and
that the RCAs decision regarding the percentage of feeder plant that must be placed in the road
prism was not supported by substantial evidence. In November 2006, the court ruled against all
claims and upheld the RCAs decision.
Competitive local exchange regulations
In August 2005, the RCA adopted regulations addressing a variety of telecommunications related
matters including tariff policies, depreciation practices, local competitive market rules, and
interexchange competitive market rules. The regulations provide for, among other things: initial
classification of all ILECs, including our rural properties and ACSA, as dominant carriers;
requirements that all carriers, both dominant and non-dominant, offer all retail services for
resale at wholesale rates consistent with 47 U.S.C. § 251 and 252; and limited dominant carrier
pricing flexibility in competitive areas, under which carriers may reduce retail rates, offer new
or repackaged services and implement special contracts for retail service upon 30 days notice.
Rate increases affecting existing services are subject to full cost support showings by the
dominant carrier in areas with local competition; but the RCA may demand, and has demanded, cost
support even for rate reductions and new or repackaged services in competitive areas. On September
16, 2005, the RCA defined the ACSA, ACSAK and ACSF service areas as competitive local exchange
markets under its new regulations. The RCA had previously granted ACSA, ACSAK and ACSF
non-dominant status on a trial basis only for retail tariff purposes. On February 22, 2006, the
RCA designated ACSA, ACSAK-Juneau and ACSF as non-dominant carriers in their respective competitive
local exchange markets for the provision of retail services except for line extension services,
construction services, subdivision agreements and access services. This change in designation has
given these three ACS LECs access to relaxed tariff filing rules that allow retail offers to be
introduced to the market without advance public notice or RCA approval. We are seeking similar
designation changes for ACSN and the second study area in ACSAK to become immediately effective
upon receipt of a CLECs 90-day notice of intent to enter these markets.
End user local rates
The rates charged by our ILECs to end-users for basic local service are generally subject to
the RCAs regulation based on a cost-of-service method using an authorized rate of return.
Competition may prevent local rates from being sufficient to recover embedded costs for local
service. Rate cases are typically infrequent, carrier-initiated and require the
18
carrier to meet substantial burdens of proof. The RCA may, however, investigate, upon
complaint or upon its own motion, the rates of a LEC and hold hearings on those rates.
Intrastate access rates
ILECs not yet subject to local competition participate in a pool administered by AECA for
intrastate access charges to long distance carriers. AECA pools their access costs and sets a
statewide average price which participating ILECs charge to long distance carriers for originating
or terminating calls. Access revenues are collected in a pool and then redistributed to the ILECs
based on their actual costs.
The RCA requires an ILEC to file separate, individual company access charge tariffs when a
competitor enters its service area. These tariffs are based on the ILECs cost of service and are
revised biennially. ACSN is our only ILEC associated with AECA. AECA administers ACSNs intrastate
access tariff, but ACSN has a stand-alone rate. In 2006, the RCA commenced a state rulemaking
proceeding to consider the impact of competition on the access pooling process and whether to
continue to require ILECs in competitive markets to exit the AECA pool.
The RCA has adopted regulations limiting the access fees local carriers can charge
interexchange carriers and imposing a Network Access Fee on end-users to make up for the reduction
in fees paid by interexchange carriers. The RCA is also analyzing the effects of various FCC
intercarrier compensation proposals on Alaskan consumers and telecommunications companies.
Alaska Universal Service Fund
The RCA has established the AUSF. The AUSF serves as a complement to the federal USF, but must
meet federal statutory criteria concerning consistency with federal rules and regulations.
Currently, the AUSF supports a portion of certain higher cost carriers switching costs, the costs
of lifeline service (which supports rates of low income customers), and a portion of the cost of
Public Interest Pay Telephones. The RCA has adopted regulations that limit high-cost switching
support to local companies with access lines of 20,000 or less. This change has eliminated the
switching support that our rural ILECs received.
ETC Determinations
The RCA granted GCIs request that it be designated an ETC in Anchorage, Fairbanks, Juneau,
and Fort Wainwright, all of which are currently served by our subsidiaries. Further, there is a
trend toward granting ETC status to wireless carriers. In July 2004, ACSW was granted ETC status in
the MTA and ACSF study area and was subsequently ETC status in ACSA, ACSAK-Juneau, and ACSN-Glacier
State study areas in November 2004. ACSW was also granted ETC status in the areas serviced by the
Copper Valley Telephone Cooperative, Inc., and KPU Telecommunications in April, 2006.
Other state regulations
The RCA adopted regulations allowing some bundling of local exchange and intrastate
interexchange services. Other RCA rules, however, result in limitations on our ability to actually
bundle our intrastate interexchange services.
The RCA has also opened dockets in 2005 to consider: the need to promulgate regulations to
establish an affordability benchmark for local exchange telephone service, and to address whether
and how to use state universal service funds to offset potentially unaffordable local exchange
rates; the need to promulgate ETC regulations; and generally accepted industry standards for E911
service. All of these dockets, as well as the 2006 rulemakings previously mentioned, could impact
our business.
Item 1A. Risk Factors
We face a variety of risks that may affect our business, financial condition, and results of
operations, some of which are beyond our control. The risks described below are not the only ones
we face and should be considered in addition to the other cautionary statements and risks described
elsewhere, and the other information contained, in this report and in our other filings with the
SEC, including our subsequent reports on Forms 10-Q and 8-K. Additional risks and uncertainties not
known to us or that we currently deem immaterial may also affect our business. If any of these
known or unknown risks or uncertainties actually occurs, our business, financial condition and
results of operations could be seriously harmed.
19
Risks related to our common stock
ACS Group is a holding company and relies on dividends, interest and other payments, advances and
transfer of funds from its subsidiaries to meet its debt service and pay dividends.
ACS Group has no direct operations and no significant assets other than ownership of 100% of
the stock of ACS Holdings, Inc. (ACSH). Because we conduct our operations through our direct and
indirect subsidiaries, we depend on those entities for dividends and other payments to generate the
funds necessary to meet our financial obligations, including paying dividends on our common stock.
Legal restrictions applicable to our subsidiaries and contractual restrictions in our senior credit
facility, and other agreements governing current and future debt of our subsidiaries, as well as
the financial condition and operating requirements of our subsidiaries, may limit our ability to
obtain cash from our subsidiaries. The earnings from, or other available assets of, our
subsidiaries may not be sufficient to pay dividends on the common stock.
Our dividend policy may limit our ability to pursue growth opportunities.
Our board of directors has adopted a dividend policy which reflects an intention to distribute
a substantial portion of the cash generated by our business in excess of operating needs, interest
and principal payments on our debt and capital expenditures as regular quarterly dividends to our
stockholders. As a result, we may not retain a sufficient amount of cash to finance a material
expansion of our business, or to fund our operations consistent with past levels of funding. In
addition, our ability to pursue any material expansion of our business, including through
acquisitions or increased capital spending, will depend more than it otherwise would on our ability
to obtain third party financing. Financing may not be available to us at an acceptable cost, or at
all.
You may not receive the level of dividends provided for in our dividend policy or any dividends at
all.
We are not obligated to pay dividends. Our board of directors may, in its absolute discretion,
amend or repeal the 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 applicable law, and other factors that our board of directors may deem relevant.
Additionally, Delaware law and the terms of our senior credit facility may reduce or eliminate our
ability to pay dividends.
We might not generate sufficient cash from operations in the future to pay dividends on our
common stock in the intended amounts, or at all. Our board of directors may decide not to pay
dividends at any time and for any reason. If our cash flows from operations for future periods were
to fall below our minimum expectations, we would need either to reduce or eliminate dividends or,
to the extent permitted under the terms of our senior credit facility or any future agreement
governing our debt, fund a portion of our dividends with borrowings or from other sources. If we
were to use working capital or permanent borrowings to fund dividends, we would have less cash
and/or borrowing capacity available for future dividends and other purposes, which could negatively
affect our financial condition, results of operations, liquidity, ability to maintain or expand our
business, and ability to fund dividends. Our board is free to depart from or change our dividend
policy at any time and could do so, for example, if it were to determine that we had insufficient
cash to take advantage of growth opportunities. The reduction or elimination of dividends may cause
the market price of our common stock to decline.
Our substantial debt could adversely affect our financial health and restrict our ability to pay
dividends on our common stock and adversely affect our financing options and liquidity position.
We have a substantial amount of debt. As of December 31, 2006 we had total long-term
obligations, including current portion, of $438.2 million and net income for the year ended
December 31, 2006 of $20.0 million.
Our debt could have important consequences for you as a holder of our common stock. For
example, our substantial debt could:
|
|
|
require us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures, future business opportunities and other
general corporate purposes; |
20
|
|
|
limit our flexibility to plan, adjust or react to changing economic, market or
industry conditions, reduce our ability to withstand competitive pressures, and
increase our vulnerability to general adverse economic and industry conditions; |
|
|
|
|
place us at a competitive disadvantage to many of our competitors who are less
leveraged than we are; |
|
|
|
|
limit our ability to borrow additional amounts for working capital, capital
expenditures, future business opportunities, including strategic acquisitions, and
other general corporate requirements or hinder us from obtaining such financing on
terms favorable to us or at all; and |
|
|
|
|
limit our ability to refinance our debt. |
The terms of our senior credit facility and the terms of our other debt allows us and our
subsidiaries to incur additional debt upon the satisfaction of certain conditions. If new debt is
added, the related risks described above would intensify.
Our debt instruments include restrictive and financial covenants that limit our operating
flexibility.
Our senior credit facility requires us to maintain certain financial ratios and adhere to
other covenants that, among other things, restrict our ability to take specific actions, even if we
believe such actions are in our best interest. These include restrictions on our ability to:
|
|
|
pay dividends or distributions on, redeem or repurchase our capital stock;. |
|
|
|
|
issue certain preferred or redeemable capital stock; |
|
|
|
|
incur additional debt; |
|
|
|
|
create liens; |
|
|
|
|
make certain types of investments, loans, advances or other forms of payments; |
|
|
|
|
issue, sell or allow distributions on capital stock of specified subsidiaries; |
|
|
|
|
prepay or defease specified debt; |
|
|
|
|
enter into transactions with affiliates; or |
|
|
|
|
merge, consolidate or sell our assets. |
These restrictions could limit our ability to obtain financing, make acquisitions or fund
capital expenditures, withstand downturns in our business or take advantage of business
opportunities. A breach of any of these covenants, ratios or tests could result in a default under
our senior credit facility. Upon the occurrence of an event of default under our senior credit
facility, the lenders could elect to declare all amounts outstanding under our senior credit
facility to be immediately due and payable. Such a default or acceleration may allow our other
creditors to accelerate our other debt. If the lenders accelerate the payment of the debt under our
senior credit facility, our assets may not be sufficient to repay in full this debt and our other
debt.
We will require a significant amount of cash to service our debt, pay dividends and fund our other
liquidity needs. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our debt, including amounts borrowed under
our senior credit facility, to pay dividends, and to fund planned capital expenditures and any
strategic acquisitions we may make, if any, will depend on our ability to generate cash in the
future. We cannot assure you that our business will generate sufficient cash flow from operations
such that our currently anticipated growth in revenues and cash flow will be realized on schedule
or that future borrowings will be available to us in an amount sufficient to enable the repayment
of our debt, pay dividends or to fund our other liquidity needs. We may need to refinance all or a
portion of our debt, including the senior credit facility, on or before maturity. We may not be
able to refinance any of our debt on commercially reasonable terms or at all. If we are unable to
refinance our debt or obtain new financing under these circumstances, we would have to consider
other options, including:
|
|
|
sales of certain assets to meet our debt service requirements; |
|
|
|
|
sales of equity; and |
|
|
|
|
negotiations with our lenders to restructure the applicable debt. |
If we are forced to pursue any of the above options our business and/or the value of our
common stock could be adversely affected.
21
We may issue shares of our common stock or other securities from time to time as consideration
for future acquisitions and investments. In the event any such acquisition or investment is
significant, the number of shares of our common stock, or the number or aggregate principal amount,
as the case may be, of other securities that we may issue may be significant. We may also grant
registration rights covering those shares or other securities in connection with any such
acquisitions and investments.
Possible volatility in the price of our common stock could negatively affect us and our
stockholders.
The trading price of our common stock may be volatile in response to a number of factors, many
of which are beyond our control, including actual or anticipated variations in quarterly financial
results, actual or anticipated variations in our dividend policy, changes in financial estimates by
securities analysts, and announcements by our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments. In addition, our financial results or dividend
payments may be below the expectations of securities analysts and investors. If this were to occur,
the market price of our common stock could decrease, perhaps significantly. Additionally,
historically, there has been a limited public market for our common stock. The limited liquidity
for holders of our common stock may add to the volatility of the trading price of our common stock.
These effects could materially adversely affect the trading market and prices for our common stock,
as well as our ability to issue additional securities or to secure additional financing in the
future.
In addition, the U.S. securities markets have experienced significant price and volume
fluctuations. These fluctuations often have been unrelated to the operating performance of
companies in these markets. Broad market and industry factors may negatively affect the price of
our common stock, regardless of our operating performance.
The limited liquidity of the trading market for our common stock may affect the trading price of
our common stock.
The trading market for our common stock is limited and a more liquid trading market for our
common stock may not develop. It is more likely for common stock issued in larger aggregate numbers
of shares to trade more favorably than similar common stock issued in smaller aggregate numbers
because of the increased liquidity created by higher trading volumes resulting from larger numbers
of traded shares. There may not be a sufficiently liquid market for our common stock for holders to
sell common stock readily.
Limitations on usage of our net operating losses, and other factors requiring us to pay cash taxes
in future periods, may affect our ability to pay dividends to you.
The disposition of a substantial number of shares of our common stock by a major stockholder
in 2005 and 2006 held by it caused us to undergo an ownership change for purposes of Section 382
of the Internal Revenue Code. As a result, our ability to use our substantial net operating losses
to offset taxable income for taxable periods ending after the disposition is limited. Consequently,
in the future we may be required to pay cash income taxes because of limitations on using our net
operating losses, or because all of our net operating losses have been used or have expired. Any of
the foregoing would have the effect of increasing our taxable income and potentially reducing our
after-tax cash flow available for payment of dividends in future periods, and may require us to
reduce dividend payments on our common stock in such future periods.
Risks related to our business
We provide services to our customers over access lines and if we continue to lose access lines our
revenues, earnings and cash flow from operations may decrease.
Our business generates revenue by delivering voice and data services over access lines. We
have experienced net access line loss over the past few years, and during the year ended December
31, 2006, the number of access lines we serve declined by 6.73% due to increased competition and
the introduction of DSL and cable modems. We may continue to experience net access line loss in our
markets for an unforeseen period of time. In addition, GCI, the dominant cable television operator,
aggressively offers competitive local telephone service in many of our largest markets. Our
petition for forbearance from the requirement to provide UNEs in Anchorage has not been approved on
terms we find acceptable, and we are appealing the FCCs ruling. In any event, we expect to
experience continued access line loss in areas served by this competitor, and other competitors.
Our inability to retain access lines would adversely affect our revenues, earnings and cash flow
from operations.
22
Our business is subject to extensive governmental legislation and regulation. Applicable federal
and state legislation and regulations and changes to them could adversely affect our business.
We operate in a heavily regulated industry, and most of our revenues come from the provision
of services regulated by the FCC, and the RCA. Laws and regulations applicable to us and our
competitors may be, and have been, challenged in the courts, and could be changed by legislation or
regulatory orders at any time. Future developments or changes to the regulatory environment, or the
effect of such developments or changes, may have an adverse effect on us.
There are a number of FCC and RCA rules under review that could have a significant effect on
us. For example, many of the FCCs rules with regard to the provisioning of UNEs and other
interconnection rules have been revised from time to time and are subject to further proceedings at
the FCC. Several parties have challenged the FCCs current interconnection regulations in court,
increasingly over its own facilities. Court rulings, further FCC actions, or new legislation in
this area could affect our obligation to provide UNEs and the prices we receive for our UNEs.
Changes to intercarrier compensation or the roaming agreements between wireless operators that
affect our access or roaming revenues are also likely over the next few years. The FCC and Congress
are also looking at universal service fund contribution and disbursement rules that are likely to
affect the amount and timing of our contributions to and receipt of universal service funds; our
obligations may increase and/or our revenue may decline; and our competitors may receive greater
payments. Further, most FCC and RCA telecommunications decisions are subject to substantial delay
and judicial review. These delays and related litigation create risk associated with uncertainty
over the final direction of federal and state policies and our regulated rates.
As the incumbent local exchange carrier in our service areas, we are subject to legislation and
regulation that are not applicable to our competitors.
Existing federal and state rules impose obligations and limitations on us, as the incumbent
local telephone company, that are not imposed on our competitors. Federal obligations to share
facilities, file and justify tariffs, maintain certain types of accounts, and file certain types of
reports are all examples of disparate regulation. Similarly, state regulators impose accounting and
reporting requirements and service obligations on us that do not exist for our competitors. In
addition, state regulators have imposed greater tariffing standards and obligations on us than on
our competitors. Some of our proposed tariffs may be suspended for six to twelve months before they
go into effect, which has enabled our competitors to plan competitive responses before we are able
to implement new rates, diminishing our ability to compete. As our business becomes increasingly
competitive, the continued regulatory disparity could have a material adverse effect on our
business.
A reduction by the RCA or the FCC of the rates we charge our customers would reduce our revenues
and earnings.
The rates we charge our local telephone customers are based, in part, on a rate of return
authorized by the RCA on capital invested in our networks. These authorized rates, as well as
allowable investment and expenses, are subject to review and change by the RCA at any time. If the
RCA orders us to reduce our rates, both our revenues and our earnings will be reduced.
Additionally, in this competitive market, we are not sure we would be able to implement higher
rates even if approved by the RCA.
State regulators may rebalance our planned rates or set new rates closer to our costs, and
refuse to keep our sensitive business information confidential, furthering our competitive
disadvantage in the marketplace. Our local exchange service competitors may also gain a competitive
advantage as a result of the state regulators permitting our competitors to intervene in
rate-setting proceedings.
FCC regulations also affect rates that are charged to customers. The FCC regulates tariffs for
interstate access and subscriber line charges, both of which are components of our network service
revenue. The FCC currently is considering proposals to reduce interstate access charges for
carriers like us. If the FCC lowers interstate access charges without adopting an adequate revenue
replacement mechanism, we may be required to recover more revenue through subscriber line charges
and universal service funds or forego this revenue altogether. This could reduce our revenue or
impair our competitive position.
23
Increased bandwidth consumption by customers using our data services may result in increased costs
to us for wholesale network capacity, and we may be unable to recover those costs in our retail
prices.
Consistent with national trends, data customers using our network have generally increased
their individual consumption of network bandwidth over time. We believe demand for bandwidth will
likely continue to increase as applications requiring ever-increasing data transfer rates, such as
streaming video, gaming, and other Internet services, gain popularity. At the same time, retail
pricing for bandwidth has remained flat or has decreased. Further, our proprietary data network has
limited capacity in certain areas, and in those areas, we must purchase supplemental capacity from
third-parties, including from our competitors. Thus, while our bandwidth needs are likely to grow,
we may not be able to obtain additional capacity from wholesale providers at acceptable prices or
at all. Consequently, our data services margins may decline or our service levels may fail to keep
pace with consumer demands, which would adversely affect our reputation, business, and results of
operations.
Loss of the exemption from certain forms of competition granted to one of our rural local exchange
carriers under the Federal Telecommunications Act of 1996 exposes us to increased competition.
ACSN currently has a rural exemption from the requirement to provide UNEs to CLECs, but it
remains subject to petitions for termination or facilities-based competition at any time. GCI was
granted, subject to certain conditions, approval to provide local exchange telephone service in
ACSNs Glacier State study area. New facilities-based local exchange service competition will
likely reduce our revenues and return.
Interconnection duties are governed by telecommunications rules and regulations related to the
UNEs that must be provided. These rules and regulations remain subject to ongoing change. In
addition, to the extent that rural exemptions are terminated, other carriers are entitled to obtain
interconnection agreements with us on the same basis as GCI. Finally, to the extent the new rates
are higher than the previous rates, GCI or other competitors may provide service over their own
facilities, further depriving us of revenue.
Our results of operations could be materially harmed as GCI further develops its own network
facilities and stops leasing our network elements.
GCI commenced offering cable telephony in Anchorage during 2004 and has increasingly moved its
customers off of our network and onto its own cable system. GCI announced plans to migrate
virtually all of its Anchorage customers to its own network during 2007 and 2008. Significant
migration of customers would result in a significant reduction of revenue for us, as GCI would no
longer be leasing our facilities to serve those customers, which could materially harm our results
of operations.
We derive a significant portion of our wireless revenue from roaming charges. This revenue may
fluctuate or decline in the future as a result of general economic, contractual, and competitive
factors.
Approximately 4% of our revenue for the year ended December 31, 2006 was derived from roaming
charges incurred by other wireless providers whose customers traveled within our coverage areas.
The revenue we recognize from these roaming charges may in the future be volatile or decline as a
result of a number of factors, many of which are outside our control. These factors include, the
strength of Alaskan economy and its primary industries, including tourism, general economic factors
affecting commerce between Alaska and other States and countries, unresolved political matters
which may affect public and private spending in Alaska, and others. For example, our service areas
include a number of summer tourist destinations in Alaska; as a result, our roaming revenue
generally increases during summer months and declines during other periods and depends heavily in
these areas on the number of tourists who visit Alaskan tourist destinations. In addition, we
cannot assure you our roaming agreements with other providers will continue to generate similar
roaming revenues. Our agreements with other carriers have varying terms of varying length,
including some which are terminable on short notice. In the event these roaming agreements expire
or are terminated, we may be unable to renegotiate or replace these agreements on similar or
acceptable terms. Failure to obtain acceptable roaming agreements could lead to a significant
decline in our revenue and operating income. Lastly, changes in the network footprints of our
roaming partners, or those of our competitors who are able to provide roaming coverage in our
service areas, could have a material adverse effect on us.
24
The telecommunications industry is extremely competitive, particularly in Alaska, and we may have
difficulty competing effectively for share in generally small markets.
The telecommunications industry in Alaska is extremely competitive, and providers compete over
a small number of customers in small markets. We face competition in local voice, local high-speed
data and wireless, Internet, long distance and video services. Competitors in our markets:
|
|
|
reduce our customer base; |
|
|
|
|
require us to lower rates and other prices in order to compete; |
|
|
|
|
require us to invest in new facilities and capabilities |
|
|
|
|
increase marketing expenditures and require the use of discounting and
promotional campaigns that would adversely affect our margins; or |
|
|
|
|
otherwise lead to reduced revenues, margins, and returns. |
We face strong competition from GCI in many areas for integrated, facilities-based, voice,
broadband and video services, and GCI has been increasingly been providing these integrated
services over its own facilities via cable telephony. New competitors in local services may be
encouraged by FCC and RCA rules regarding interconnection agreements and universal service
supports. We face competition from wireless service providers for local, long distance and wireless
customers. One of our competitors provides wireless data at 1xRTT speeds in addition to wireless
voice services.
Wireline-to-wireless and wireless-to-wireless number portability increases risk of wireless
substitution for traditional local telephone services and increased competition among wireless
carriers. In addition, carriers offering VoIP services may also lead to a reduction in traditional
local and long distance telephone service revenues as well as our network access revenues. Some of
our competitors may be exempt from or subject to lesser regulatory burdens.
Recent strategic investment among other Alaskan telecommunications providers may lead to increased
competition and a different competitive landscape.
On December 22, 2006, the FCC approved an agreement by GCI, one of our primary competitors, to
invest $29.5 million in Alaska DigiTel, one of our wireless competitors. The investment closed on
January 1, 2007. In exchange for its investment, GCI received a majority equity interest in Alaska
DigiTel. In addition to its equity investment, GCI entered into a revolving credit loan agreement
with Alaska DigiTel. The loan agreement provides that Alaska DigiTel can draw up to $15.0 million.
These transactions provide liquidity and cash to Alaska DigiTel to fund growth and operations that
it may not otherwise have been able to afford. Growth by Alaska DigiTel could result in stronger
competition in the statewide wireless market. This could have a material adverse effect on our
business, operating results, and financial condition.
Revenues from our retail local telephone access lines may be reduced or lost.
As the incumbent local exchange carrier, we face stiff competition from resellers, local
providers who lease UNEs from us, and other facilities-based providers of local telephone services.
Through December 31, 2006, we have lost approximately 37% of our retail local telephone market
share. In Anchorage, our largest market, since opening to competition, we have lost approximately
52% of our retail local telephone market share. Similarly, in Fairbanks and Juneau we have lost
approximately 35% of our retail local telephone access lines. Further, our competitors may at any
time bypass or remove these customers from our network completely, which would eliminate our
revenue from those lines altogether. For example, GCI has already eliminated some revenue to us as
a result of its deployment of cable telephony in Anchorage. We may not be successful in recovering
those lost retail customers or revenues.
Revenues from access charges may be reduced or lost.
We received approximately 26% of our operating revenues for the year ended December 31, 2006
from local exchange network access charges. The amount of revenue that we receive from these access
charges is calculated in accordance with requirements set by the FCC and the RCA. Any change in
these requirements may reduce our revenues and earnings. Generally, access charges have decreased
since our inception in 1999.
25
Under the regulatory rules that exist today, we receive access revenue related to the calls
made by all of our retail customers as well as our competitors customers who are served via resale
of our services. Access revenue related to our competitors retail customers that are served by
UNEs or by the competitors own facilities flows to our competitors. To the extent that competitors
shift the form in which they provide service away from resale our access revenue will be reduced.
We do not receive access revenue from VoIP calls, and growth of this service will reduce our access
revenues.
The FCC is reviewing new mechanisms for intercarrier compensation. Some parties have suggested
terminating all interstate access charge payments by interexchange carriers with alternative
compensation methods for providers of access services. If such a proposal is adopted, it would
likely have a material impact on our revenue and earnings. The FCC has stated its intent to adopt
some form of access charge reform soon, which more likely than not will reduce this source of
revenue. Similarly, the RCA has adopted regulations modifying intrastate access charges that may
reduce our revenue.
In addition, we have from time to time been involved in disputes we believe will relate to
interstate access revenue. We cannot assure you that claims alleging excess charges will not be
made in the future, nor that we will be able to defeat such claims.
A reduction in the universal service support currently received by some of our subsidiaries would
reduce our revenues and earnings.
We received approximately 8.8% of our operating revenues for the year ended December 31, 2006
from the USF. The USF was established under the direction of the FCC to compensate carriers for the
high cost of providing universal telecommunications services in rural, insular, and high-cost
areas. If the support we receive from the USF is materially reduced or discontinued, some of our
rural local exchange carriers as well as wireless providers might not be able to operate
profitably. Also, because we provide interstate and international services, we are required to
contribute to the USF a percentage of our revenue earned from such services. Although our rural
LECs receive support from the USF, we cannot be certain of how, in the future, our contributions to
the USF will compare to the support we receive from the USF.
Various reform proceedings are under way at the FCC to change the method of calculating the
amount of contributions paid into the USF by all carriers and the amount of contributions or
support rural carriers like ACSF, ACSAK and ACSN receive from the USF, as well as the amount of
support received and contributions paid by our competitors. We cannot predict when or how any
change in the method of calculating contributions and support may affect our business.
The RCA has granted ETC status to GCI in Fairbanks and Juneau. Under current FCC rules, ETC
status entitles GCI to the same amount of per-line USF support that we are entitled to receive
regardless of GCIs costs. To the extent that any competitive ETC, such as GCI, has lower costs
than us, but receives the same amount of financial support, the competitor gains a competitive cost
advantage over us. If this should occur, it could have an adverse effect on our ability to compete.
As for wireless carriers, Alaska DigiTel, ACS Wireless, Inc., or ACSW, MTA Wireless, and
Dobson have been granted ETC status for certain areas.
Revenues from wireless services may be reduced.
Market prices for wireless voice and data services have declined over the last several years
and may continue to decline in the future. We may be unable to maintain or improve our average
revenue per user. We expect significant competition among wireless providers, which has been
intensified by wireless number portability and may be spurred by additional spectrum auctions, to
continue to drive service and equipment prices lower, which may lead to increased turnover of
customers. If market prices continue to decline, our ability to grow revenue would be affected,
which would have an adverse effect on our financial condition and results of operation. There can
be no assurance that any advanced wireless services we offer will be profitable or increase average
revenue per user.
26
We may not be able to offer long distance and Internet services on a profitable basis.
Our long distance operations have historically been modest in relation to the long distance
businesses of our competitors. Our long distance operations generated income of $7.0 million in
2006, and $0.3 million for the year ended December 31, 2005. Our Internet operations generated
operating losses of $8.9 million in 2006, and $6.4 million for the year ended December 31, 2005.
Our operating losses from long distance and Internet services may increase in the future, even
after taking into account additional revenue from complementary or advanced services.
If we substantially underestimate or overestimate the demand for our long distance services, our
cost of providing these services would increase.
We expect to continue to enter into resale agreements for a portion of our long distance
services. In connection with these agreements, we must estimate future demand for our long distance
service. If we overestimate this demand, we may be forced to pay for services we do not need, and
if we underestimate this demand, we may need to lease additional capacity on a short-term basis at
unfavorable prices, assuming additional capacity is available. If additional capacity is not
available, we would not be able to meet this demand.
If we do not adapt to technological changes in the telecommunications industry, we could lose
customers or market share.
Our success will likely depend on our ability to adapt to rapid technological changes in the
telecommunications industry. Our failure to adopt a new technology or our choice of one technology
over another may have an adverse effect on our ability to compete or meet the demands of our
customers. Technological change could, among other things, reduce the barriers to entry facing our
competitors providing local service in our service areas. The pace of technology change and our
ability to deploy new technologies may be constrained by insufficient capital and/or the need to
generate sufficient cash to make interest payments on our debt and to maintain our dividend policy.
New products and services may arise out of technological developments and our inability to
keep pace with these developments may reduce the attractiveness of our services. If we fail to
adapt successfully to technological changes or fail to obtain access to new technologies, we could
lose customers and be unable to attract new customers and/or sell new services to our existing
customers. We may be unable to successfully deliver new products and services, and we may not
generate anticipated revenues from such products or services.
New governmental regulations may impose obligations on us to upgrade our existing technology or
adopt new technology that may require additional capital and we may not be able to comply timely
with these new regulations.
We cannot predict the extent the government will impose new unfunded mandates on us. Such
mandates include those related to emergency location, providing access to hearing-impaired
customers, law enforcement assistance, and local number portability. Each of these government
mandates has imposed new requirements for capital that we could not have predicted with any
precision. Along with these obligations, the FCC has imposed deadlines for compliance with these
mandates. We may not be able to provide services that comply with these mandates in time to meet
the imposed deadlines. Further, we cannot predict whether other mandates, from the FCC or other
regulatory authorities, will occur in the future or the demands they may place on our capital
expenditures.
Our network capacity and customer service system may not be adequate and may not expand quickly
enough to support our anticipated customer growth.
Our financial and operational success depends on ensuring that we have adequate network
capacity, sufficient infrastructure equipment and a sufficient customer support system to
accommodate anticipated new customers and the commensurate increase in usage of our network. Our
failure to expand and upgrade our networks, including obtaining and constructing additional cell
sites, obtaining wireless telephones of the appropriate model and type to meet the demands and
preferences of our customers, and obtaining additional spectrum to meet the increased usage, could
have a material adverse effect on our business. Further, as a result of our dividend policy, our
available cash to expand and upgrade our network may be limited.
27
The reduction in our regulated rate base may adversely affect our ability to price our services.
For the last several years, our depreciation has exceeded our capital investment. As a result,
our rate base, used to price our regulated services, is in decline. Our service rates for our local
telephone services, for example, are determined by calculating a reasonable rate of return on and
to our rate base. Thus, a declining rate base leads to declining rates and prices for our regulated
services, which may adversely affect our cash flow and results of operations.
The successful operation and growth of our businesses depends on economic conditions in Alaska.
Substantially all of our customers and operations are located in Alaska. Due to our
geographical concentration, the successful operation and growth of our businesses depends on
economic conditions in Alaska. The Alaskan economy, in turn, depends upon many factors, including:
|
|
|
the strength of the natural resources industries, particularly oil production; |
|
|
|
|
the strength of the Alaskan tourism industry; |
|
|
|
|
the level of government and military spending; and |
|
|
|
|
the continued growth of services industries. |
The customer base for telecommunications services in Alaska is small and geographically
concentrated. According to U.S. Census Bureau estimates, the population of Alaska is approximately
670,000 as of July 1, 2006, approximately 60% of whom live in Anchorage, Fairbanks and Juneau. We
do not know whether Alaskas economy will grow or even be stable.
We depend on key members of our senior management team.
Our success depends largely on the skills, experience and performance of key members of our
senior management team, as well as our ability to attract and retain other highly qualified
management and technical personnel. There is intense competition for qualified personnel in our
industry, and we may not be able to attract and retain the personnel necessary for the development
of our business. If we lose one or more of our key employees, our ability to successfully implement
our business plan could be materially adversely affected. We do not maintain any key person
insurance on any of our personnel.
We rely on a limited number of key suppliers and vendors for timely supply of equipment and
services for our network infrastructure. If these suppliers or vendors experience problems or favor
our competitors, we could fail to obtain sufficient quantities of the equipment and services we
require to operate our business successfully.
We depend on a limited number of suppliers and vendors for equipment and services for our
network. If these suppliers experience interruptions, patent litigation, or other problems,
subscriber growth and our operating results could suffer. If our supplier uses its proprietary
technology, including CDMA technology, as an integral component of our network, we may be
effectively locked into one or few suppliers for key network components. As a result, we have
become reliant upon a limited number of network equipment manufacturers. In the event it becomes
necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory
replacement suppliers or vendors on economically attractive terms on a timely basis, or at all,
which could increase costs and may cause disruption in service.
Wireless devices may pose health and safety risks and driving while using a wireless phone may be
prohibited; as a result, we may be subject to new regulations, and demand for our services may
decrease.
Media reports have suggested that, and studies have been undertaken to determine whether,
certain radio frequency emissions from wireless handsets and cell sites may be linked to various
health concerns, including cancer. Further, radio frequency emissions may interfere with various
electronic medical devices, including hearing aids and pacemakers. In addition, lawsuits have been
filed against others in the wireless industry alleging various adverse health consequences as a
result of wireless phone usage.
If consumers health concerns over radio frequency emission increase, they may be discouraged
from using wireless handsets; regulators may impose or increase restrictions on the location and
operation of cell sites or increase regulation on handsets; and wireless providers may be exposed
to litigation, which, even if not successful, may be costly to
28
defend. The actual or perceived risk of radio frequency emissions could adversely affect us through
a reduced subscriber growth rate, a reduction in our subscribers, reduced network usage per
subscriber, or reduced financing available to the wireless communications industry.
In addition, new government regulations on the use of a wireless device while driving may
adversely affect our results of operations. Studies have indicated that using wireless devices
while driving may impair a drivers attention. Many state and local legislative bodies have passed
or proposed legislation to restrict the use of wireless telephones while driving motor vehicles.
Concerns over safety and the effect of future legislation, if adopted and enforced in the areas we
serve, could limit our ability to market and sell our wireless services and decrease our revenue
from customers who now use their wireless telephones while driving. Further, litigation relating to
accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone
use while driving could result in damage awards against telecommunications providers, adverse
publicity and further governmental regulation. Any of these results could have a material adverse
effect on our results of operations and financial condition.
We are subject to environmental regulation and environmental compliance expenditures and
liabilities.
Our business is subject to many environmental laws and regulations, particularly with respect
to owned or leased real property containing our network equipment and tower sites. Some or all of
the environmental laws and regulations to which we are subject could become more stringent or more
stringently enforced in the future. For example, the FCC is considering whether to adopt rules to
reduce the incidents of migratory bird collisions with cell towers. Our failure to comply with
applicable environmental laws and regulations and permit requirements could result in civil or
criminal fines or penalties or enforcement actions, including regulatory or judicial orders
enjoining or curtailing operations or requiring corrective measures, installation of pollution
control equipment or remedial actions.
In addition to operational standards, environmental laws also impose obligations on us to
clean up contaminated properties or pay for the costs of such clean up. We could become liable,
either contractually or by operation of law, for such clean up costs even if the contaminated
property is not currently owned or operated by us, or if the contamination was caused by third
parties during or prior to our ownership or operation of the property. Moreover, future events,
such as changes in existing laws or policies or their enforcement, or the discovery of currently
unknown contamination, may give rise to material clean up costs.
A failure of our system or network cables could cause significant delays or interruptions of
service, which could cause us to lose customers.
To be successful, we will need to continue to provide our customers reliable service over our
network. In certain important cases, our systems lack redundancy, which reduces the reliability of
our network. Our network and infrastructure are constantly at risk of physical damage to access
lines or other inoperability as a result of human, natural, or other factors. These factors may
include labor strikes, pandemics, acts of terrorism, sabotage, natural disasters, power surges or
outages, software defects, contractor or vendor failure, and other disruptions that may
be beyond our control. For example, should the primary fiber-optic cable connecting our Alaskan
network to the lower 48 states become damaged or otherwise inoperable, services on our network to
the lower 48 states and beyond would likely be degraded or unavailable.
We rely heavily on our networks, network equipment, data and software and the networks of
other telecommunications providers to support all of our functions and for substantially all of our
revenues. We are able to deliver services only to the extent that we can protect our network
systems against damage from power or telecommunication failures, computer viruses, natural
disasters, unauthorized access and other disruptions. While we endeavor to provide for failures in
the network by providing back-up systems and procedures, we cannot guarantee that these back-up
systems and procedures will operate satisfactorily in an emergency.
Should we experience a prolonged system failure or a significant service interruption, our
customers may choose a different provider, and our reputation may be damaged.
29
A failure of enhanced emergency calling services associated with our network may harm our business.
We provide E911, service to our customers where such service is available. We also contract
from time to time with municipalities to upgrade their public safety answering points such that
those facilitates become capable of receiving our transmission of a 911 callers location
information and telephone number. If the emergency call center is unable to process such
information, the caller is provided only basic 911 services. In these instances, the emergency
caller may be required to verbally advise the operator of such callers location at the time of the
call. Any inability of the answering point to automatically recognize the callers location or
telephone number whether or not it occurs as a result of our network operations may cause us to
incur liability or cause our reputation or financial results to suffer.
We cannot assure you that we will be able to successfully integrate any acquisitions we may make in
the future.
We continually explore acquisitions. However, any future acquisitions we make may involve some
or all of the following risks:
|
|
|
diversion of management attention from operating matters; |
|
|
|
|
unanticipated liabilities or contingencies of acquired businesses; |
|
|
|
|
failure to achieve projected cost savings or cash flow from acquired businesses; |
|
|
|
|
inability to retain key personnel of the acquired business or maintain relationships with its customers; |
|
|
|
|
inability to successfully integrate acquired businesses with our existing
businesses, including information-technology systems, personnel, products and
financial, computer, payroll and other systems of the acquired businesses; |
|
|
|
|
failure to obtain necessary regulatory approvals; |
|
|
|
|
difficulties in enhancing our customer support resources to adequately service
our existing customers and the customers of the acquired businesses; and |
|
|
|
|
difficulty in maintaining uniform standards, controls, procedures, and policies. |
Further, as a result of our dividend policy and other factors which affect the availability to
us of capital resources, we may not have sufficient available cash or access to sufficient capital
resources necessary to complete a transaction even if such a transaction would otherwise be
beneficial to us and our stockholders.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
At December 31, 2006, our telecommunications network includes approximately 1,070 sheath miles
of fiber-optic cable, approximately 200 switching facilities and a statewide wireless network. In
addition, we own fiber capacity for high-speed links within Alaska and for termination of traffic
in the continental United States. We plan to continue enhancing our network to meet customer demand
for increased bandwidth and advanced services. See Item 1BusinessNetwork and Technology
We own approximately 364,000 square feet of facilities in Anchorage, Alaska; which includes
our corporate headquarters. We also own or lease facilities in our service areas across Alaska. We
believe this space is sufficient for us to conduct our business.
Substantially all of our assets (including those of our subsidiaries) have been pledged as
collateral for our 2005 senior credit facility.
Local telephone. Our primary local telephone properties consist of approximately 200 switching
facilities. We own most of our administrative and maintenance facilities, customer service centers,
central office and remote switching platforms and transport and distribution network facilities.
Our local telephone assets are located in Alaska. Our transport and distribution network facilities
include a fiber-optic backbone and copper wire distribution facilities that connect customers to
remote switch locations or to the central office and to points of presence or interconnection with
interexchange carriers. These facilities are located on land pursuant to permits, easements, right
of ways or other agreements.
30
Wireless. We have five digital switching centers, approximately 194 cell locations and three
repeaters covering substantially all major population centers and highway corridors in Alaska plus
one analog switch and cell site covering Barrow, Alaska. We lease the land or tower space on which
substantially all the sites are located.
Internet. We own or lease point of presence facilities that permit our dial-up and DSL
customers to access the Internet in more than 30 communities serving the majority of Alaskas
populated areas. These communities are linked to the Internet in Seattle, Washington over both
owned and leased facilities.
Interexchange. We are a facilities-based interexchange carrier. We have invested in
fiber-optic capacity through IRUs that provides bandwidth between our Anchorage, Fairbanks, and
Juneau locations and Seattle, Washington. We also lease transport facilities and have arrangements
with other interexchange carriers to terminate traffic in the lower 48 states.
Item 3. Legal Proceedings
We are involved in various claims, legal actions and regulatory proceedings arising in the
ordinary course of business, including various legal proceedings involving regulatory matters
described under Item 1BusinessRegulation. We have recorded litigation reserves of $0.1 million
as of December 31, 2006 against certain current claims and legal actions. We believe that the
disposition of these matters will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
The information set forth under Note 20 Commitments and Contingencies in the Notes to
Consolidated Financial Statements, included in Part IV, Item 15 of this Report, and is incorporated
herein by reference. For an additional discussion of certain risks associated with legal
proceedings, see the section entitled Risk Factors in Item 1A of this Report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended December 31,
2006.
31
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Our common stock is traded on the Nasdaq National Market under the symbol ALSK. The
following table presents, for the periods indicated, the high and low sales prices of our common
stock as reported by the Nasdaq National Market.
|
|
|
|
|
|
|
|
|
2006 Quarters |
|
High |
|
Low |
4th |
|
$ |
15.86 |
|
|
$ |
13.10 |
|
3rd |
|
$ |
14.47 |
|
|
$ |
11.51 |
|
2nd |
|
$ |
13.08 |
|
|
$ |
11.00 |
|
1st |
|
$ |
12.63 |
|
|
$ |
9.40 |
|
|
|
|
|
|
|
|
|
|
2005 Quarters |
|
High |
|
Low |
4th |
|
$ |
11.79 |
|
|
$ |
9.82 |
|
3rd |
|
$ |
11.90 |
|
|
$ |
9.54 |
|
2nd |
|
$ |
10.42 |
|
|
$ |
8.98 |
|
1st |
|
$ |
10.40 |
|
|
$ |
7.81 |
|
As of February 26, 2007, there were 42,349,801 shares of our common stock issued and
outstanding and approximately 305 record holders of our common stock. Because many of our shares of
existing common stock are held by brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of stockholders represented by these record holders.
Dividends
On October 28, 2004, we announced the adoption of a dividend policy by our board of directors
and declared our first quarterly dividend of $0.185 per share, which was paid on January 19, 2005
to holders of record on December 31, 2004. Prior to announcing this dividend, we had no history of
paying dividends. On March 21, 2005, our board of directors declared a quarterly cash dividend, of
$0.20 per share, an increase over the prior quarterly cash dividend of approximately 8%. This
dividend payment applied to holders of record on March 31, June 30, September 30, 2005 and December
29, 2005. In February 2006, we announced that our board of directors increased our dividend policy
to an annual rate of $0.86 per share, an increase of 7.5% over the previous annual rate of $0.80
per share. On February 22, June 15, September 15 and December 15, 2006 a dividend of $0.215 per
share was declared.
Based on approximately 42.3 million shares outstanding on February 26, 2007, we estimate
dividends payable during 2007 to be approximately $36.4 million.
Our ability to make dividend payments in the future will depend on future economic conditions
and on financial, business, regulatory and other factors, many of which are beyond our control.
Accordingly, our board of directors may modify or revoke this policy at any time. Thus, you may not
receive any dividends. Factors that may affect our dividend policy are:
|
|
|
we are a holding company and rely on dividends, interest and other payments,
advances and transfer of funds from our subsidiaries to meet our debt service and
pay dividends; |
|
|
|
|
we may not have enough cash to pay dividends due to changes in our operating
earnings, working capital requirements and anticipated cash needs; |
|
|
|
|
nothing requires us to declare or pay dividends; |
|
|
|
|
while the dividend policy adopted by our board of directors reflects an intention
to distribute a substantial portion of our cash generated by our business in excess
of operating needs, interest and principal payments on debt and capital
expenditures, to pay dividends, our board could modify or revoke this policy at any
time; |
32
|
|
|
even if our dividend policy is not modified or revoked, the actual amount of
dividends distributed under the policy and the decision to make any distribution will
remain, at all times, entirely at the discretion of our board of directors; |
|
|
|
|
the amount of dividends that we may distribute will be limited by restricted
payment and leverage covenants in our new senior credit facility, and potentially,
the terms of any future debt that we may incur; |
|
|
|
|
the amount of dividends that we may distribute is subject to restrictions under Delaware law; and |
|
|
|
|
our stockholders have no contractual or other legal right to dividends. |
See Item1ARisk FactorsRisks related to our common stock. You may not receive the level of
dividends provided for in our dividend policy or any dividends at all.
Securities Authorized for Issuance under Equity Compensation Plans
The information set forth in this Report under Item 12Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder MattersSecurities Authorized for Issuance
under Equity Compensation Plans is incorporated herein by reference. For additional information on
our stock incentive plans and activity, see Note 13 Stock Incentive Plans in the Notes to
Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
Item 6. Selected Financial Data
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our historical consolidated financial data as of December 31,
2006, 2005, 2004, 2003 and 2002 and for the fiscal years ended December 31, 2006, 2005, 2004, 2003
and 2002, which are derived from our audited financial statements for those years.
The selected historical financial data set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated financial
statements and related notes thereto for the years ended December 31, 2006, 2005, 2004, 2003 and
2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
349,817 |
|
|
$ |
326,809 |
|
|
$ |
302,707 |
|
|
$ |
323,847 |
|
|
$ |
340,394 |
|
Income/(loss) from continuing operations |
|
|
19,994 |
|
|
|
(41,635 |
) |
|
|
(39,294 |
) |
|
|
(6,578 |
) |
|
|
(72,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations per share basic |
|
$ |
0.48 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
$ |
(0.22 |
) |
|
$ |
(2.30 |
) |
Cash dividends per share |
|
|
0.86 |
|
|
|
0.80 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
562,321 |
|
|
$ |
576,413 |
|
|
$ |
637,127 |
|
|
$ |
685,391 |
|
|
$ |
752,509 |
|
Long-term debt, including current portion |
|
|
438,213 |
|
|
|
445,578 |
|
|
|
525,889 |
|
|
|
550,220 |
|
|
|
607,763 |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes and the other financial information included elsewhere in
this Form 10-K.
Alaska Communications Systems Group
We generate revenue primarily through:
|
|
|
The provision of local telephone services, including: |
|
o |
|
Basic local service to retail customers within our service areas, |
|
|
o |
|
Wholesale service to CLECs, |
33
|
o |
|
Network access services to interexchange carriers for origination and termination of interstate and
intrastate long distance phone calls, |
|
|
o |
|
Enhanced services, |
|
|
o |
|
Ancillary services, such as billing and collection, and |
|
|
o |
|
Universal service payments; |
|
|
|
The provision of wireless services; |
|
|
|
|
The provision of Internet services; and |
|
|
|
|
The provision of interexchange network long distance and data services. |
In addition, we provide video entertainment services through our partnership with the
satellite operator, DISH Network.
Local Telephone We are the largest LEC in Alaska. Basic local service is generally provided
at a flat monthly rate and allows the user to place unlimited calls within a defined local calling
area. Access revenues are generated in part by billing interexchange carriers for access to the
LECs local network and its customers and in part by billing the local customers themselves.
Universal service revenues are a subsidy paid to rural LECs to support the high cost of providing
service in rural markets.
Changes in revenue are largely attributable to changes in the number of access lines, local
service rates and minutes of use. Other factors can also impact revenue, including:
|
|
|
intrastate and interstate revenue settlement methodologies; |
|
|
|
|
authorized rates of return for regulated services; |
|
|
|
|
whether an access line is used by a business or consumer subscriber; |
|
|
|
|
intrastate and interstate calling patterns; |
|
|
|
|
customers selection of various local rate plan options; |
|
|
|
|
selection of enhanced calling services, such as voice mail; and |
|
|
|
|
other subscriber usage characteristics. |
LECs have three basic tiers of customers:
|
|
|
consumer and business customers located in our local service areas that pay for
local phone service and a portion of network access; |
|
|
|
|
interexchange carriers that pay for access to long distance calling customers
located within our local service areas; and |
|
|
|
|
CLECs that pay for wholesale access to our network in order to provide competitive
local service on either a wholesale or UNE basis as prescribed under the
Telecommunications Act. |
LECs provide access service to numerous interexchange carriers and may also bill and collect
long distance charges from interexchange carrier customers on behalf of the interexchange carriers.
The amount of access charge revenue associated with a particular interexchange carrier varies
depending upon long distance calling patterns and the relative market share of each long distance
carrier.
Our local service rates for end users are authorized by the RCA. Authorized rates are set by
the FCC, and the RCA for interstate and intrastate access charges, respectively, and may change
from time to time.
Wireless We are the second largest statewide provider of wireless services in Alaska,
currently serving approximately 134,000 subscribers. Our wireless network footprint covers over
542,000 residents, including all major population centers and highway and ferry corridors. We offer
wireless services primarily on our digital network known as CDMA 1xRTT, which provides customers
with improved voice call quality, average mobile data speeds of 70-80kbps and provides a platform
for the launch of enhanced services. We offer mobile wireless broadband service based on EV-DO
which enables high speed data connectivity with speeds that burst up to 2mbps to our wireless
markets in Anchorage, Fairbanks, and Juneau. We estimate that the new CDMA service currently covers
81% of the States population of approximately 670,000.
34
Internet We are the second largest provider of Internet access services in Alaska with
approximate 57,000 customers. We offer dial-up and dedicated DSL Internet access to our customers.
We are a single source provider of advanced IP based private networks in Alaska.
Interexchange We provide switched and dedicated long distance services to approximately
64,000 customers in Alaska. The traffic from these customers is carried over our owned or leased
facilities.
Video Entertainment We provide video entertainment services on a resale basis through our
partnership with the satellite provider, DISH Network. The current agreement with the provider
became effective August 2003 and will either be renegotiated or terminate in December 2007.
Critical accounting policies and accounting estimates
Management is responsible for the financial statements herein and has evaluated the accounting
policies used in their preparation. Management believes these policies to be reasonable and
appropriate. Our significant accounting policies are described in Note 1: Description of Company
and Summary of Significant Accounting Policies, in the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements. The following discussion identifies those accounting policies
that management believes are critical in the preparation of our financial statements, the judgments
and uncertainties affecting the application of those policies, and the possibility that materially
different amounts would be reported under different conditions or using different assumptions.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of commitments and
contingencies at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the significant estimates affecting the financial
statements are those related to the realizable value of accounts receivable, long-lived assets (in
particular, those assets accounted for under SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation), income taxes, stock compensation, network access revenue reserves and
litigation reserves. Actual results may differ from those estimates.
We use an allowance method to estimate the net realizable value of accounts receivable. As of
December 31, 2006 and December 31, 2005, the allowance for doubtful accounts receivable was $7.4
million and $6.2 million, respectively. Actual collection results could vary significantly from
managements estimate.
Access revenue is recognized when earned. We participate in access revenue pools with other
telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the
RCA within the intrastate jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These estimates are derived
from interim financial statements, available separations studies and the most recent information
available about achieved rates of return. These estimates are subject to adjustment in future
accounting periods as additional operational information becomes available. To the extent that
disputes arise over revenue settlements, our policy is to defer revenue collected until settlement
methodologies are resolved and finalized. At December 31, 2006, we had recorded liabilities of
$21.4 million related to our estimate of refundable access revenue. Actual results could vary from
this estimate.
We utilize the asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred taxes reflect the temporary differences between the financial and tax
basis of assets and liabilities using the enacted tax rates in effect in the years in which the
differences are expected to reverse. Net deferred tax assets are reduced by a valuation allowance
to the extent that it is more likely than not that such net deferred tax asset will not be
realized. The cumulative valuation allowance against net deferred tax assets was $120.5 million as
of December 31, 2006, which represents 100% of net deferred tax assets.
Our local telephone exchange operations account for costs in accordance with the accounting
principles for regulated enterprises prescribed by SFAS No. 71. This accounting recognizes the
economic effects of rate regulation by recording cost and a return on investment as such amounts
are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71,
plant and equipment is depreciated over lives approved by regulators and certain costs and
obligations are deferred based upon approvals received from regulators to permit recovery of such
amounts in future years.
We implemented, effective January 1, 2003, higher depreciation rates for our regulated
telephone plant for the interstate jurisdiction, which we believe approximates the economically
useful lives of the underlying plant. As a result, we have recorded a regulatory asset under SFAS
No. 71 of $65.7 million and $52.6 million as of December 31, 2006 and 2005, respectively, related
35
to depreciation of the regulated telephone plant allocable to our intrastate and local
jurisdictions. If we were not following SFAS No. 71, these costs would have been charged to expense
as incurred. We also have a regulatory liability of $61.5 million and $58.2 million at December 31,
2006 and 2005, respectively, related to accumulated removal costs on the local exchange
subsidiaries. If we were not following SFAS No. 71, we would have followed SFAS No. 143 for asset
retirement obligations associated with our regulated telephone plant. SFAS No. 71 also requires
revenue and costs generated between regulated and non-regulated companies not be eliminated on
consolidation; these revenues and costs totaled $32.8 million and $32.2 million for the twelve
months ended December 31, 2006 and 2005, respectively. Non-regulated revenues and costs incurred by
our local telephone exchange operations and non-regulated operations are not accounted for under
SFAS No. 71 principles.
Goodwill and indefinite-lived intangible assets are assessed for impairment on at least an
annual basis. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit
level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial
step requires us to determine the fair value of each reporting unit and compare it to the carrying
value, including goodwill, of such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds
its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is
then measured in the second step. We determined the fair value of each reporting unit for purposes
of this test primarily by using a discounted cash flow valuation technique. Significant estimates
used in the valuation include estimates of future cash flows, both future short-term and long-term
growth rates, and estimated cost of capital for purposes of arriving at a discount factor. At
December 31, 2006, we had recorded goodwill of $38.4 million applicable to our local telephone and
wireless segments and intangible assets of $21.6 million related primarily to our wireless segment,
of which none was considered impaired.
Effective January 1, 2005, we adopted SFAS No. 123(R), Share-Based Payment, which requires us
to measure compensation cost for all outstanding unvested share-based awards at fair value and
recognize compensation over the service period for awards expected to vest. The estimation of stock
awards that will ultimately vest requires judgment, and to the extent actual results differ from
our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are
revised. We consider many factors when estimating expected forfeitures, including types of awards,
employee class, and historical experience. Actual results may differ substantially from these
estimates. As a result of the early adoption of SFAS No. 123(R), and the issuance of restricted
stock, we recorded $6.9 million of stock-based compensation for the year ended December 31, 2006.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 will be effective for us on January
1, 2007. This Interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. This Interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. We are currently
in the process of quantifying the impact FIN 48 will have on its financial position and results of
operations.
In June 2006, FASB Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected
from Customers and Remitted to Government Authorities Should Be Presented in the Income Statement
was issued. EITF 06-3 will be effective for accounting periods beginning after December 15, 2006.
The consensus reached in this Issue is that the presentation of taxes on either a gross (included
in revenue and costs) or a net (excluded from revenues) basis is an accounting policy decision and
should be disclosed pursuant to Opinion 22. We currently present taxes on a gross basis and are in
the process of quantifying the impact EITF No. 06-3 will have on our financial position and results
of operations.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans. This statement requires an employer to recognize in
its statement of financial position the over-funded or under-funded status of a defined benefit
postretirement plan measured as the difference between the fair value of a plans assets and the
benefit obligation. Employers must also recognize as a component of other comprehensive income, net
of tax, the actuarial gains and losses and the prior service costs and credits that arise during
the period. The Statement was effective for us on December 31, 2006. Adoption of this standard
resulted in a decrease in our pension assets of $4.0 million, a decrease to our pension liability
of $3.3 million and a decrease to other comprehensive income of $0.7 million. See Note 14 -
Retirement Plans, to the Alaska Communications Systems Group, Inc. Consolidated Financial
Statements for additional disclosure information regarding the adoption of this standard.
36
We are involved in various claims, legal actions and regulatory proceedings arising in
the ordinary course of business, and have recorded litigation reserves of $0.1 million against
certain claims and legal actions as of December 31, 2006. We believe that the disposition of these
matters will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows beyond the amounts already recorded. Estimates involved in developing
these litigation reserves could change as these claims, legal actions and regulatory proceedings
progress.
Results of Operations
The following table summarizes our companys operations for the years ended December 31, 2006,
2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
$ |
192,058 |
|
|
$ |
202,842 |
|
|
$ |
211,187 |
|
Wireless |
|
|
115,584 |
|
|
|
86,235 |
|
|
|
56,694 |
|
Internet |
|
|
25,221 |
|
|
|
21,672 |
|
|
|
20,173 |
|
Interexchange |
|
|
16,954 |
|
|
|
16,060 |
|
|
|
14,653 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
349,817 |
|
|
|
326,809 |
|
|
|
302,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone (exclusive of depreciation and amortization) |
|
|
130,178 |
|
|
|
126,982 |
|
|
|
127,918 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
62,022 |
|
|
|
49,407 |
|
|
|
37,918 |
|
Internet (exclusive of depreciation and amortization) |
|
|
29,625 |
|
|
|
23,298 |
|
|
|
25,739 |
|
Interexchange (exclusive of depreciation and amortization) |
|
|
12,633 |
|
|
|
17,314 |
|
|
|
19,773 |
|
Depreciation and amortization |
|
|
63,259 |
|
|
|
82,819 |
|
|
|
78,387 |
|
Loss (gain) on disposal of assets, net |
|
|
1,105 |
|
|
|
(152 |
) |
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
298,822 |
|
|
|
299,668 |
|
|
|
292,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
50,995 |
|
|
|
27,141 |
|
|
|
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(40,753 |
) |
|
|
(70,776 |
) |
|
|
(51,064 |
) |
Interest income and other |
|
|
10,178 |
|
|
|
1,983 |
|
|
|
1,417 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(30,575 |
) |
|
|
(68,793 |
) |
|
|
(49,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes |
|
|
20,420 |
|
|
|
(41,652 |
) |
|
|
(39,529 |
) |
|
Income tax benefit (expense) |
|
|
(443 |
) |
|
|
|
|
|
|
219 |
|
|
Equity in income of investments |
|
|
17 |
|
|
|
17 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
19,994 |
|
|
$ |
(41,635 |
) |
|
$ |
(39,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.48 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.46 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
42,045 |
|
|
|
40,185 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
Diltuted |
|
|
43,387 |
|
|
|
40,185 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
37
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Operating Revenue
Operating revenue increased $23.0 million, or 7.0%, for the year ended December 31, 2006
compared to the year ended December 31, 2005. Wireless, Internet and interexchange revenue
increased compared to the corresponding period of 2005, while local telephone revenue decreased
compared to the corresponding period of 2005.
Local Telephone. Local telephone revenue, which consists of local network service, network
access and deregulated and other revenue, decreased $10.8 million, or 5.3%, for year ended December
31, 2006 compared to the same period in 2005. The following table summarizes our consolidated local
telephone revenue by category:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Local telephone revenue: |
|
|
|
|
|
|
|
|
Local network service |
|
$ |
80,177 |
|
|
$ |
86,482 |
|
Network access |
|
|
90,894 |
|
|
|
92,379 |
|
Deregulated and other |
|
|
20,987 |
|
|
|
23,981 |
|
|
|
|
|
|
|
|
Total local telephone revenue |
|
$ |
192,058 |
|
|
$ |
202,842 |
|
|
|
|
|
|
|
|
The following table summarizes our local telephone access lines:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
Retail access lines |
|
|
194,815 |
|
|
|
199,341 |
|
Wholesale access lines |
|
|
11,226 |
|
|
|
13,966 |
|
Unbundled network elements loop (UNE-L) |
|
|
39,568 |
|
|
|
50,875 |
|
Unbundled network elements platform (UNE-P) |
|
|
7,058 |
|
|
|
6,703 |
|
|
|
|
|
|
|
|
Total local telephone access lines |
|
|
252,667 |
|
|
|
270,885 |
|
|
|
|
|
|
|
|
Local network service revenue decreased $6.3 million or 7.3% for the year ended December
31, 2006, compared to the year ended December 31, 2005. Access lines in service decreased 6.7% to
252,667, primarily reflecting the net effect of access line losses offset by increases in UNE rates
and improved line mix. In November 2004 we received a final order from the RCA with respect to
UNE-L rates for Anchorage, retroactive to June 2004, increasing the UNE-L rate from $14.92 to
$18.64, and on January 1, 2005, rates increased for UNE-P and UNE-L in Fairbanks and Juneau from
$19.19 to $23.00 and from $16.71 to $18.00, respectively.
Network access revenue decreased $1.5 million, 1.6%, for the year ended December 31, 2006,
compared to the same period in 2005. Network access revenue is based on a regulated return on rate
base and recovery of allowable expenses associated with the origination and termination of toll
calls for our retail and resale customers. The decrease was primarily attributable to the decline
in depreciation expense on the LECs and its effect on the interstate access and universal service
fund studies. The decreases were offset in part by a $1.5 million settlement with interexchange
carriers in the fourth quarter of 2006. We expect that network access revenue will decline as a
component of local telephone revenue for the foreseeable future.
Deregulated and other revenue consists principally of billing and collection services, space
and power rents, CPE, paystation revenue, regulated directory listing revenue, and other
miscellaneous telephone revenue. Deregulated revenue decreased $3.0 million, or 12.5% for the year
ended December 31, 2006, compared to the year ended December 31, 2005, as the result of a decrease
in CPE sales and a decline in billing and collection revenue due to amended affiliate contracts.
38
Consistent with the U.S. telecommunications industry trend, we experienced a loss of local
telephone access lines as customers migrated to broadband Internet services reducing demand for
second lines, migrated to cable telephony, or replaced landline service with wireless service.
During 2004, our primary competitor began deploying cable telephony and switching its UNE-L
provisioned subscribers over to its own network.
Wireless. Wireless revenue increased $29.3 million, or 34.0%, to $115.6 million for the year
ended December 31, 2006 from $86.2 million for the year ended December 31, 2005. This increase is
due primarily to the following:
|
|
|
growth in subscribers year over year of 14.0% at December 31, 2006; |
|
|
|
|
an increase in average revenue per unit (ARPU), of 7.8% to $58.71 for the year
ended December 31, 2006, from $54.45 for the year ended December 31, 2005, primarily as
a result of improved subscriber mix with a higher proportion of post paid retail
subscribers, increased plan revenue, feature revenue, roaming revenue, regulatory
surcharges and receipt of CETC funding which added $9.49 and $7.33 to cellular ARPU in
2006 and 2005, respectively; |
|
|
|
|
higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $14.2 million from $6.7 million for the year
ended December 31, 2006 and 2005, respectively. |
|
|
|
|
$2.4 million in out of period CETC funds received in the fourth quarter of 2006; and |
|
|
|
|
higher gross customer adds, handset upgrades and accessory sales in the year ended
December 31, 2006 resulting in $8.2 million of revenue compared to $7.1 million for the
year ended December 31, 2005. |
Internet. Internet revenue increased $3.5 million, or 16.4%, for the year ended December 31,
2006 compared to the year ended December 31, 2005, primarily as a result of growth in sales of data
services to commercial and government customers and DSL subscribers, which increased by 22.9% to
44,066 at December 31, 2006 from 35,884 at December 31, 2005, offset in part by a 27.6% reduction
in dial-up subscribers to 12,591 at December 31, 2006.
Interexchange. Interexchange revenue increased $0.9 million, or 5.6%, for the year ended
December 31, 2006 compared to the year ended December 31, 2005. Long distance subscribers increased
13.6% to 63,995 at December 31, 2006, from 56,317 at December 31, 2005 and annual minutes of use
increased to 236.5 million for the year ended December 31, 2006, from 182.1 million for the year
ended December 31, 2005. Minutes of use includes 117.4 million at December 31, 2006 compared to
65.4 million at December 31, 2005 of activity generated on our wireless network, with associated
revenues recorded in our wireless segment.
Operating Expense
Operating expense decreased $0.9 million, or 0.3%, to $298.8 million for the year ended
December 31, 2006, from $299.7 million for the year ended December 31, 2005. Depreciation and
amortization associated with the operation of each of our segments has been included in total
depreciation and amortization.
Local Telephone. The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and property and other
operating tax expense. Local telephone expense increased $3.2 million to $130.2 million for the
year ended December 31, 2006 from $127.0 million for the year ended December 31, 2005. The increase
in local telephone expense was the result of a number of factors. The increase in local telephone
expense was substantially attributable to a $3.4 million increase in stock compensation expense and
$2.4 million increase in labor costs primarily driven by higher incentive compensation. These
expenses were offset by $1.1 million decrease in cost of goods sold related to sales of large E-911
systems in 2005 and by $1.4 million in IT and accounting, consulting and outside service fees for
SOx compliance and audit work.
Wireless. Wireless expense increased $12.6 million, or 25.5%, for the year ended December 31,
2006 compared to the year ended December 31, 2005. The increase in total subscribers and the
continued TDMA to CDMA conversion resulted in an increase of $3.7 million in handset, accessory and
data content expense. As of December 31, 2006, 94% of our retail customer base resided on our CDMA
network. The network build-out resulted in $6.1 million of additional expense. Advertising
increased $1.3 million and we experienced an increase in regulatory charges and outsourced billing
and provisioning costs of $1.6 million, directly associated with an increase in subscribers and end
user revenue.
39
Internet.. Internet expense increased by $6.3 million, or 27.2% to $29.6 million for the year
ended December 31, 2006, compared to $23.3 million for the year ended December 31, 2005. Consistent
with the growth in DSL subscriber base, we saw an increase of $3.8 million in DSL cost of goods
sold and $0.6 million in ISP access and circuit expenses. We also experienced a $2.1 million
increase in labor expense driven by customer service related functions supporting our DSL products
and the exercise of our option to assume ownership of a fiber-optic cable running from Fairbanks to
Whittier via Anchorage.
Interexchange. Interexchange expenses decreased by $4.7 million, or 27.0% to $12.6 million
for the year ended December 31, 2006, compared to $17.3 million for the year ended December 31,
2005. The decline is attributable to the receipt of $1.0 million in prior year access charge
credits; a $0.4 million reduction in federal universal service surcharges; and a $4.7 million reduction in
affiliate billing and collection expense, offset in part by an increase of $0.6 million in labor
expenses; and a $1.0 million increase in interstate traffic usage charges associated with an
increase in both rates and minutes of use.
Depreciation and amortization. Depreciation and amortization expense decreased $19.6 million,
or 23.6%, for the year ended December 31, 2006 compared to the year ended December 31, 2005. The
decrease is primarily attributable to certain asset classes reaching their maximum depreciable
lives.
Interest expense. As a result of our debt restructuring activities, interest expense
decreased by $4.8 million to $31.1 million for the year ended December 31, 2006 compared to $35.9
million for the year ended December 31, 2005.
Loss on extinguishment of debt. Loss on extinguishment of debt charges arose from various
accretive debt restructuring transactions. Tender premiums were $6.4 million in 2006 compared to
$18.3 million in 2005 and the write off of unamortized debt issuance costs and settlement of
original issue discounts were $3.3 million in 2006 compared to
$16.6 million in the same period last year.
Other. In 2006, we recognized a gain of $6.7 million following the liquidation of our stock
holding in the Rural Telephone Bank (RTB), and a gain of $2.0 million arising from the settlement
of our transaction to acquire the Crest Communications, LLCs Alaska terrestrial fiber network. See
Note 21 Other Events for more information on these transactions.
Income Taxes
In 2006, we generated taxable income which was offset by net operating loss carry forwards. We
did, however, incur an alternative minimum tax charge of $0.4 million.
Net income
The increase in net income is primarily a result of the factors discussed above.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Operating Revenue
Operating revenue increased $24.1 million, or 8.0%, for the year ended December 31, 2005
compared to the year ended December 31, 2004. Wireless, Internet and interexchange revenue
increased compared to the corresponding period of 2004, while local telephone revenue decreased
compared to the corresponding period of 2004.
40
Local Telephone. Local telephone revenue, which consists of local network service, network
access and deregulated and other revenue, decreased $8.3 million, or 4.0%, for year ended December
31, 2005 compared to the same period in 2004. The following table summarizes our consolidated local
telephone revenue by category:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Local telephone revenue: |
|
|
|
|
|
|
|
|
Local network service |
|
$ |
86,482 |
|
|
$ |
91,669 |
|
Network access revenue |
|
|
92,379 |
|
|
|
97,536 |
|
Deregulated revenue and other |
|
|
23,981 |
|
|
|
21,982 |
|
|
|
|
|
|
|
|
Total local telephone revenue |
|
$ |
202,842 |
|
|
$ |
211,187 |
|
|
|
|
|
|
|
|
The following table summarizes our local telephone access lines:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2005 |
|
|
2004 |
|
Retail access lines |
|
|
199,341 |
|
|
|
206,209 |
|
Wholesale access lines |
|
|
13,966 |
|
|
|
16,590 |
|
Unbundled network elements loop (UNE-L) |
|
|
50,875 |
|
|
|
64,589 |
|
Unbundled network elements platform (UNE-P) |
|
|
6,703 |
|
|
|
6,365 |
|
|
|
|
|
|
|
|
Total local telephone access lines |
|
|
270,885 |
|
|
|
293,753 |
|
|
|
|
|
|
|
|
Local network service revenue decreased $5.2 million or 5.7% for the year ended December
31, 2005, compared to the year ended December 31, 2004. Access lines in service decreased 7.8% to
270,885, primarily reflecting the net effect of access line losses offset by increases in UNE rates
and improved line mix. In November 2004, we received a final order from the RCA with respect to
UNE-L rates for Anchorage, retroactive to June 2004, increasing the UNE-L rate from $14.92 to
$18.64, and on January 1, 2005, rates increased for UNE-P and UNE-L in Fairbanks and Juneau from
$19.19 to $23.00 and from $16.71 to $18.00, respectively.
Network access revenue decreased $5.2 million, 5.3%, for the year ended December 31, 2005,
compared to the same period in 2004. Network access revenue is based on a regulated return on rate
base and recovery of allowable expenses associated with the origination and termination of toll
calls for our retail and resale customers. The decrease was primarily attributable to higher than
typical settlement adjustments to the prior year interstate access and universal service fund
studies. We expect that network access revenue will decline as a component of local telephone
revenue for the foreseeable future.
Deregulated and other revenue consists principally of billing and collection services, space
and power rents, CPE, paystation revenue, regulated directory listing revenue, and other
miscellaneous telephone revenue. Deregulated revenue increased $2.0 million, or 9.1% for the year
ended December 31, 2005, compared to the year ended December 31, 2004, as the result of higher
billing and collection revenue and an increase in net CPE sales.
Consistent with the U.S. telecommunications industry trend, we experienced a loss of local
telephone access lines as customers migrated to broadband Internet services reducing demand for
second lines, migrated to cable telephony, or replaced landline service with wireless service.
During 2004, our primary competitor began deploying cable telephony and switching its UNE-L
provisioned subscribers over to its own network.
Wireless. Wireless revenue increased $29.5 million, or 52.1%, to $86.2 million for the year
ended December 31, 2005 compared to $56.7 million for the year ended December 31, 2004. This
increase is due primarily to the following:
|
|
|
growth in subscribers year over year of 16.8% at December 31, 2005; |
|
|
|
|
an increase in ARPU, of 23.8% to $54.45 for the year ended December 31, 2005, from
$44.64 for the year ended December 31, 2004, primarily as a result of improved
subscriber mix with a higher proportion of post paid retail |
41
|
|
|
subscribers, increased plan revenue, feature revenue, roaming revenue, regulatory
surcharges and receipt of CETC funding on January 1, 2005 which added $7.33 to cellular
ARPU in 2005; |
|
|
|
|
higher gross customer adds, handset upgrades and accessory sales in the year ended
December 31, 2005 resulting in $7.1 million of revenue compared to $5.1 million for the
year ended December 31, 2004; and |
|
|
|
|
higher revenue from non-ACS customers roaming on our network resulting in
third-party roaming revenue increasing to $6.7 million from $1.6 million for the year
ended December 31, 2005 and 2004, respectively. |
Internet. Internet revenue increased $1.5 million, or 7.4%, for the year ended December 31,
2005 compared to the year ended December 31, 2004, primarily as a result of growth of DSL
subscribers, increasing by 45.1% to 35,844 at December 31, 2005 from 24,711 at December 31, 2004,
offset in part by a 23.8% reduction in dial-up subscribers to 17,401 at December 31, 2005.
Interexchange. Interexchange revenue increased $1.4 million, or 9.6%, for the year ended
December 31, 2005, compared to the year ended December 31, 2004. Long distance subscribers
increased 19.7% to 56,317 at December 31, 2005, from 47,050 at December 31, 2004 and annual minutes
of use increased to 182.1 million for the year ended December 31, 2005, from 136.7 million for the
year ended December 31, 2004. Minutes of use includes activity generated on our wireless network,
with associated revenues recorded in our wireless segment.
Operating Expense
Operating expense increased $7.1 million, or 2.4%, to $299.7 million for the year ended
December 31, 2005, from $292.6 million for the year ended December 31, 2004. Depreciation and
amortization associated with the operation of each of our segments has been included in total
depreciation and amortization.
Local Telephone. The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and property and other
operating tax expense. Local telephone expense decreased $0.9 million to $127.0 million for the
year ended December 31, 2005 from $127.9 million for the year ended December 31, 2004. The decrease
in local telephone expense was the result of a number of factors. They include, a $2.3 million
prior year charge related to the early extinguishment of an airplane operating lease and lower net
charges for inventory write downs, consulting expense and legal reserves of $1.6 million, $1.5
million and $2.0 million, respectively. These decreases were partially offset by increases of $1.2
million in property taxes; $2.5 million in cost of goods sold, primarily related to our increase in
CPE sales; $0.2 million in advertising; and $2.4 million in stock-based compensation costs
associated with our adoption of SFAS No. 123(R) and restricted stock grants. In addition, we also
implemented a contractual wage increase for our represented employees of approximately 2.8% on
January 1, 2005.
Wireless. Wireless expense increased $11.5 million, or 30.3%, for the year ended December 31,
2005 compared to the year ended December 31, 2004. The increase is driven by support costs for our
16.8% increase in subscribers and the continued rollout of our new CDMA network. This resulted in
increases of $4.9 million in handset, accessory and data content expense, $0.7 million increase in circuit
charges, and a $0.9 million increase in incremental roaming expense. We also increased our
advertising and third party sales commissions by $1.2 million to promote our new network build out
and premier product line outsourced our billing and provisioning system resulting in $1.1 million
of additional expense, and recognized $0.3 million in stock-based compensation costs associated
with our adoption of SFAS No. 123(R) and restricted stock grants. Additionally, in 2005, we adopted
a new allocation methodology regarding certain interexchange expenses. We determined that this
allocation would more appropriately match costs incurred to provide wireless end users with long
distance service with revenues from those services. The result is a movement of expense from
interexchange to wireless of approximately $3.4 million for the year ended December 31, 2005. The
expense increases in 2005 were offset in part by prior year charges related to the termination of
our airplane operating lease and reduction of consulting costs of $0.5 million and $0.2 million,
respectively.
Internet. Internet expense decreased by $2.4 million, or 9.5% to $23.3 million for the year
ended December 31, 2005, compared to $25.7 million for the year ended December 31, 2004. The
decrease was due to a $1.1 million decline in internal labor which was primarily the result of
severance expense in the first six months of 2004, $0.9 million in ISP access and expense
reductions resulting from a decrease in DSL access loop costs and network grooming, $0.5 million
decrease in IT software maintenance contract costs due to successful renegotiation of contracts,
and a $0.7 million decrease in inventory write offs. Additionally, expenses declined $0.3 million
due to the prior year charges related to the termination of our airplane operating lease and $0.2
million reduction in consulting expense. These decreases were partially offset by a $0.8 million
increase in DSL cost of goods sold and $0.6 million in advertising related to growing our customer
base.
42
Interexchange. Interexchange expenses decreased by $2.5 million, or 12.4% to $17.3 million
for the year ended December 31, 2005, compared to $19.8 million for the year ended December 31,
2004. The decrease is primarily attributable to a $1.2 million decrease in legal consulting
expenses associated with the infinite minutes class action lawsuit; a $0.1 million decrease related
to the termination of our airplane operating lease; a $0.2 million reduction in consulting costs;
and a $2.7 million decrease in cost of interexchange services due in part to the allocation of
expenses to the wireless segment for wireless generated interexchange activity; offset in part by a
$1.9 million increase in billing and collecting expense.
Depreciation and amortization. Depreciation and amortization expense increased $4.4 million,
or 5.7%, for the year ended December 31, 2005 compared to the year ended December 31, 2004.
Approximately $3.0 million of the increase is due to additional depreciation associated with the
build out of our new CDMA network and additional depreciation, due to lowering the expected
remaining life of our TDMA network assets, and $1.2 million of the increase is due to asset
additions related primarily to the upgrade in our back office customer support and provisioning
system.
Interest expense. Interest expense decreased by $11.7 million to $35.9 million for the year
ended December 31, 2005 compared to $47.6 million for the year ended December 31, 2004, driven by
an $80.3 million reduction in gross debt and a reduction in our weighted average cost of debt to
7.1%.
Loss on extinguishment of debt. Loss on extinguishment of debt for the year ended December
31, 2005 of $34.9 million is attributable to our series of accretive debt restructuring activities
undertaken during 2005 and is comprised of $18.3 million of tender premiums and $16.6 million for
the write off of unamortized debt issuance costs and settlement of original issue discounts.
Income Taxes
We have fully reserved the income tax benefit resulting from the consolidated losses we have
incurred since May 14, 1999, the date of the acquisition of substantially all of our operations.
Net loss
The increase in net loss is primarily a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Sources
We have satisfied our cash requirements for the year ended December 31, 2006 for operations,
capital expenditures, debt service and dividend commitments primarily through internally generated
funds, the sale of RTB stock, debt financing and our cash and investments on hand. For the year
ended December 31, 2006, our net cash flows provided by operating activities were $90.7 million,
inclusive of $8.9 million of cash payments for the settlement of redemption premiums and accrued
interest on retired notes. Additionally in 2006, we received $7.7 million in cash from the
redemption of our investment in Class C Rural Telephone Bank stock.
At December 31, 2006, we had approximately $12.9 million in net working capital, approximately
$36.9 million in cash and cash equivalents, and $1.7 million in restricted cash. As of December 31,
2006, we had $45.0 million of remaining capacity under our revolving credit facility, representing
100% of available capacity.
In the first quarter of 2006, we engaged in certain transactions affecting our 2005 senior
credit facility and our outstanding debt securities. We amended our 2005 credit facility,
re-pricing the facility to London Inter-Bank Offered Rate (LIBOR) plus 1.75% from LIBOR plus
2.00% and increasing our term loan by $52.9 million. We used the $52.9 million of term loan
proceeds together with cash on hand to buy down $60.9 million of our higher interest debt. We also
entered into new interest swap agreements and with other swaps outstanding we effectively hedged
LIBOR on our entire term loan.
As of December 31 2006, total long-term obligations outstanding, gross of original issue
discount, were $438.3 million consisting primarily of the $472.9 million 2005 senior credit
facility with a drawn term loan of $427.9 million and an un-drawn revolving credit facility of
$45.0 million, and $4.0 million remaining aggregate principal amount outstanding of senior
unsecured notes. The $427.9 million term loan under the 2005 senior credit facility was drawn on
February 1,
43
2005, July 15, 2005 and February 22, 2006 and generally bears interest at an annual rate of
LIBOR plus 1.75%, with a term of seven years from the first closing date and no scheduled principal
payments before maturity. The $45.0 million undrawn revolving credit facility, to the extent drawn
in the future, will bear interest at an annual rate of LIBOR plus 2.00% and have a term of six
years from the date of closing. To the extent the $45.0 million revolving credit facility under the
2005 senior credit facility remains undrawn; we will pay an annual commitment fee of 0.375% of the
undrawn principal amount over its term. We also entered into floating-to-fixed interest rate swaps
with total notional amounts of approximately $135.0 million, $85.0 million, $40.0 million, $115.0
million and $52.9 million which swap the floating interest rate on the entire term loan borrowings
under the 2005 senior credit facility for a further three to five years at a fixed rate of 5.88%,
6.25%, 6.18%, 6.71% and 6.75%, per year, respectively, inclusive of the 1.75% premium over LIBOR.
The swaps are accounted for as cash flow hedges.
The following summarizes our aggregate maturities of contractual obligations and commitments
with quantifiable payment terms as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
Thereafter |
|
Long-term debt |
|
$ |
431,940 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,040 |
|
|
$ |
427,900 |
|
Interest on long-term debt |
|
|
146,986 |
|
|
|
28,008 |
|
|
|
55,979 |
|
|
|
60,378 |
|
|
|
2,621 |
|
Capital leases |
|
|
6,356 |
|
|
|
1,043 |
|
|
|
1,638 |
|
|
|
1,394 |
|
|
|
2,281 |
|
Operating leases |
|
|
53,824 |
|
|
|
5,276 |
|
|
|
8,848 |
|
|
|
6,561 |
|
|
|
33,139 |
|
Unconditional purchase obligations |
|
|
36,215 |
|
|
|
10,773 |
|
|
|
11,956 |
|
|
|
2,851 |
|
|
|
10,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
675,321 |
|
|
$ |
45,100 |
|
|
$ |
78,421 |
|
|
$ |
75,224 |
|
|
$ |
476,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses
Our networks require the timely maintenance of plant and infrastructure. Our historical
capital expenditures have been significant. The construction and geographic expansion of our
wireless network has required significant capital. The implementation of our interexchange network
and data services strategy is also capital intensive. Capital expenditures for the year ended
December 31, 2006 were $60.2 million, of which $22.1 million, inclusive of an IRU with a fair value
of $1.1 million that was funded as a part of a settlement negotiation, was expended on growth
capital including our CDMA 1xRTT build out and the purchase of additional fiber-optic capacity. We
intend to fund future capital expenditures with cash on hand, through internally generated cash
flows, and if necessary, through borrowings under our revolving credit facility. At December 31,
2006, we had allocated $5.0 million of our current unrestricted cash balance of $36.9 million to
fund additional network capacity in the areas of our CDMA 1xRTT and EV-DO build that are most
heavily used by tourists who visit Alaska in the summer months and roam on our network.
Our capital requirements may change due to impacts of regulatory decisions that affect our
ability to recover our investments, changes in technology, the effects of competition, changes in
our business strategy, and our decision to pursue specific acquisition opportunities, among other
things.
On October 28, 2004, we announced the adoption of a dividend policy by our board of directors
and declared our first quarterly dividend of $0.185 per share. Since adopting a dividend policy
the board has increased the quarterly dividend rate twice; firstly in February 2005 when it was
increased to $0.20 per share and secondly in February 2006 when it was increased to $0.215 per
share. For the year ended December 31, 2006 dividend payments to our shareholders totaled $35.5
million.
We believe that we will have sufficient cash provided by operations and available borrowing
capacity under our revolving credit facility to service our debt, pay our quarterly dividends, and
fund our operations, capital expenditures and other obligations over the next 12 months. Our
ability to meet such obligations will be dependent upon our future financial performance, which is,
in turn, subject to future economic conditions and to financial, business, regulatory and other
factors, many of which are beyond our control.
44
Outlook
We expect that the overall demand for telecommunications services in Alaska will grow,
particularly as a result of:
|
|
|
increasing demand for wireless voice and data services following the launch of our
CDMA 1xRTT network; |
|
|
|
|
growth in demand for DSL, Internet access and data services due to higher business
and consumer bandwidth needs; and |
|
|
|
|
increasing demand for private network services by government and business on a
statewide basis on either a circuit switched or IP basis. |
We believe that we will be able to capitalize on this demand through our diverse service
offerings on our owned circuit switched and IP facilities, new sales and marketing initiatives
directed toward basic voice, enhanced and data services, and offering customers an integrated
bundle of telecommunication services including local telephone, wireless, Internet, long distance,
messaging and video entertainment.
Consistent with the U.S. telecommunications industry, we continue to experience losses in
local telephone access lines as customers cancel second lines, replace wireline services with
wireless, and lines migrate to cable telephony. Our primary UNE customer has announced plans to
migrate most of its Anchorage area customers to its own cable telephony plant during the next two
years. Consequently, we anticipate that these trends will continue.
The telecommunications industry is extremely competitive, and we expect competition to
intensify in the future. As an ILEC, we face competition from resellers, local providers who lease
our UNEs and from providers of local telephone services over separate facilities. Moreover, while
wireless telephone services have historically complemented traditional LEC services, we anticipate
that existing and emerging wireless technologies may increasingly compete with LEC services.
Similarly, local and interexchange service competition may come from cable television providers and
voice over IP providers. In wireless services, we currently compete with at least one other
wireless provider in each of our wireless service areas. In the highly competitive business for
Internet access services, we currently compete with a number of established online service
companies, interexchange carriers and cable companies. In the interexchange market, we believe we
currently have less than 5% of total revenue in Alaska and face competition from two major
interexchange providers.
The telecommunications industry is subject to continuous technological change. We expect that
new technological developments in the future will generally serve to enhance our ability to provide
service to our customers. However, these developments may also increase competition or require us
to make significant capital investments to maintain our leadership position in Alaska.
Item 7A. Quantitative and qualitative disclosures about market risk
As of December 31, 2006, we had outstanding senior unsecured notes and our 2005 senior credit
facility. These on-balance sheet financial instruments, to the extent they provide for variable
rates of interest, expose us to interest rate risk, with the primary interest rate risk exposure
resulting from changes in LIBOR or the prime rate, which are used to determine the interest rates
that are applicable to borrowings under our 2005 senior credit facility.
45
The table below provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2006. To the extent that our financial
instruments expose us to interest rate risk, they are presented within each market risk category in
the table below. The table presents principal cash flows and related expected interest rates by
year of maturity for our 2005 senior credit facility, senior unsecured notes, and capital leases
and other long-term obligations outstanding at December 31, 2006. Weighted average variable rates
for the 2005 senior credit facility are based on implied forward rates in the LIBOR yield curve as
of December 31, 2006. Fair values as of December 31, 2006 included herein have been determined
based on (i) quoted market prices for the 2005 senior secured credit facility; and (ii) quoted
market prices for the senior unsecured notes. Our consolidated financial statements contain
descriptions of the 2005 senior credit facility, senior unsecured notes and capital leases and
other long-term obligations and should be read in conjunction with the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
($ in thousands) |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
Value |
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 bank credit facility |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
427,900 |
|
|
$ |
427,900 |
|
|
$ |
430,040 |
|
Weighted average interest rate (var) |
|
|
7.03 |
% |
|
|
6.61 |
% |
|
|
6.62 |
% |
|
|
6.71 |
% |
|
|
6.78 |
% |
|
|
6.79 |
% |
|
|
6.75 |
% |
|
|
|
|
|
Senior unsecured notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,040 |
|
|
$ |
|
|
|
$ |
4,040 |
|
|
$ |
4,254 |
|
Average interest rate (fixed) |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
|
|
|
|
9.88 |
% |
|
|
|
|
|
Captial lease and other long-term |
|
$ |
1,043 |
|
|
$ |
943 |
|
|
$ |
695 |
|
|
$ |
664 |
|
|
$ |
730 |
|
|
$ |
2,281 |
|
|
$ |
6,356 |
|
|
$ |
6,356 |
|
Average interest rate (fixed) |
|
|
10.00 |
% |
|
|
10.22 |
% |
|
|
10.26 |
% |
|
|
10.37 |
% |
|
|
10.55 |
% |
|
|
11.34 |
% |
|
|
10.48 |
% |
|
|
|
|
|
Interest Rate Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed Interest Rate Swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
1,646 |
|
Fixed Rate Payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
1.12 |
% |
|
|
0.75 |
% |
|
|
0.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.87 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
1,655 |
|
Fixed Rate Payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
1.12 |
% |
|
|
0.75 |
% |
|
|
0.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.87 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
85,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
85,000 |
|
|
$ |
1,267 |
|
Fixed Rate Payable |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
|
|
|
|
4.50 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.74 |
% |
|
|
0.38 |
% |
|
|
0.37 |
% |
|
|
0.46 |
% |
|
|
|
|
|
|
|
|
|
|
0.49 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
976 |
|
Fixed Rate Payable |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
|
|
|
|
4.43 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.82 |
% |
|
|
0.45 |
% |
|
|
0.44 |
% |
|
|
0.53 |
% |
|
|
0.61 |
% |
|
|
|
|
|
|
0.57 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
115,000 |
|
|
$ |
|
|
|
$ |
115,000 |
|
|
$ |
197 |
|
Fixed Rate Payable |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
4.96 |
% |
|
|
|
|
|
|
4.96 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable (Payable) |
|
|
0.28 |
% |
|
|
-0.08 |
% |
|
|
-0.09 |
% |
|
|
0.00 |
% |
|
|
0.07 |
% |
|
|
|
|
|
|
0.03 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
52,900 |
|
|
$ |
|
|
|
$ |
52,900 |
|
|
$ |
12 |
|
Fixed Rate Payable |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
5.00 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable (Payable) |
|
|
0.25 |
% |
|
|
-0.12 |
% |
|
|
-0.13 |
% |
|
|
-0.04 |
% |
|
|
0.04 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
In February 2006, we amended our 2005 senior credit facility, increasing the $375.0
million term loan under the facility by $52.9 million and re-priced the facility to LIBOR plus
1.75% from LIBOR plus 2.00%. The amendment and the re-price became effective as of February 23,
2006 and February 22, 2006 respectively; the amendment permits ACS Holdings to purchase the notes
subject to its above noted tender offer for any and all of its currently outstanding 9 7/8 % Senior
Notes due 2011.
In February 2006, the Company and ACS Holdings executed $115.0 million and $52.9 million
notional amount floating-to-fixed interest rate swap agreements related to its $375.0 million term
loan under its 2005 senior secured bank
46
credit facility. The swaps effectively fix the LIBOR rate
on $115.0 million and $52.9 million principal amount of
senior secured bank debt at 6.71% and
6.75%, inclusive of a 1.75% premium over LIBOR, through December 2011. We had
previously entered into interest rate swaps for a notional amount of $260.0 million, and this
transaction fixes the rates on its entire term loan.
The table below provides information about our sensitivity to market risk associated with
fluctuations in interest rates as of December 31, 2005. To the extent that our financial
instruments expose us to interest rate risk, they are presented within each market risk category in
the table below. The table presents principal cash flows and related expected interest rates by
year of maturity for our 2005 senior credit facility, senior unsecured notes, and capital leases
and other long-term obligations outstanding at December 31, 2005. Weighted average variable rates
for the 2005 senior credit facility are based on implied forward rates in the LIBOR yield curve as
of December 31, 2005. Fair values as of December 31, 2005 included herein have been determined
based on (i) quoted market prices for the 2005 senior secured credit facility; and (ii) quoted
market prices for the senior unsecured notes. Our consolidated financial statements contain
descriptions of the 2005 senior credit facility, senior unsecured notes and capital leases and
other long-term obligations and should be read in conjunction with the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
($ in thousands) |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
Thereafter |
|
Total |
|
Value |
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 senior credit facility |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
375,000 |
|
|
$ |
375,000 |
|
|
$ |
378,281 |
|
Weighted average interest rate (variable) |
|
|
6.86 |
% |
|
|
6.86 |
% |
|
|
6.82 |
% |
|
|
6.91 |
% |
|
|
6.95 |
% |
|
|
6.32 |
% |
|
|
6.78 |
% |
|
|
|
|
|
Senior unsecured notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
64,978 |
|
|
$ |
64,978 |
|
|
$ |
69,221 |
|
Average interest rate (fixed) |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
9.88 |
% |
|
|
|
|
|
Capital leases and other long-term |
|
$ |
970 |
|
|
$ |
1,028 |
|
|
$ |
926 |
|
|
$ |
677 |
|
|
$ |
643 |
|
|
$ |
2,974 |
|
|
$ |
7,218 |
|
|
$ |
7,218 |
|
Average interest rate (fixed) |
|
|
9.89 |
% |
|
|
9.99 |
% |
|
|
10.22 |
% |
|
|
10.26 |
% |
|
|
10.37 |
% |
|
|
11.10 |
% |
|
|
10.25 |
% |
|
|
|
|
|
Interest Rate Derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed Interest Rate Swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
1,570 |
|
Fixed Rate Payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.69 |
% |
|
|
|
|
|
|
|
|
|
|
0.63 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,500 |
|
|
$ |
1,557 |
|
Fixed Rate Payable |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.62 |
% |
|
|
0.69 |
% |
|
|
|
|
|
|
|
|
|
|
0.63 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
85,000 |
|
|
$ |
|
|
|
$ |
85,000 |
|
|
$ |
882 |
|
Fixed Rate Payable |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
|
|
|
|
4.50 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.25 |
% |
|
|
0.25 |
% |
|
|
0.25 |
% |
|
|
0.32 |
% |
|
|
0.45 |
% |
|
|
|
|
|
|
0.28 |
% |
|
|
|
|
|
Notional Amount |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000 |
|
|
$ |
40,000 |
|
|
$ |
734 |
|
Fixed Rate Payable |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
4.43 |
% |
|
|
|
|
Weighted average Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Receivable |
|
|
0.33 |
% |
|
|
0.32 |
% |
|
|
0.32 |
% |
|
|
0.39 |
% |
|
|
0.46 |
% |
|
|
0.43 |
% |
|
|
0.37 |
% |
|
|
|
|
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of Alaska Communications Systems Group, Inc. and
Subsidiaries are submitted as a separate section of this Form 10-K. See Index to Consolidated
Financial Statements and Schedule, which appears on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
47
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of December 31, 2006, the end of the period covered by
this Report.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision
and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework set forth in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under the framework set forth in Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was effective as of
December 31, 2006. There have not been any changes in the Companys internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the Companys fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. Our managements
assessment of the effectiveness of our internal control over financial reporting as of December 31,
2006 and the Consolidated Financial Statements as of and for the year ended December 31, 2006 have
has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their
reports which are included herein.
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alaska Communications Systems Group, Inc.
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Alaska Communications Systems Group, Inc.
maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Alaska Communications Systems Group, Inc.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Alaska Communications Systems Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2006, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Alaska Communications Systems Group, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Alaska Communications Systems Group, Inc.
as of December 31, 2006 and 2005, and the related consolidated statements of operations,
stockholders equity (deficit) and comprehensive income (loss), and cash flows for each of the
years in the two-year period ended December 31, 2006, and our report dated March 13, 2007 expressed
an unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Anchorage, Alaska
March 13, 2007
49
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is contained under the captions Identification of
Directors and Executive Officers in our Proxy Statement for our 2007 Annual Meeting of
Shareholders and are incorporated herein by reference.
Information on our audit committee financial experts is contained in our Proxy Statement for
our 2007 Annual Meeting of Shareholders under the caption Audit Committee Financial Expert, and
is incorporated herein by reference.
We have appointed a separately designated standing audit committee. The names of each of our
audit committee members are contained in our Proxy Statement for our 2007 Annual Meeting of
Shareholders under the caption Identification of the Audit Committee, and this information is
incorporated herein by reference.
Information on the beneficial ownership reporting for our directors and executive officers is
contained under the caption Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy
Statement for our 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer, or controller, and persons performing similar
functions. We will provide to any person, free of charge, a copy of such code of ethics. The
request must be submitted in writing to the Corporate Secretary, Alaska Communications Systems
Group, Inc., 600 Telephone Avenue, Anchorage, Alaska 99503.
Item 11. Executive Compensation Summary Compensation Table
Information on compensation of our directors and executive officers is contained in our Proxy
Statement for our 2007 Annual Meeting of Shareholders under the captions Reg S-K, Item
402(b): Compensation Discussion and Analysis, Reg S-K, Item 402(c): Summary Compensation
Table, and Reg S-K, Item 402(d)(2): Grants of Plan-Based Awards, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information with respect to security ownership of certain beneficial owners and management is
incorporated herein by reference to information included in the Proxy Statement for our 2007 Annual
Meeting of Shareholders.
50
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2006, the number of securities remaining available for future issuance
under equity compensation plans includes 1,780,968 shares under the Alaska Communications Systems
Group, Inc. 1999 Stock Incentive Plan, 158,665 shares under the ACS Group, Inc. 1999 Non-Employee
Director Stock Compensation Plan, and 864,067 shares under the Alaska Communications Systems Group,
Inc. 1999 Employee Stock Purchase Plan. All shares reserved under the non-qualified stock option
agreement between Liane Pelletier and Alaska Communications Systems Group, Inc. have been awarded
through stock options. See Note 13 Stock Incentive Plans, to the Alaska Communications Systems
Group, Inc. Consolidated Financial Statements for further information on our equity compensation
plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
Weighted-average |
|
Number of securities remaining |
|
|
to be issued upon |
|
exercise price of |
|
available for future issuance |
|
|
exercise of |
|
outstanding |
|
under equity compensation |
|
|
outstanding options, |
|
options, warrants |
|
plans (excluding securities |
|
|
warrants and rights |
|
and rights |
|
reflected in column (a)) |
Equity compensation plans |
|
(a) |
|
(b) |
|
(c) |
Approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
894,314 |
|
|
$ |
5.92 |
|
|
|
|
|
Restricted stock |
|
|
1,192,159 |
|
|
$ |
|
|
|
|
2,803,700 |
|
|
Not approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
600,000 |
|
|
|
4.50 |
|
|
|
|
|
Item 13. Certain Relationships and Related Transactions
Information with respect to such contractual relationships is incorporated herein by reference
to the information in the Proxy Statement for our 2007 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services
Information on our audit committees pre-approval policy for audit services, and information
on our principal accountant fees and services is contained in our Proxy Statement for our 2007
Annual Meeting of Shareholders under the caption Audit Fees, and is incorporated herein by
reference.
51
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
Our consolidated financial statements are submitted as a separate section of this Form
10-K. See Index to Consolidated Financial Statements and Schedule which appears on page F-1
hereof.
2. Financial Statement Schedule
Our financial statement schedules for the Company and its subsidiaries are submitted as a
separate section of this Form 10-K. See Index to Consolidated Financial Statements and
Schedule which appears on page F-1 hereof.
(b) Exhibits
|
|
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
Purchase Agreement, dated as of August 14, 1998, as amended, by and among ALEC
Acquisition Sub Corp., CenturyTel of the Northwest, Inc. and CenturyTel Wireless, Inc. (1) |
|
|
|
|
|
|
|
|
2.2 |
|
|
|
|
Asset Purchase Agreement, dated as of October 20, 1998, by and between Alaska
Communications Systems, Inc. and the Municipality of Anchorage (1) |
|
|
|
|
|
|
|
|
3.1 |
|
|
|
|
Amended and Restated Certificate of Incorporation of the Registrant (3) |
|
|
|
|
|
|
|
|
3.2 |
|
|
|
|
Amended and Restated By-Laws of the Registrant (3) |
|
|
|
|
|
|
|
|
4.1 |
|
|
|
|
Specimen of Common Stock Certificate (3) |
|
|
|
|
|
|
|
|
4.2 |
|
|
|
|
Stockholders Agreement, dated as of May 14, 1999, by and among the Registrant and
the Investors listed on the signature pages thereto (1) |
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
First Amendment to Stockholders Agreement, dated as of July 6, 1999, by and among
the Registrant and the Stockholders listed on the signature pages thereto (1) |
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
Second Amendment to Stockholders Agreement, dated as of November 16, 1999 by and
among the Registrant and the Stockholders listed on the signature pages thereto (3) |
|
|
|
|
|
|
|
|
4.5 |
|
|
|
|
Indenture, dated as of May 14, 1999, by and between Alaska Communications Systems
Holdings, Inc., the Guarantors (as defined therein) and IBJ Whitehall Bank & Trust Company
(1) |
|
|
|
|
|
|
|
|
4.6 |
|
|
|
|
Purchase Agreement, dated as of May 11, 1999, by and among Alaska Communications
Systems Holdings, Inc., the Guarantors, Chase Securities Inc., CIBC World Markets Corp. and
Credit Suisse First Boston Corporation (1) |
|
|
|
|
|
|
|
|
4.7 |
|
|
|
|
Indenture, dated as of May 14, 1999, by and between the Registrant and The Bank of New York (1) |
|
|
|
|
|
|
|
|
4.8 |
|
|
|
|
First Amendment, dated as of October 29, 1999, to Indenture listed as Exhibit No. 4.7 (2) |
|
|
|
|
|
|
|
|
4.9 |
|
|
|
|
Form of Second Amendment dated as of November 17, 1999 to Indenture listed as Exhibit No. 4.7 (3) |
|
|
|
|
|
|
|
|
4.10 |
|
|
|
|
Purchase Agreement, dated as of May 11, 1999, by and among the Registrant, DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II, L.P. (1) |
|
|
|
|
|
|
|
|
4.11 |
|
|
|
|
Indenture, dated as of August 26, 2003, among Alaska Communications Systems Holdings,
Inc., as Issuer, the Guarantors (as defined therein) and The Bank of New York, as trustee.
(4) |
|
|
|
|
|
|
|
|
4.12 |
|
|
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.11, dated January 25, 2005,
among the Company, Alaska Communications Systems Holdings, Inc., the guarantors party
thereto and The Bank of New York, as trustee. (7) |
|
|
|
|
|
|
|
|
4.13 |
|
|
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.5, dated January 25, 2005,
among the Company, Alaska Communications Systems Holdings, Inc., the guarantors party
thereto and The Bank of New York, as trustee. (7) |
|
|
|
|
|
|
|
|
4.14 |
|
|
|
|
Supplemental indenture to Indenture listed as Exhibit No. 4.11, dated July 15, 2005,
among the Registrant, Alaska Communications Systems Holdings, Inc., the guarantors party
thereto and the Bank of New York, as trustee. (13) |
|
|
|
|
|
|
|
|
4.15 |
|
|
|
|
Supplemental Indenture to Indenture listed as Exhibit No. 4.11, dated February 22,
2006, among the Company, Alaska Communications Systems Holdings, Inc., the guarantors party
thereto and The Bank of New York, as trustee. (14) |
52
|
|
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
|
|
10.1 |
|
|
|
|
Exchange and Registration Rights Agreement, dated as of May 14, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Guarantors, Chase Securities Inc., CIBC
World Markets Corp. and Credit Suisse First Boston Corporation (1) |
|
|
|
|
|
|
|
|
10.2 |
|
|
|
|
Exchange and Registration Rights Agreement, dated as of May 14, 1999, by and among the
Registrant, DLJ Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ ESC II L.P.
(1) |
|
|
|
|
|
|
|
|
10.3 |
|
|
|
|
ALEC Holdings, Inc. 1999 Stock Incentive Plan (1) |
|
|
|
|
|
|
|
|
10.4 |
|
|
|
|
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan (3) |
|
|
|
|
|
|
|
|
10.5 |
|
|
|
|
Alaska Communications Systems Group, Inc. 1999 Non-Employee Director Compensation Plan (3) |
|
|
|
|
|
|
|
|
10.6 |
|
|
|
|
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan (3) |
|
|
|
|
|
|
|
|
10.7 |
|
|
|
|
Exchange and Registration Rights Agreement, dated August 26, 2003, by and among Alaska
Communications Systems Holdings, Inc., the Guarantors and J.P. Morgan Securities Inc. for
itself and on behalf of CIBC World Markets Corp., Citigroup Global Markets Inc., Jefferies
& Company, Inc. and Raymond James & Associates, Inc. (4) |
|
|
|
|
|
|
|
|
10.8 |
|
|
|
|
Credit Agreement, dated August 26, 2003, among Alaska Communications Systems Group,
Inc., Alaska Communications Systems Holdings, Inc., as the Borrower, the Lenders Party
thereto and JPMorgan Chase Bank, as Administrative Agent and Collateral Agent, CIBC World
Markets Corp., as Syndication Agent, and Citicorp North America, Inc., as Documentation
Agent, and J.P. Morgan Securities Inc., as Arranger. (4) |
|
|
|
|
|
|
|
|
10.9 |
|
|
|
|
Retirement Agreement, dated as of September 14, 2003, between Alaska Communications
Systems Group, Inc. and Charles E. Robinson. (4) |
|
|
|
|
|
|
|
|
10.10 |
|
|
|
|
Executive Employment Agreement, dated as of September 14, 2003, between Alaska
Communications Systems Group, Inc. and Liane Pelletier. (4) |
|
|
|
|
|
|
|
|
10.11 |
|
|
|
|
Settlement Agreement and Mutual Release, dated October 14, 2003, by and between the
State of Alaska and Alaska Communications Systems Group, Inc. (4) |
|
|
|
|
|
|
|
|
10.12 |
|
|
|
|
Executive Employment Agreement, dated as of October 17, 2003, between Alaska
Communications Systems Group, Inc. and David C. Eisenberg. (5) |
|
|
|
|
|
|
|
|
10.13 |
|
|
|
|
Executive Employment Agreement, dated as of January 23, 2004 between Alaska
Communications Systems Group, Inc. and Sheldon Fisher. (6) |
|
|
|
|
|
|
|
|
10.14 |
|
|
|
|
Executive Employment Agreement, dated as of February 18, 2004 between Alaska
Communications Systems Group, Inc. and David Wilson. (6) |
|
|
|
|
|
|
|
|
10.15 |
|
|
|
|
Letter Agreement, dated January 26, 2005, between Alaska Communications Systems
Holdings, Inc. and Fox Paine & Company, LLC. (8) |
|
|
|
|
|
|
|
|
10.16 |
|
|
|
|
Credit Agreement, dated February 1, 2005, among the Company, ACSH, the lenders named
therein and Canadian Imperial Bank of Commerce, as Administrative Agent. (9) |
|
|
|
|
|
|
|
|
10.17 |
|
|
|
|
Master Agreement, dated November 7, 1999, by and between Alaska Communications Systems
Holdings, Inc. and the International Brotherhood of Electrical Workers, Local Union 1547.
(10) |
|
|
|
|
|
|
|
|
10.18 |
|
|
|
|
Letter Agreement, dated March 1, 2005, by and between Alaska Communications Systems
Holdings, Inc. and the International Brotherhood of Electrical Workers, Local Union 1547.
(10) |
|
|
|
|
|
|
|
|
10.19 |
|
|
|
|
Consent and Agreement No. 1, dated July 15, 2005, among Alaska Communications Systems
Group, Inc. , Alaska Communications Systems Holdings, Inc., the lenders party thereto and
Canadian Imperial Bank of Commerce as Administrative Agent. (12) |
|
|
|
|
|
|
|
|
10.20 |
|
|
|
|
Form of Restricted Stock Agreement between the Registrant and certain participants in
the Registrants 1999 Stock Incentive Plan. (13) |
|
|
|
|
|
|
|
|
10.21 |
|
|
|
|
Consent and Agreement No. 2, dated February 22, 2006, among Alaska Communications
Systems Group, Inc. , Alaska Communications Systems Holdings, Inc., the lenders party
thereto and Canadian Imperial Bank of Commerce as Administrative Agent. (14) |
|
|
|
|
|
|
|
|
10.22 |
|
|
|
|
2006 Officer Severance Program (15) |
|
|
|
|
|
|
|
|
16.1 |
|
|
|
|
Letter of Deloitte & Touche LLP to the Commission dated March 17, 2005. (11) |
|
|
|
|
|
|
|
|
21.1 |
|
|
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
|
|
|
23.1 |
|
|
|
|
Consent of KPMG LLP relating to the audited financial statements of Alaska
Communications Systems Group, Inc. |
|
|
|
|
|
|
|
|
23.2 |
|
|
|
|
Consent of Deloitte & Touche LLP relating to the audited financial statements of Alaska
Communications Systems Group, Inc. |
|
|
|
|
|
|
|
|
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 Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
53
|
|
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
|
|
|
|
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. |
|
|
|
(1) |
|
Filed as an exhibit to the Registrants Registration Statement on Form S-4 file No.
333-82361 and incorporated by reference thereto. |
|
(2) |
|
Filed as an exhibit to the Registrants Form 8-K filed on November 5, 1999 and
incorporated by reference thereto. |
|
(3) |
|
Filed as an exhibit to the Registrants Registration Statement on Form S-1/A file No.
333-888753 filed on November 17, 1999 and incorporated by reference thereto. |
|
(4) |
|
Filed as an exhibit to Alaska Communications Systems Holdings, Inc. Registration
Statement on Form S-4 file No. 333-109927 filed on October 23, 2003 and incorporated by
reference thereto. |
|
(5) |
|
Filed as an exhibit to Alaska Communications Systems Holdings, Inc. Registration
Statement on Form S-4/A file No. 333-109927 filed on January 21, 2004 and incorporated by
reference thereto. |
|
(6) |
|
Filed as an exhibit to the Registrants Form 10-K filed on March 30, 2004 and
incorporated by reference thereto. |
|
(7) |
|
Filed as an exhibit to the Registrants Form 8-K filed on January 26, 2005 and
incorporated by reference thereto. |
|
(8) |
|
Filed as an exhibit to the Registrants Form 8-K filed on January 27, 2005 and
incorporated by reference thereto. |
|
(9) |
|
Filed as an exhibit to the Registrants Form 8-K filed on February 2, 2005 and
incorporated by reference thereto. |
|
(10) |
|
Filed as an exhibit to the Registrants Form 8-K filed on March 7, 2005 and
incorporated by reference thereto. |
|
(11) |
|
Filed as an exhibit to the Registrants Form 8-K filed on March 18, 2005 and
incorporated by reference thereto. |
|
(12) |
|
Filed as an exhibit to the Registrants Form 8-K filed on July 21, 2005 and
incorporated by reference thereto. |
|
(13) |
|
Filed as an exhibit to the Registrants Form 10-K filed on August 15, 2005 and
incorporated herein by reference thereto. |
|
(14) |
|
Filed as an exhibit to the Registrants Form 8-K filed on February 27, 2006 and
incorporated herein by reference thereto. |
|
(15) |
|
Filed as an exhibit to the Registrants Form 8-K filed on July 17, 2006 and is
incorporated by reference thereto. |
54
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
Date: March 13, 2007 |
|
Alaska Communications Systems Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Liane Pelletier
|
|
|
|
|
|
|
Liane Pelletier |
|
|
|
|
|
|
Chief Executive Officer, |
|
|
|
|
|
|
Chairman of the Board and President |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
/s/ Liane Pelletier
Liane Pelletier
|
|
Chief Executive Officer,
Chairman of the Board and
President (Principal Executive
Officer)
|
|
March 09, 2007 |
|
|
|
|
|
/s/ David Wilson
David Wilson
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 13, 2007 |
|
|
|
|
|
/s/ Annette M. Jacobs
Annette M. Jacobs
|
|
Director
|
|
March 14, 2007 |
|
|
|
|
|
/s/ Brian Rogers
Brian Rogers
|
|
Director
|
|
March 10, 2007 |
|
|
|
|
|
/s/ David A. Southwell
David A. Southwell
|
|
Director
|
|
March 10, 2007 |
|
|
|
|
|
/s/ John M. Egan
John M. Egan
|
|
Director
|
|
March 10, 2007 |
|
|
|
|
|
/s/ Patrick Pichette
Patrick Pichette
|
|
Director
|
|
March 10, 2007 |
|
|
|
|
|
/s/ Gary R. Donahee
Gary R. Donahee
|
|
Director
|
|
March 11, 2007 |
|
|
|
|
|
/s/ Edward J. Hayes, Jr.
Edward J. Hayes, Jr.
|
|
Director
|
|
March 09, 2007 |
55
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
F-1 |
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-43 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alaska Communications Systems Group, Inc.
We have audited the accompanying consolidated balance sheets of Alaska Communications Systems and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders equity (deficit) and comprehensive income (loss), and cash flows for each
of the years in the two-year period ended December 31, 2006. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement schedule as listed
in the accompanying index. These consolidated financial statements and financial statement schedule
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Alaska Communications Systems Group, Inc. and
subsidiaries as of December 31, 2006 and 2005, and the results of its their operations and their
cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Alaska Communications Systems Group, Inc.s internal
control over financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 13, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting.
(signed) KPMG LLP
Anchorage, Alaska
March 13, 2007
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Alaska Communications Systems Group, Inc.
We have audited the consolidated statements of operations, stockholders
equity (deficit) and comprehensive income (loss), and cash flows of Alaska Communications
Systems Group, Inc. and Subsidiaries (the Company) for the year ended December 31, 2004.
Our audits also included the financial statement schedule listed in the index at Item 15.
These financial statements and the financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Companys internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the results of operations and cash flows of Alaska Communications Systems Group,
Inc. and Subsidiaries for the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 23, the accompanying 2004 consolidated financial statements have
been restated.
Deloitte & Touche LLP
Portland, Oregon
March 7, 2005
(November 2, 2005 as to Note 23)
F-2
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Balance Sheets
December 31, 2006 and 2005
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
36,860 |
|
|
$ |
28,877 |
|
Restricted cash |
|
|
1,700 |
|
|
|
4,415 |
|
Short-term investments |
|
|
|
|
|
|
10,525 |
|
Accounts receivable-trade, net of allowance of $7,434 and $6,206 |
|
|
39,801 |
|
|
|
41,080 |
|
Materials and supplies |
|
|
7,977 |
|
|
|
7,885 |
|
Prepayments and other current assets |
|
|
3,514 |
|
|
|
3,445 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
89,852 |
|
|
|
96,227 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,164,450 |
|
|
|
1,116,780 |
|
Less: accumulated depreciation |
|
|
767,907 |
|
|
|
718,750 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
396,543 |
|
|
|
398,030 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
38,403 |
|
|
|
38,403 |
|
Intangible assets |
|
|
21,604 |
|
|
|
21,688 |
|
Debt issuance cost |
|
|
9,437 |
|
|
|
11,733 |
|
Deferred charges and other assets |
|
|
6,482 |
|
|
|
10,332 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
562,321 |
|
|
$ |
576,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit) |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
1,025 |
|
|
$ |
683 |
|
Accounts payable affiliates |
|
|
2,942 |
|
|
|
2,844 |
|
Accounts payable, accrued and other current liabilities |
|
|
62,307 |
|
|
|
54,920 |
|
Advance billings and customer deposits |
|
|
10,667 |
|
|
|
9,712 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
76,941 |
|
|
|
68,159 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
|
437,188 |
|
|
|
444,895 |
|
Other deferred credits and long-term liabilities |
|
|
72,881 |
|
|
|
82,223 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
587,010 |
|
|
|
595,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit): |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 145,000 authorized, 42,322 and 46,230 issued and
42,322 and 41,681 outstanding, respectively |
|
|
423 |
|
|
|
462 |
|
Treasury stock, 0 and 4,549 shares at cost |
|
|
|
|
|
|
(18,443 |
) |
Additional paid in capital in excess of par |
|
|
288,055 |
|
|
|
333,522 |
|
Accumulated deficit |
|
|
(314,733 |
) |
|
|
(334,727 |
) |
Accumulated other comprehensive income |
|
|
1,566 |
|
|
|
322 |
|
|
|
|
|
|
|
|
Total
stockholders equity (deficit) |
|
|
(24,689 |
) |
|
|
(18,864 |
) |
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity (deficit) |
|
$ |
562,321 |
|
|
$ |
576,413 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Operations
Years Ended December 31, 2006, 2005 and 2004
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
$ |
192,058 |
|
|
$ |
202,842 |
|
|
$ |
211,187 |
|
Wireless |
|
|
115,584 |
|
|
|
86,235 |
|
|
|
56,694 |
|
Internet |
|
|
25,221 |
|
|
|
21,672 |
|
|
|
20,173 |
|
Interexchange |
|
|
16,954 |
|
|
|
16,060 |
|
|
|
14,653 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
349,817 |
|
|
|
326,809 |
|
|
|
302,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone (exclusive of depreciation and amortization) |
|
|
130,178 |
|
|
|
126,982 |
|
|
|
127,918 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
62,022 |
|
|
|
49,407 |
|
|
|
37,918 |
|
Internet (exclusive of depreciation and amortization) |
|
|
29,625 |
|
|
|
23,298 |
|
|
|
25,739 |
|
Interexchange (exclusive of depreciation and amortization) |
|
|
12,633 |
|
|
|
17,314 |
|
|
|
19,773 |
|
Depreciation and amortization |
|
|
63,259 |
|
|
|
82,819 |
|
|
|
78,387 |
|
Loss (gain) on disposal of assets, net |
|
|
1,105 |
|
|
|
(152 |
) |
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
298,822 |
|
|
|
299,668 |
|
|
|
292,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
50,995 |
|
|
|
27,141 |
|
|
|
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(31,103 |
) |
|
|
(35,894 |
) |
|
|
(47,641 |
) |
Loss on extinguishment of debt |
|
|
(9,650 |
) |
|
|
(34,882 |
) |
|
|
(3,423 |
) |
Interest income |
|
|
1,835 |
|
|
|
2,253 |
|
|
|
1,633 |
|
Other |
|
|
8,360 |
|
|
|
(253 |
) |
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income and expense |
|
|
(30,558 |
) |
|
|
(68,776 |
) |
|
|
(49,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit |
|
|
20,437 |
|
|
|
(41,635 |
) |
|
|
(39,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
(443 |
) |
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
19,994 |
|
|
$ |
(41,635 |
) |
|
$ |
(39,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.48 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.46 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
42,045 |
|
|
|
40,185 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
43,387 |
|
|
|
40,185 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Stockholders Equity (Deficit)
and Comprehensive Income (Loss)
Years Ended December 31, 2006, 2005 and 2004
(In Thousands, Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Additional Paid |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Subject to |
|
|
|
|
|
|
in Capital in |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common |
|
|
Mandatory |
|
|
Treasury |
|
|
Excess of |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Stock |
|
|
Redemption |
|
|
Stock |
|
|
Par |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity (Deficit) |
|
Balance, January 1, 2004 |
|
$ |
336 |
|
|
$ |
(1,198 |
) |
|
$ |
(17,118 |
) |
|
$ |
278,181 |
|
|
$ |
(253,798 |
) |
|
$ |
(4,543 |
) |
|
$ |
1,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,294 |
) |
|
|
|
|
|
|
(39,294 |
) |
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 267 shares subject to mandatory redemption |
|
|
|
|
|
|
1,198 |
|
|
|
(1,262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 14 shares of common stock, $.01 par |
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,694 |
) |
|
|
|
|
|
|
|
|
|
|
(5,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,634 shares of common
stock, pursuant to stock plans, $.01 par |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
9,785 |
|
|
|
|
|
|
|
|
|
|
|
9,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
|
352 |
|
|
|
|
|
|
|
(18,443 |
) |
|
|
282,272 |
|
|
|
(293,092 |
) |
|
|
(4,531 |
) |
|
|
(33,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,635 |
) |
|
|
|
|
|
|
(41,635 |
) |
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
109 |
|
Interest rate swap marked to market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,744 |
|
|
|
4,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,107 |
) |
|
|
|
|
|
|
|
|
|
|
(33,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of 128 option shares and related
taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(757 |
) |
|
|
|
|
|
|
|
|
|
|
(757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,088 shares of common
stock, pursuant to stock plans, $.01 par |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
6,107 |
|
|
|
|
|
|
|
|
|
|
|
6,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 9,897 shares of common
stock, net of offering costs, $.01 par |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
76,207 |
|
|
|
|
|
|
|
|
|
|
|
76,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
|
462 |
|
|
|
|
|
|
|
(18,443 |
) |
|
|
333,522 |
|
|
|
(334,727 |
) |
|
|
322 |
|
|
|
(18,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,994 |
|
|
|
|
|
|
|
19,994 |
|
Pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234 |
|
|
|
234 |
|
Interest rate swap marked to market |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,010 |
|
|
|
1,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,274 |
) |
|
|
|
|
|
|
|
|
|
|
(36,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,870 |
|
|
|
|
|
|
|
|
|
|
|
6,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashless exercise of 123 stock plan shares
and related taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,175 |
) |
|
|
|
|
|
|
|
|
|
|
(1,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 641 shares of common stock
stock, pursuant to stock plans, $.01 par |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
3,510 |
|
|
|
|
|
|
|
|
|
|
|
3,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of 4,549 shares of stock held
in treasury |
|
|
(45 |
) |
|
|
|
|
|
|
18,443 |
|
|
|
(18,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
423 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
288,055 |
|
|
$ |
(314,733 |
) |
|
$ |
1,566 |
|
|
$ |
(24,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
19,994 |
|
|
$ |
(41,635 |
) |
|
$ |
(39,294 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
63,259 |
|
|
|
82,819 |
|
|
|
78,387 |
|
Loss (gain) on disposal of assets |
|
|
1,105 |
|
|
|
(152 |
) |
|
|
2,854 |
|
Gain on sale of long-term investments |
|
|
(6,685 |
) |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and original issue discount |
|
|
5,180 |
|
|
|
18,760 |
|
|
|
6,088 |
|
Stock compensation costs |
|
|
6,870 |
|
|
|
2,800 |
|
|
|
|
|
Other non-cash expenses |
|
|
234 |
|
|
|
109 |
|
|
|
12 |
|
Changes in components of assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other current assets |
|
|
1,118 |
|
|
|
(2,650 |
) |
|
|
7,907 |
|
Accounts payable and other current liabilities |
|
|
8,556 |
|
|
|
(7,977 |
) |
|
|
22 |
|
Deferred charges and other assets |
|
|
3,882 |
|
|
|
3,760 |
|
|
|
1 |
|
Other deferred credits |
|
|
(12,774 |
) |
|
|
502 |
|
|
|
3,048 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
90,739 |
|
|
|
56,336 |
|
|
|
59,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(60,216 |
) |
|
|
(58,422 |
) |
|
|
(51,422 |
) |
Purchase of short-term investments |
|
|
(57,500 |
) |
|
|
(95,095 |
) |
|
|
(154,650 |
) |
Sale of short-term investments |
|
|
68,025 |
|
|
|
119,770 |
|
|
|
162,672 |
|
Liquidation of long-term investments |
|
|
7,663 |
|
|
|
|
|
|
|
|
|
Placement of funds in restricted account |
|
|
|
|
|
|
(700 |
) |
|
|
(1,055 |
) |
Release of funds from escrow |
|
|
2,715 |
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(39,313 |
) |
|
|
(33,472 |
) |
|
|
(44,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(61,860 |
) |
|
|
(459,015 |
) |
|
|
(26,962 |
) |
Proceeds from the issuance of long-term debt |
|
|
52,900 |
|
|
|
375,000 |
|
|
|
|
|
Debt issuance costs |
|
|
(1,349 |
) |
|
|
(11,307 |
) |
|
|
|
|
Payment of cash dividend on common stock |
|
|
(35,475 |
) |
|
|
(30,393 |
) |
|
|
|
|
Issuance of common stock, net |
|
|
2,341 |
|
|
|
88,885 |
|
|
|
9,801 |
|
Stock issuance costs |
|
|
|
|
|
|
(7,817 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(1,325 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
|
(43,443 |
) |
|
|
(44,647 |
) |
|
|
(18,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
7,983 |
|
|
|
(21,783 |
) |
|
|
(3,916 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the period |
|
|
28,877 |
|
|
|
50,660 |
|
|
|
54,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
36,860 |
|
|
$ |
28,877 |
|
|
$ |
50,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest |
|
$ |
31,280 |
|
|
$ |
39,474 |
|
|
$ |
45,470 |
|
Income taxes paid, net of refund |
|
|
264 |
|
|
|
|
|
|
|
876 |
|
(Increase) decrease in accounts payable for construction and capital expenditures |
|
|
915 |
|
|
|
(5,975 |
) |
|
|
|
|
Supplemental Noncash Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Property acquired under capital leases and mortgages |
|
$ |
60 |
|
|
$ |
|
|
|
$ |
|
|
Dividend declared, but not paid |
|
|
9,105 |
|
|
|
8,347 |
|
|
|
5,694 |
|
See Notes to Consolidated Financial Statements
F-6
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Group, Inc. and Subsidiaries (the Company or ACS Group), a
Delaware corporation, is engaged principally in providing local telephone, wireless, Internet,
interexchange network and other services to its retail consumer and business customers and
wholesale customers in the State of Alaska through its telecommunications subsidiaries. The
Company was formed in October of 1998 for the purpose of acquiring and operating
telecommunications properties.
The accompanying consolidated financial statements for the Company are as of December 31,
2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004. They represent the
consolidated financial position, results of operations and cash flows principally of ACS Group
and the following wholly owned subsidiaries:
|
|
|
Alaska Communications Systems Holdings, Inc. (ACS Holdings) |
|
|
|
|
ACS of Alaska, Inc. (ACSAK) |
|
|
|
|
ACS of the Northland, Inc.
(ACSN) |
|
|
|
|
ACS of Fairbanks, Inc. (ACSF) |
|
|
|
|
ACS of Anchorage, Inc. (ACSA) |
|
|
|
|
ACS Wireless, Inc. (ACSW) |
|
|
|
|
ACS Long Distance, Inc. (ACSLD) |
|
|
|
|
ACS Internet, Inc. (ACSI) |
A summary of significant accounting policies followed by the Company is set forth below:
Basis of Presentation
The consolidated financial statements include all majority-owned subsidiaries. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation, intercompany revenue between local telephone and all
other segments is not eliminated. All other significant intercompany balances have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the significant estimates affecting the financial
statements are those related to the realizable value of accounts receivable, materials and
supplies, long-lived assets, goodwill and intangible assets, income taxes and network access
revenue reserves. Actual results may differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash flows, the Company
generally considers all highly liquid investments with a maturity at acquisition of three months or
less to be cash equivalents.
Restricted Cash
The Company has placed restricted cash in certificates of deposits as required under the terms
of certain contracts to which it is a party. When the restrictions are lifted, the Company will
transfer the funds back into its operating accounts.
Short-term Investments
Short-term investments include investments in auction-rate securities. Short-term investments
are considered available for sale and are carried at amortized cost which approximates fair value.
F-7
ALASKA
COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Materials and Supplies
Materials and supplies are carried in inventory at the lower of weighted average cost or
market.
Property, Plant and Equipment
Telephone plant is stated substantially at original cost of construction. Telephone plant
retired in the ordinary course of business, together with the cost of removal, less salvage, is
charged to accumulated depreciation with no gain or loss recognized. Renewals and betterments of
telephone plant are capitalized while repairs, as well as renewals of minor items, are charged to
operating expense as incurred. The Company provides for depreciation of telephone plant on the
straight-line method, using rates approved by regulatory authorities. The composite annualized rate
of depreciation for all classes of telephone property, plant, and equipment was 4.6%, 5.8% and 6.1%
for 2006, 2005 and 2004, respectively.
Non-Telephone plant is stated at purchased cost, and when sold or retired a gain or loss is
recognized. Depreciation of such property is provided on the straight-line method over its
estimated service life ranging from three to 20 years.
The Company is the lessee of equipment and buildings under capital leases expiring in
various years through 2019. The assets and liabilities under capital leases are initially
recorded at the lower of the present value of the minimum lease payments or the fair value of the
assets at the inception of the lease. The assets are amortized over the lower of their related
lease terms or the estimated productive lives. Amortization of assets under capital leases is
included in depreciation and amortization expense for 2006, 2005 and 2004.
The Company is also the lessee of various land, building and personal property under
operating lease agreements for which expense is recognized on a monthly basis.
Goodwill
Goodwill and indefinite-lived intangible assets are not amortized but are assessed for
impairment on at least an annual basis. Intangible assets with estimable useful lives are amortized
over their respective estimated useful lives to their estimated residual values and are
periodically reviewed for impairment. See Note 5, Goodwill and Other Intangible Assets.
Debt Issuance Costs
Underwriting, legal, accounting, printing and other fees and expenses associated with the
issuance of the Companys senior credit facility, senior subordinated notes, senior unsecured
notes and senior discount debentures are being amortized using the straight-line method which
approximates the effective interest method, over the term of the debt. During 2005, the Company
extinguished early its 2003 senior credit facility, senior unsecured notes and senior
subordinated notes which resulted in a write off to expense of $14,784 of debt issuance costs.
Debt issuance costs amortization included in loss on extinguishment of debt and interest expense
for 2006, 2005 and 2004 was $3,645, $16,793 and $3,457, respectively.
Original Issue Discounts
Certain debt instruments of the Company have been issued below their face value, resulting
in original issue discounts that are recorded net in long-term debt. These original issue
discounts are amortized using the effective interest method. During 2005, the Company
extinguished early its 2003 senior credit facility and repurchased a portion of its 2011 notes
which resulted in a write off to expense of $1,557 of original issue discount. In 2006, the
Company repurchased additional 2011 notes which resulted in a write off to expense of $1,479.
Original issue discount amortization included in loss on extinguishment of debt and interest
expense for 2006, 2005 and 2004 was $1,535, $2,000 and $2,631, respectively.
F-8
ALASKA
COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Preferred stock
The Company has 5,000, no par, shares authorized. Zero was issued or outstanding at December
31, 2006 and 2005.
Treasury Stock
The Company, with Board of Directors authorization, occasionally repurchases shares of its
common stock. Since management intends to hold the treasury stock temporarily for later
re-issuance, the cost method of accounting for treasury stock is used. The Company has repurchased
a total of 4,749 shares and reissued 200 shares since 2002. On December 15, 2006, the Companys
Board of Directors approved the retirement of 100% of the Companys treasury stock.
Revenue Recognition
Substantially all recurring service revenues are billed one month in advance and are deferred
until earned. Non-recurring and usage sensitive revenues are billed in arrears and are recognized
when earned. Certain of the Companys bundled products and services, primarily in wireless, have
been determined to be revenue arrangements with multiple deliverables. Total consideration received
in these arrangements is allocated and measured using units of accounting within the arrangement
based on relative fair values. Wireless offerings include wireless phones and service contracts
sold together in its Company-owned stores. The handset and activation fee revenue associated with
these direct channel sales is recognized at the time the related wireless phone is sold and is
classified as equipment sales. Monthly service revenue is recognized as services are rendered.
Additionally, the Company establishes estimated bad debt reserves against uncollectible
revenues incurred during the period. The Company accounts for bad debt expense in accordance with
SFAS No. 71 which prescribes that revenue be recognized net of bad debt expense.
Access revenue is recognized when earned. The Company participates in access revenue pools
with other telephone companies. Such pools are funded by toll revenue and/or access charges
regulated by the Federal Communications Commission (FCC) within the interstate jurisdiction. Much
of the interstate access revenue is initially recorded based on estimates. These estimates are
derived from interim financial statements, available separations studies and the most recent
information available about achieved rates of return. These estimates are subject to adjustment in
future accounting periods as additional operational information becomes available. To the extent
that disputes arise over revenue settlements, the Companys policy is to defer revenue collected
until settlement methodologies are resolved and finalized. At December 31, 2006 and 2005, the
Company had recorded liabilities of $21,448 and $19,197, respectively, related to its estimate of
refundable access revenue. The increase in the reserve during the year ended December 31, 2006 of
$2,250 was the net impact of increases to the reserve for the deferral of current period billed
revenue, or cash receipts that are subject to dispute. This was offset, in part, by reductions to
the reserve for refunds or revenue recognized following the settlement of prior period claims.
During 2005 and 2004, one customer accounted for 10% and 12%, respectively, of consolidated
revenues and no customer accounted for more than 10% of consolidated revenue in 2006.
Income Taxes
The Company utilizes the asset-liability method of accounting for income taxes. Under the
asset-liability method, deferred taxes reflect the temporary differences between the financial and
tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to
the extent that management believes it is more likely than not that such deferred tax assets will
not be realized.
F-9
ALASKA
COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Regulatory Accounting and Regulation
The local telephone exchange operations of the Company account for costs in accordance with
the accounting principles for regulated enterprises prescribed by SFAS No. 71. This accounting
recognizes the economic effects of rate regulation by recording cost and a return on investment as
such amounts are recovered through rates authorized by regulatory authorities. Accordingly, plant
and equipment is depreciated over lives approved by regulators and certain costs and obligations
are deferred based upon approvals received from regulators to permit recovery of such amounts in
future years.
The Company implemented, effective January 1, 2003, higher depreciation rates for its
regulated telephone plant for the interstate jurisdiction, which management believes approximate
the economically useful lives of the underlying plant. As a result, the Company has recorded a
regulatory asset under SFAS No. 71 of $65,724 and $52,565 as of December 31, 2006 and 2005,
respectively, related to depreciation of the regulated telephone plant allocable to its intrastate
and local jurisdictions. If the Company were not following SFAS No. 71, these costs would have been
charged to expense as incurred. The Company also has a regulatory liability of $61,486 and $58,154
at December 31, 2006 and 2005, respectively, related to accumulated removal costs for its local
telephone subsidiaries. If the Company were not following SFAS No. 71, it would have followed SFAS
No. 143 for asset retirement obligations associated with its regulated telephone plant.
Non-regulated revenues and costs incurred by the local telephone exchange operations and
non-regulated operations of the Company are not accounted for under SFAS No. 71 principles. SFAS
No. 71 also requires revenue generated between regulated and non-regulated group companies not be
eliminated on consolidation; these revenues totaled $32,814, $32,219 and $27,927 for the years
ended December 31, 2006, 2005 and 2004, respectively.
The local telephone exchange activities of the Company are subject to rate regulation by the
FCC for interstate telecommunication service and the RCA for intrastate and local exchange
telecommunication service. The Company, as required by the FCC, accounts for such activity
separately. Long distance services of the Company are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and the RCA for
intrastate telecommunication services. Wireless and Internet operations are not subject to rate
regulation.
Non-Operating Expense
The Company periodically evaluates the fair value of its investments and other non-operating
assets against their carrying value whenever market conditions indicate a change in that fair
value. Any changes relating to declines in the fair value of non-operating assets are charged to
non-operating expense under the caption Other in the Consolidated Statement of Operations.
Derivative Financial Instrument
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its
corresponding amendments under SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities requires that an entity recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value. The accounting for
changes in fair value of a derivative depends on the intended use of the derivative and its
designation as a hedge. Derivatives that are not hedges must be adjusted to fair value through
earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in fair value
either offset the change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or are recognized in other comprehensive income until the hedged transaction is
recognized in earnings. The change in a derivatives fair value related to the ineffective portion
of a hedge, if any, is immediately recognized in earnings. The Company does not enter into any
derivative contracts for speculative purposes. On the date a derivative contract is entered into,
the Company designates the derivative as either a fair value or cash flow hedge. The Company
formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in offsetting changes in fair values or
cash flows of hedged items. If the Company determines that a derivative is not highly effective as
a hedge or that it has ceased to be a highly effective hedge, the Company would discontinue hedge
accounting prospectively and all amounts included in accumulated other comprehensive income would
be immediately reclassified into earnings.
F-10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Dividend Policy
On October 28, 2004, the Company announced the adoption of a dividend policy by the board of
directors and the board of directors declared its first quarterly dividend of $0.185 per share. On
March 21, June 14, September 16, and November 29, 2005, the Companys board of directors declared
quarterly cash dividends of $0.20 per share. On February 23, 2006 the board of directors approved
an increase to the dividend of 7.5%. Dividends of $0.215 per share were declared February 22, June
15, September 15, and December 15, 2006. Dividends on the Companys common stock are not
cumulative.
Adoption of SFAS No. 123(R), Share-Based Payment
As of July 1, 2005, the Company adopted 123(R), Share-Based Payment, using the modified
retrospective method applied to prior interim periods in the year of initial adoption, which
requires measurement of compensation cost from January 1, 2005, for all unvested stock-based awards
at fair value on date of grant and recognition of compensation over the service period for awards
expected to vest. The adoption of SFAS No. 123(R) resulted in additional stock based compensation
expense of $539 being recorded for the twelve months ended December 31, 2005. The fair value of
restricted stock and restricted stock units is determined based on the number of shares granted and
the quoted price of our common stock on the date of grant, discounted for estimated dividend
payments that do not accrue to the employee during the vesting period; and the fair value of stock
options is determined using the Black-Scholes valuation model, which is consistent with our
valuation techniques previously utilized for options in footnote disclosures. Such value is
recognized as expense over the service period, net of estimated forfeitures, using the straight
line attribution method for stock-based payment grants from July 1, 2005 onwards and the graded
vesting attribution method for legacy stock-based payment grants.
Prior to July 1, 2005, the Company accounted for stock-based awards under the intrinsic value
method. The following table illustrates the effect on net income and earnings per share as if the
fair value based method had been applied to all outstanding and unvested awards in periods prior to
January 1, 2005:
|
|
|
|
|
|
|
2004 |
|
Net loss: |
|
|
|
|
As reported |
|
$ |
(39,294 |
) |
Deduct: Stock-based employee compensation expense |
|
|
(1,938 |
) |
|
|
|
|
Pro forma net income (loss) |
|
$ |
(41,232 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic and diluted: |
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(1.33 |
) |
Pro forma |
|
|
(1.39 |
) |
As the Company has a full valuation allowance against its deferred tax asset, adopting
SFAS No. 123(R) had no impact on the net deferred tax asset balance.
Earnings Per Share
The Company uses the treasury stock method to calculate earnings per share.
Valuation Assumptions
The fair value for each stock option granted was estimated at the date of grant using a
Black-Scholes option-pricing model. Expected volatilities are based on historical volatilities of
our common stock; the expected life represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to vesting schedules and our historical
exercise patterns; the dividend yield is based on dividend yield of the option strike price at
grant date and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant for periods corresponding with the expected life. See Note 13, Stock Incentive Plans for
additional information.
F-11
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This
statement requires an employer to recognize in its statement of financial position the over-funded
or under-funded status of a defined benefit postretirement plan measured as the difference between
the fair value of a plans assets and the benefit obligation. Employers must also recognize as a
component of other comprehensive income, net of tax, the actuarial gains and losses and the prior
service costs and credits that arise during the period. The Statement was effective for the Company
on December 31, 2006. Adoption of this standard resulted in a decrease in our pension assets of
$4,034, a decrease to our pension liability of $3,296 and a decrease to other comprehensive
income/loss of $738. See Note 14 Retirement Plans, for additional disclosure regarding the
adoption of this standard.
In September 2006, the Securities and Exchange Commission published Staff Accounting Bulleting
No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. The interpretations in this Staff Accounting Bulleting are being
issued to address diversity in practice in quantifying financial statement misstatements and the
potential under current practice to build up improper amounts on the balance sheet. This guidance
will apply to the first fiscal year ending after November 15, 2006, or December 31, 2006 for the
Company. The adoption of SAB 108 did not have a material impact on the Companys financial
position, results of operations or cash flows and no cumulative adjustment was required.
2. ACCOUNTS RECEIVABLE
Accounts receivable trade consists of the following at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Customers |
|
$ |
34,200 |
|
|
$ |
33,202 |
|
Connecting companies |
|
|
8,754 |
|
|
|
9,108 |
|
Other |
|
|
4,281 |
|
|
|
4,976 |
|
|
|
|
|
|
|
|
|
|
|
47,235 |
|
|
|
47,286 |
|
Less: allowance for doubtful accounts |
|
|
7,434 |
|
|
|
6,206 |
|
|
|
|
|
|
|
|
Accounts receivable trade, net |
|
$ |
39,801 |
|
|
$ |
41,080 |
|
|
|
|
|
|
|
|
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Land, buildings and support assets |
|
$ |
206,511 |
|
|
$ |
203,717 |
|
Central office switching and transmission |
|
|
316,204 |
|
|
|
306,901 |
|
Outside plant cable and wire facilities |
|
|
515,345 |
|
|
|
499,115 |
|
Wireless switching and transmission systems |
|
|
88,828 |
|
|
|
74,486 |
|
Other |
|
|
3,640 |
|
|
|
3,609 |
|
Construction work in progress |
|
|
33,922 |
|
|
|
28,952 |
|
|
|
|
|
|
|
|
|
|
|
1,164,450 |
|
|
|
1,116,780 |
|
Less: accumulated depreciation and amortization |
|
|
767,907 |
|
|
|
718,750 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
396,543 |
|
|
$ |
398,030 |
|
|
|
|
|
|
|
|
F-12
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
3. PROPERTY, PLANT AND EQUIPMENT (Continued)
The following is a summary of property held under capital leases included in the above
property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Land, buildings and support assets |
|
$ |
14,568 |
|
|
$ |
14,535 |
|
Outside plant cable and wire facilities |
|
|
2,115 |
|
|
|
2,115 |
|
|
|
|
|
|
|
|
|
|
|
16,683 |
|
|
|
16,650 |
|
Less: accumulated depreciation and amortization |
|
|
9,023 |
|
|
|
8,052 |
|
|
|
|
|
|
|
|
Property held under capital leases, net |
|
$ |
7,660 |
|
|
$ |
8,598 |
|
|
|
|
|
|
|
|
Amortization of assets under capital leases included in depreciation expense in 2006,
2005 and 2004 was $1,053, $1,052 and $1,046, respectively.
The Company leases various land, buildings, right-of-ways and personal property under
operating lease agreements. Rental expenses under operating leases for 2006, 2005 and 2004 were
$4,725, $3,248 and $3,515, respectively.
Future minimum payments under these leases for the next five years and thereafter are as
follows:
|
|
|
|
|
2007 |
|
$ |
5,276 |
|
2008 |
|
|
4,600 |
|
2009 |
|
|
4,248 |
|
2010 |
|
|
3,825 |
|
2011 |
|
|
2,736 |
|
Thereafter |
|
|
33,139 |
|
|
|
|
|
|
|
$ |
53,824 |
|
|
|
|
|
4. ASSET RETIREMENT
In March 2005, the FASB issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset
Retirement Obligations. FIN 47 became effective for the Company on December 31, 2005, and requires
it to recognize asset retirement obligations which are conditional on a future event. Uncertainty
about the timing or settlement of the obligation is factored into the measurement of the liability.
The Company has a regulatory asset and liability of $61,486 and $58,154 at December 31, 2006 and
2005, respectively, related to accumulated removal costs for its local telephone subsidiaries.
Consistent with the industry, the Company follows SFAS No. 71, for asset retirement obligations
associated with its regulated telephone plant. The Companys assets are pooled and the depreciable
lives set by the regulators include a removal component which in effect accounts for the cost of
removal. Non-regulated operations of the Company are accounted for under the principles of SFAS No.
143 and FIN 47 for which the Company has a retirement obligation of $1,171 and $836 and an
associated asset of $731 and $501, at December 31, 2006 and 2005, respectively. These balances were
recorded as a result of the Companys estimated obligation related to the removal of certain cell
sites at the end of their operating lease term, adjusted for accretion/depreciation over the life
of the lease.
The following table outlines the changes in the accumulated retirement obligation liability:
|
|
|
|
|
Balance, January 1, 2005 |
|
$ |
726 |
|
Asset retirement obligation |
|
|
51 |
|
Accretion expense |
|
|
59 |
|
Settlement of lease obligations |
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
836 |
|
Asset retirement obligation |
|
|
239 |
|
Accretion expense |
|
|
100 |
|
Settlement of lease obligations |
|
|
(4 |
) |
|
|
|
|
Ending Balance, December 31, 2006 |
|
$ |
1,171 |
|
|
|
|
|
F-13
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is tested for impairment at the reporting unit level at least annually utilizing a
two-step methodology. The initial step requires the Company to determine the fair value of each
reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair
value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying
value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The
amount, if any, of the impairment is then measured in the second step. The second step of the
goodwill impairment test compares the implied fair value of goodwill of the reporting unit with the
carrying amount of that goodwill. The implied fair value of a reporting units goodwill is the
excess of the fair value of a reporting unit over the amounts assigned to assets and liabilities.
If the carrying value amount of reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss shall be recognized in an amount equal to that excess.
The Company annually reassesses previously recognized intangible assets and has ceased
amortization of indefinite-lived intangible assets. Wireless and PCS licenses have terms of 10
years, but are renewable indefinitely through a routine process involving a nominal fee. The
Company has determined that no legal, regulatory, contractual, competitive, economic or other
factors currently exist that limit the useful life of its wireless and PCS licenses. Therefore, the
Company is not amortizing its wireless and PCS licenses based on the determination that these
assets have indefinite lives. The Company evaluates its determination of indefinite useful lives
for its wireless and PCS licenses each reporting period. Indefinite lived intangible assets are
tested for impairment at least annually by comparing the fair value of the assets to their carrying
amount.
The Company performs its annual impairment test as of the beginning of the fourth quarter or
more frequently if events or changes in circumstance indicate possible impairment. The Company
determines the fair value of each reporting unit for purposes of this test primarily by using a
discounted cash flow valuation technique. Significant estimates used in the valuation include
estimates of future cash flows, both future short-term and long-term growth rates, and estimated
cost of capital for purposes of arriving at a discount factor. The annual impairment test conducted
has resulted in no impairment charges being assessed. Intangible assets with estimable useful lives
are amortized over their respective estimated useful lives to their residual values and reviewed
for impairment. The following table provides the gross carrying value and accumulated amortization
for each major class of intangible asset as of December 31, 2006 based on the Companys
reassessment of previously recognized intangible assets and their remaining amortization lives:
|
|
|
|
|
|
|
Carrying |
|
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
Customer lists |
|
$ |
915 |
|
Less: Accumulated amortization |
|
|
(915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets: |
|
|
|
|
Cellular licenses |
|
|
18,193 |
|
PCS licenses |
|
|
3,323 |
|
Domain names and trade names |
|
|
88 |
|
|
|
|
|
|
|
|
21,604 |
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
21,604 |
|
|
|
|
|
For amortizable intangible assets the total intangible amortization expense for the years
ended December 31, 2006, 2005 and 2004 was $91, $183 and $183, respectively.
F-14
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
6. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES
Accounts payable, accrued and other current liabilities consist of the following at December
31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Accrued payroll, benefits, and related liabilities |
|
$ |
16,975 |
|
|
$ |
13,731 |
|
Access revenue subject to refund |
|
|
13,536 |
|
|
|
2,941 |
|
Accounts payable trade |
|
|
11,503 |
|
|
|
15,993 |
|
Dividend payable |
|
|
9,105 |
|
|
|
8,347 |
|
Other |
|
|
11,188 |
|
|
|
13,908 |
|
|
|
|
|
|
|
|
|
|
$ |
62,307 |
|
|
$ |
54,920 |
|
|
|
|
|
|
|
|
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
2005 senior credit facility term loan |
|
$ |
427,900 |
|
|
$ |
375,000 |
|
9 7/8% senior unsecured notes due 2011 |
|
|
4,040 |
|
|
|
64,978 |
|
Original issue discount - 9 7/8% senior unsecured notes due 2011 |
|
|
(83 |
) |
|
|
(1,618 |
) |
Capital leases and other long-term obligations |
|
|
6,356 |
|
|
|
7,218 |
|
|
|
|
|
|
|
|
|
|
|
438,213 |
|
|
|
445,578 |
|
Less: current portion |
|
|
1,025 |
|
|
|
683 |
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
$ |
437,188 |
|
|
$ |
444,895 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term obligations for each of the five years and
thereafter subsequent to December 31, 2006 are as follows:
|
|
|
|
|
2007 |
|
$ |
1,043 |
|
2008 |
|
|
943 |
|
2009 |
|
|
695 |
|
2010 |
|
|
664 |
|
2011 |
|
|
4,770 |
|
Thereafter |
|
|
430,181 |
|
|
|
|
|
|
|
$ |
438,296 |
|
|
|
|
|
2005 Senior Credit Facility
During 2005, the Company completed refinancing transactions whereby it entered into a new
$380,000 senior secured credit facility, the 2005 senior credit facility, and used $335,000 of term
loan borrowings under that facility, together with $76,307 in net proceeds of a simultaneous
offering of the Companys common stock and cash on hand to repay in full and redeem the $198,000 of
outstanding principal under the Companys 2003 senior credit facility, together with interest
accrued thereon; repurchase $59,346 of outstanding principal of the Companys senior unsecured
notes, together with tender premiums and interest accrued thereon; repurchase $147,500 of
outstanding principal of the Companys senior subordinated notes, together with tender premiums and
interest accrued thereon; and pay underwriters discounts and transaction fees and expenses
associated with the equity offering and refinancing transactions. Accordingly, the Company recorded
a loss on debt extinguishment of $26,204 and capitalized deferred financing costs of $10,637
related to the 2005 senior credit facility.
F-15
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
7. LONG-TERM OBLIGATIONS (Continued)
The $427,900 term loan under the 2005 senior credit facility was first drawn on February 1,
2005, and generally bears interest at an annual rate of LIBOR plus 1.75%, with a term of seven
years from the date of closing and no scheduled principal payments before maturity. The $45,000
un-drawn revolving credit facility, to the extent drawn in the future, will bear interest at an
annual rate of LIBOR plus 2.00% and have a term of six years from the date of closing. To the
extent the $45,000 revolving credit facility under the 2005 senior credit facility remains
un-drawn, the Company will pay an annual commitment fee of 0.375% of the un-drawn principal amount
over its term. The Company also entered into floating-to-fixed interest rate swaps with total
notional amounts of $135,000, $85,000, $40,000, $115,000 and $52,900, respectively, which swap the
floating interest rate on the entire term loan borrowings under the 2005 senior credit facility for
remaining periods at December 31, 2006 which range from three to five years, at a fixed rate of
5.88%, 6.25%, 6.18%, 6.71% and 6.75% per year, respectively, inclusive of the 1.75% premium over
LIBOR. The swaps are accounted for as cash flow hedges.
On July 15, 2005, the Company completed a refinancing transaction whereby it amended and
entered into a new term loan under its 2005 senior credit facility with substantially the same
terms, increasing the size of the facility to $420,000 and used the $40,000 of term loan and cash
on hand to repurchase $41,326 of outstanding principal of its senior unsecured notes, together with
redemption premiums, accrued interest and transaction fees and expenses associated with the
refinancing transaction of $9,258. The Company recorded a loss on the early extinguishment of debt
of $6,888 and capitalized deferred financing costs of $670 associated with this refinancing
transaction.
In February 2006, the Company amended its 2005 senior credit facility, increasing the $375,000
term loan under the facility by $52,900 and re-priced the facility to LIBOR plus 1.75% from LIBOR
plus 2.00%. The amendment and the re-price became effective as of February 23, 2006 and February
22, 2006, respectively. The amendment permits ACS Holdings to purchase any and all of its currently
outstanding 9 7/8 % Senior Notes due 2011.
As of December 31, 2006 and 2005, the Company was in compliance with all of its debt
covenants.
Senior Unsecured Notes
On August 26, 2003, the Company issued $182,000 in aggregate principal amount of 9 7/8% senior
unsecured notes due 2011. Interest on the notes is payable semi-annually on February 15 and August
15. The notes mature on August 15, 2011, and are redeemable, in whole or in part, at the option of
the Company, at any time on or after August 15, 2007, at 104.938% of the principal amount declining
to 100% of the principal amount on or after August 15, 2010. In the first and third quarters of
2005 the Company repurchased $100,672 of the outstanding principal together with tender premiums
and interest accrued. In the fourth quarter of 2005, the Company repurchased $12,000 of outstanding
principal together with tender premiums and interest accrued. In January and February 2006, the
Companys subsidiary, ACS Holdings, repurchased $8,039 principal amount of its existing 9 7/8%
senior unsecured notes due 2011 (CUSIP No. 011679AF4) at a weighted average premium of 9.7% over
the par value. The Company incurred an early extinguishment of debt charge of $1,206 in connection
with this transaction, inclusive of $778 in cash premiums. In February 2006, ACS Holdings commenced
a cash tender offer for any and all of the $56,939 aggregate principal amount of outstanding 9 7/8%
senior unsecured notes due 2011 issued by ACS Holdings. In conjunction with the tender offer, ACS
Holdings also solicited consents to adopt certain amendments to the indenture under which the
senior notes were issued. The amendments to the senior notes indenture, among other things,
eliminate substantially all of the restrictive covenants and eliminate most events of default,
other than for failure to make payments of interest or principal. On February 23, 2006, the Company
successfully repurchased $52,899 of the remaining $56,939 outstanding principal balance of these
notes. The Company incurred an early extinguishment of debt charge of $8,423 in connection with
this transaction, inclusive of $5,640 in cash premiums.
Capital leases and other long-term obligations
The Company has entered into various capital leases and other financing agreements totaling
$6,356 and $7,218 with a weighted average interest rate of 10.00% and 10.25% at December 31, 2006
and 2005, respectively.
F-16
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
8. OTHER DEFERRED CREDITS AND LONG-TERM LIABILITIES
Deferred credits and other long-term liabilities consist of the following at December 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Regulatory liabilities accumulated removal costs |
|
$ |
61,486 |
|
|
$ |
58,154 |
|
Refundable access revenue |
|
|
7,912 |
|
|
|
16,256 |
|
Other deferred credits |
|
|
2,591 |
|
|
|
2,450 |
|
Pension obligations |
|
|
892 |
|
|
|
5,363 |
|
|
|
|
|
|
|
|
|
|
$ |
72,881 |
|
|
$ |
82,223 |
|
|
|
|
|
|
|
|
9. LOCAL TELEPHONE OPERATING REVENUE
Local telephone operating revenues consist of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Local network service |
|
$ |
80,177 |
|
|
$ |
86,482 |
|
|
$ |
91,669 |
|
Network access revenue |
|
|
90,894 |
|
|
|
92,379 |
|
|
|
97,536 |
|
Deregulated revenue and other |
|
|
20,987 |
|
|
|
23,981 |
|
|
|
21,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
192,058 |
|
|
$ |
202,842 |
|
|
$ |
211,187 |
|
|
|
|
|
|
|
|
|
|
|
10. NON-OPERATING CHARGES
The Company periodically evaluates the fair value of its investments and other non-operating
assets against their carrying value whenever market conditions indicate a change in that fair
value. Any changes relating to declines in the fair value of non-operating assets are charged to
non-operating expense under the caption Other in the Consolidated Statement of Operations. During
2003, the Company undertook an assessment of the net realizable value of its note receivable from
Crest Communications LLC (Crest) and the option, as part of the note receivable, to purchase
certain network assets from Crest as a result of changes in market and economic conditions (and a
notice the Company received from the State of Alaska of termination of the TPA). As a result of the
analysis, the Company recorded a charge of $15,924 representing the estimated decline in fair value
of the note receivable from Crest. During 2005, the full balance of the note and accrued interest
of $2,692 was fully reserved. In January 2006, the Company executed definitive agreements to assume
ownership of strategic fiber optic cable network assets from Crest. As previously disclosed,
pursuant to the Companys 2002 agreement with Crest, the Company was granted an option to exchange
its $15,000 note for the strategic assets. See Note 21 Other Events for more information on
this transaction.
F-17
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
11. INCOME TAXES
For the years ended December 31, 2006, 2005 and 2004, a reconciliation of federal
statutory tax at 34% and the recorded tax (expense)/benefit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Computed federal income taxes at the 34% statutory rate |
|
$ |
(6,948 |
) |
|
$ |
14,156 |
|
|
$ |
13,434 |
|
(Increase) reduction in tax resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes (net federal benefit) |
|
|
(1,194 |
) |
|
|
2,684 |
|
|
|
3,439 |
|
Excess compensation not allowed |
|
|
(182 |
) |
|
|
(596 |
) |
|
|
|
|
Other |
|
|
(39 |
) |
|
|
(239 |
) |
|
|
(98 |
) |
Original issue discount interest |
|
|
|
|
|
|
|
|
|
|
(185 |
) |
Recovery of previously paid income tax |
|
|
|
|
|
|
|
|
|
|
219 |
|
Write-off of original issue discount |
|
|
|
|
|
|
|
|
|
|
(713 |
) |
Prior year adjustments |
|
|
181 |
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
869 |
|
|
|
1,522 |
|
|
|
|
|
Valuation allowance |
|
|
6,870 |
|
|
|
(17,527 |
) |
|
|
(15,877 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
(443 |
) |
|
$ |
|
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
The Company files a consolidated federal income tax return. The income tax provision
for the years ended December 31, 2006, 2005 and 2004 comprised of the following charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax |
|
$ |
(375 |
) |
|
$ |
|
|
|
$ |
185 |
|
State income tax |
|
|
(68 |
) |
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
(443 |
) |
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense) |
|
$ |
(443 |
) |
|
$ |
|
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
F-18
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
11. INCOME TAXES (Continued)
The Company accounts for income taxes under the asset and liability method. Deferred income
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Companys deferred tax assets and liabilities at a combined effective
rate of 40% (federal and state) as of December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Deferred tax liabilities long-term: |
|
|
|
|
|
|
|
|
Mark to market on interest rate swap |
|
|
(2,301 |
) |
|
|
(1,897 |
) |
Other |
|
|
|
|
|
|
(128 |
) |
|
|
|
|
|
|
|
Total long-term deferred tax liabilities |
|
|
(2,301 |
) |
|
|
(2,025 |
) |
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Accrued compensation |
|
|
4,085 |
|
|
|
3,084 |
|
Accrued bad debts |
|
|
2,934 |
|
|
|
2,483 |
|
Pension liability |
|
|
1,675 |
|
|
|
1,769 |
|
Contingent liabilities |
|
|
270 |
|
|
|
789 |
|
Self insurance accruals |
|
|
597 |
|
|
|
|
|
Other |
|
|
237 |
|
|
|
282 |
|
|
|
|
|
|
|
|
Total current deferred tax assets |
|
|
9,798 |
|
|
|
8,407 |
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
57,431 |
|
|
|
68,502 |
|
Alternative minimum tax carryforward |
|
|
1,320 |
|
|
|
876 |
|
Intangibles/Goodwill |
|
|
26,753 |
|
|
|
33,063 |
|
Debt expense |
|
|
1,708 |
|
|
|
1,365 |
|
Property, plant and equipment |
|
|
23,083 |
|
|
|
16,109 |
|
Excess tax benefit from stock based compensation |
|
|
2,595 |
|
|
|
862 |
|
Other |
|
|
91 |
|
|
|
444 |
|
|
|
|
|
|
|
|
Total long-term deferred tax assets |
|
|
112,981 |
|
|
|
121,221 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
122,779 |
|
|
|
129,628 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(120,478 |
) |
|
|
(127,603 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
In 2006, the Company recorded a decrease in its valuation allowance of $7,125, net of
($498) reflected in equity. In 2005, the Company recorded an increase in its valuation allowance of
$15,395, net of ($1,940) related to the effect of changes in comprehensive income. Based on the
weight of all available evidence, management believes it is more likely than not, that the deferred
tax asset recorded may not be realized.
The Company files consolidated income tax returns with all if it subsidiaries for U.S. federal
and with the State of Alaska. The Company is no longer subject to examination for years prior to
2003. The Company is not currently being audited, nor has it been notified of any pending audits.
The Company is not aware of any controversial or unsupported positions taken on its tax returns
that have not either been resolved in prior audits, by amending prior returns or by adjusting its
Net Operating Loss (NOL) carry-forwards to rectify its filings. Income tax payable was $179 at
December 31, 2006.
The Company is required to adopt the provision of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) effective for fiscal periods beginning after December 15,
2006. The Company does not anticipate the adoption of FIN 48 will have any material impact on its
consolidated results of operations, cash flows, or financial position.
F-19
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
11. INCOME TAXES (Continued)
In connection with the adoption of SFAS No. 123(R), the Company elected to calculate the pool
of excess tax benefits under the modified retrospective method, but only to prior interim periods
in the year of initial adoption. Tax benefits of $1,733 and $862 were generated in 2006 and 2005,
respectively. The Company has recorded a full valuation allowance since it is more likely than not
that the deferred tax assets may not be realized.
The Company has available at December 31, 2006, unused operating loss carry forwards of
$143,576 that may be applied against future taxable income and that expire as shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet |
|
|
|
|
|
|
Total |
|
Year of |
|
Alaskas |
|
|
Unused Operating |
|
|
Unused Operating |
|
Expiration |
|
SRLY |
|
|
Loss Carryforwards |
|
|
Loss Carryforwards |
|
2017 |
|
$ |
27 |
|
|
$ |
|
|
|
$ |
27 |
|
2018 |
|
|
328 |
|
|
|
|
|
|
|
328 |
|
2019 |
|
|
852 |
|
|
|
|
|
|
|
852 |
|
2020 |
|
|
2,631 |
|
|
|
6,275 |
|
|
|
8,906 |
|
2021 |
|
|
|
|
|
|
49,030 |
|
|
|
49,030 |
|
2022 |
|
|
|
|
|
|
17,983 |
|
|
|
17,983 |
|
2024 |
|
|
|
|
|
|
43,974 |
|
|
|
43,974 |
|
2025 |
|
|
|
|
|
|
22,476 |
|
|
|
22,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,838 |
|
|
$ |
139,738 |
|
|
$ |
143,576 |
|
|
|
|
|
|
|
|
|
|
|
Net Operating Loss (NOL) associated with the 2000 acquisition of Internet Alaska are
limited by Separate Return Limitation Year (SRLY") rules and can only be used in years
that both the Consolidated Group and Internet Alaska have taxable income.
Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limit on the
ability of a loss corporation that undergoes an ownership change to use its NOLs to reduce its
tax liability. On December 7, 2005, ACS underwent an ownership change subject to the Section 382
loss limitation rules. ACS now has an estimated loss limitation of $19,054 per year for the usage
of NOLs generated prior to December 7, 2005 (old loss) to offset future taxable income.
12. EARNINGS PER SHARE
Earnings per share are based on weighted average number of shares of common stock and dilutive
potential common shares equivalents outstanding. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the potential dilution
of securities that could share in the earnings of an entity. The Company includes dilutive stock
options based on the treasury stock method. Due to the Companys reported net losses, potential
common share equivalents of 1,091 and zero, which consisted of options and restricted stock granted
to employees and deferred shares granted to directors, were anti-dilutive for the years ended
December 31, 2005 and 2004, respectively. The following table sets forth the computation of basic
earnings per share for the years ending December 31, 2006, 2005 and 2004:
F-20
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
12. EARNINGS PER SHARE (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Numerator net income |
|
$ |
19,994 |
|
|
$ |
(41,635 |
) |
|
$ |
(39,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
42,045 |
|
|
|
40,185 |
|
|
|
29,592 |
|
Dilutive impact of options, restricted and
deferred shares |
|
|
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive shares |
|
|
43,387 |
|
|
|
40,185 |
|
|
|
29,592 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.48 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.46 |
|
|
$ |
(1.04 |
) |
|
$ |
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
13. STOCK INCENTIVE PLANS
Under various plans, ACS Group, through the Compensation Committee of the Board of Directors,
may grant stock options, restricted stock, stock appreciation rights and other awards to officers,
employees and non-employee directors. At December 31, 2006, ACS Group has reserved a total of
10,060 (10.06 million) shares of authorized common stock for issuance under the plans. In general,
options under the plans vest ratably over three, four or five years and the plans terminate in 10
years. After the plans terminate, all shares granted under the plan, prior to its termination,
continue to vest under the terms of the grant when it was awarded.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
ACS Group has reserved 7,160 shares under this plan, which was adopted by the Company in
November 1999. At December 31, 2006, 8,551 equity instruments have been granted, 3,172 have been
forfeited, 3,292 have been exercised, and 1,781 shares are available for grant under the plan.
In August 2005, the Company began granting restricted stock in lieu of stock options as the
primary equity based incentive for executive and non-union represented employees. The time based
restricted stock awards have vesting terms that can range from three to five years with equal
annual vesting amounts. The performance based restricted stock awards cliff vest in five years and
have accelerated vesting terms of one third per year if certain profitability and capital
expenditure criteria are met. A long term incentive program (LTIP) also exists for executive
management. LTIP awards also provide compensation from January 1, 2005 and cliff vest in five years
with accelerated vesting in three years if cumulative three year profitability and capital
expenditure criteria are met. In 2006, the Company implemented a program to grant performance based
shares to union represented employees. Expense related to the union represented employee shares has
been accrued and shares are expected to be granted in the first quarter of 2007. During 2006, the
Company recognized compensation expense of $5,890 for all restricted stock awards, net of estimated
forfeitures, over the applicable vesting period based on the market value at the date of grant,
discounted for estimated dividend payments that do not accrue to the employee during the vesting
period. Additionally, $778 was recognized as compensation expense for stock options.
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
This plan was also adopted by ACS Group in November 1999 and will terminate December 31, 2009.
The Company has reserved 1,550 shares under this plan. At December 31, 2006, 864 shares are
available for issuance and sale. All ACS Group employees and all of the employees of designated
subsidiaries generally will be eligible to participate in the purchase plan, other than employees
whose customary employment is 20 hours or less per week, is not more than five months in a calendar
year, or who are ineligible to participate due to restrictions under the Internal Revenue Code.
F-21
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
13. STOCK INCENTIVE PLANS (Continued)
A participant in the purchase plan may authorize regular salary deductions up to of a maximum
of 15% and a minimum of 1% of base compensation. The fair market value of shares which may be
purchased by any employee during any calendar year may not exceed $25. The amounts so deducted and
contributed are applied to the purchase of shares of common stock at 85% of the lesser of the fair
market value of such shares on the date of purchase or on the offering date for such offering
period. The offering dates are January 1 and July 1 of each purchase plan year, and each offering
period will consist of one six-month purchase period. The first offering period under the plan
commenced on January 1, 2000. Shares are purchased on the open market or issued from authorized but
un-issued shares on behalf of participating employees on the last business days of June and
December for each purchase plan year and each such participant has the rights of a stockholder with
respect to such shares. During the year ended December 31, 2006, approximately 24% of eligible
employees elected to participate in the plan. During 2006, 2005 and 2004, 59, 56 and 73 shares were
issued, respectively. In 2005, we recognized compensation expense of $133 upon adoption and in 2006
we recognized compensation expense of $202.
2003 Options for Officer Inducement Grant
During 2003, the Companys Board of Directors awarded 1,000 options as an inducement grant in
hiring the Companys Chief Executive Officer. As of December 31, 2006, 400 options have been
exercised/converted and 600 are currently outstanding.
ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan
The non-employee director stock compensation plan was adopted by ACS Group in November 1999.
ACS Group has reserved 350 shares under this plan. At December 31, 2006, 191 shares have been
awarded and 159 shares are available for grant under the plan. In 2006, 2005 and 2004, the plan
required directors to receive not less than 50%, 50% and 25%, respectively, of their annual
retainer in the form of ACS Groups stock. Directors were permitted to elect up to 100% of their
annual retainer in the form of ACS Groups stock. Once a year, the Directors elect the method by
which they receive their stock (issued or deferred). During the year ended December 31, 2006, 19
shares under the plan were awarded to directors, of which 8 were deferred until termination of
service.
Fair Value Disclosures Prior to SFAS No. 123(R) Adoption
Stock-based compensation for the period prior to January 1, 2005, was determined using the
intrinsic value method. See Note 1, Description of the Company and Significant Accounting
Policies for the illustration of the effect on net income and earnings per share if the fair value
based method had been applied to all outstanding and unvested awards in periods prior to January 1,
2005.
SFAS No. 123(R), Share-Based Payment
Total compensation cost for share-based payments was $6,870 and $2,800 for the twelve months
ended December 31, 2006 and 2005, respectively. The Company did not recognize a tax benefit from
the stock compensation expense because the Company considers it more likely than not that the
related deferred tax assets, which have been reduced by a full valuation allowance, will not be
realized.
There were no options granted for the twelve months ended December 31, 2006 and seven options
granted for the same period in 2005. There were 760 and 724 restricted stock grants for the twelve
months ended December 31, 2006 and 2005, respectively. The following table describes the
assumptions used for valuation of equity instruments awarded during the twelve months ended
December 31, 2006, 2005 and 2004.
F-22
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
13. STOCK INCENTIVE PLANS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
Stock Options: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
|
|
|
|
4.21 |
% |
|
|
3.69 |
% |
Dividend yield |
|
|
|
|
|
|
8.65 |
% |
|
|
3.09 |
% |
Expected volatility factor |
|
|
|
|
|
|
40.17 |
% |
|
|
40.80 |
% |
Expected option life (years) |
|
|
|
|
|
|
6.0 |
|
|
|
6.4 |
|
Expected forfeiture rate |
|
|
|
|
|
|
2.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk free rate |
|
|
5.25 |
% |
|
|
3.50 |
% |
|
|
|
|
Dividend yield |
|
|
5.81 |
% |
|
|
8.65 |
% |
|
|
|
|
Expected forfeiture rate |
|
|
2.16 |
% |
|
|
2.00 |
% |
|
|
|
|
Options and Restricted Stock Outstanding
Stock Options
Proceeds from the exercise of stock options for the year ended December 31, 2006 were $2,217.
The Company chose to remit $210 of these proceeds for payroll taxes in exchange for shares
surrendered back to the Company. Information on outstanding options under the plan for the year
ended December 31, 2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Value |
|
Outstanding, January 1 |
|
|
1,981 |
|
|
$ |
5.56 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(460 |
) |
|
|
6.05 |
|
|
|
|
|
|
|
|
|
Canceled or expired |
|
|
(27 |
) |
|
|
8.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,494 |
|
|
|
5.35 |
|
|
|
6.61 |
|
|
$ |
14,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
350 |
|
|
$ |
6.95 |
|
|
|
6.47 |
|
|
|
2,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select information on equity instruments under the plan for the years ended December 31, 2006,
2005and 2004 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Weighted-average grant-date fair value of equity instruments granted |
|
$ |
9.81 |
|
|
$ |
8.63 |
|
|
$ |
6.09 |
|
Total fair value of shares vested during the period |
|
$ |
2,762 |
|
|
$ |
1,089 |
|
|
$ |
962 |
|
Total intrinsic value of options exercised |
|
$ |
2,927 |
|
|
$ |
5,076 |
|
|
$ |
1,479 |
|
F-23
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
13. STOCK INCENTIVE PLANS (Continued)
Restricted Stock
Restricted stock grants outstanding, all of which are non-vested at December 31, 2006, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Number of |
|
Fair |
|
|
Shares |
|
Value |
Outstanding at January 1, 2006 |
|
|
724 |
|
|
$ |
8.70 |
|
Granted |
|
|
760 |
|
|
|
9.81 |
|
Vested |
|
|
(195 |
) |
|
|
8.70 |
|
Canceled or expired |
|
|
(97 |
) |
|
|
9.24 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,192 |
|
|
|
9.22 |
|
|
|
|
|
|
|
|
|
|
Unamortized stock-based payment and the weighted average expense period at December 31, 2006,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Period |
|
|
|
Unamortized |
|
|
to Expense |
|
|
|
Expense |
|
|
(years) |
|
Stock options |
|
$ |
594 |
|
|
|
0.9 |
|
Restricted stock |
|
|
7,149 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
$ |
7,743 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
14. RETIREMENT PLANS
Pension benefits for substantially all of the Companys employees are provided through the
Alaska Electrical Pension Plan (AEPP). The Company pays a contractual hourly amount based on
employee classification or base compensation. As a multi-employer defined benefit plan, the
accumulated benefits and plan assets are not determined for or allocated separately to the
individual employer. The Companys portion of the plans pension cost for 2006, 2005 and 2004 was
$11,892, $12,203 and $12,342, respectively.
The Company also provides a 401(k) retirement savings plan covering substantially all of its
employees. The plan allows for discretionary contributions as determined by the Board of Directors,
subject to Internal Revenue Code limitations. There was no matching contribution for 2006, 2005 or
2004.
The Company also has a separate defined benefit plan that covers certain employees previously
employed by Century Telephone Enterprise, Inc. (CenturyTel Plan). This plan was transferred to
the Company in connection with the acquisition of CenturyTels Alaska Properties. Existing plan
assets and liabilities of the CenturyTel Plan were transferred to the ACS Retirement Plan on
September 1, 1999. Accrued benefits under the ACS Retirement Plan were determined in accordance
with the provisions of the CenturyTel Plan. Upon completion of the transfer to the Company, covered
employees ceased to accrue benefits under the plan. On November 1, 2000, the ACS Retirement Plan
was amended to conform early retirement reduction factors and various other terms to those provided
by the AEPP. As a result of this amendment, and under the prior provisions of FASB Statement No.
87, Employers Accounting for Pensions, prior service cost of $1,992 was recorded and will be
amortized over the expected service life of the plan participants at the date of the amendment. The
Company uses the traditional unit credit method for the determination of pension cost for financial
reporting and funding purposes and complies with the funding requirements under the Employee
Retirement Income Security Act of 1974 (ERISA). The plan is not adequately funded under ERISA at
December 31, 2006, and management is considering a contribution of $300 to $700 in 2007 for the
2006 plan year. The Company uses a December 31 measurement date for the plan. The Companys
applicable tax rate for 2006 and 2007 is 40%. All deferred tax assets have been evaluated and
$120,478 valuation allowance has been recorded as of December 31, 2006.
F-24
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
14. RETIREMENT PLANS (Continued)
In April 2005, ACS Group registered 250 shares of the Companys common stock under the Alaska
Communications Systems Retirement Plan for the purpose of funding its retirement plans. On April
14, 2005, ACS Group funded the ACS Retirement Plan for the 2004 plan year with approximately $600
by transferring 62 shares in lieu of cash. During May and June 2005, the plan administrators sold
the stock resulting in net proceeds after commissions of $581. In March and September 2006, the
Company funded the ACS Retirement Plan for the 2005 plan year with additional contributions of $600
and $850, respectively.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans. This statement requires an employer to recognize in
its statement of financial position the over-funded or under-funded status of a defined benefit
postretirement plan measured as the difference between the fair value of a plans assets and the
benefit obligation. Employers must also recognize as a component of other comprehensive income, net
of tax, the actuarial gains and losses and the prior service costs and credits that arise during
the period. The Statement was effective for the Company on December 31, 2006. The following is a
calculation of the funded status of the ACS Retirement Plan using beginning and ending balances for
2006 and 2005 for the projected benefit obligation and the plan assets:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
13,574 |
|
|
$ |
13,327 |
|
Interest cost |
|
|
762 |
|
|
|
757 |
|
Actuarial (gain) loss |
|
|
(41 |
) |
|
|
105 |
|
Benefits paid |
|
|
(691 |
) |
|
|
(615 |
) |
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
|
13,604 |
|
|
|
13,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
10,607 |
|
|
|
10,069 |
|
Actual return on plan assets |
|
|
1,347 |
|
|
|
553 |
|
Employer contribution |
|
|
1,450 |
|
|
|
600 |
|
Benefits paid |
|
|
(691 |
) |
|
|
(615 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
12,713 |
|
|
|
10,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(891 |
) |
|
$ |
(2,967 |
) |
|
|
|
|
|
|
|
The following table represents the net periodic pension expense for the ACS Retirement
Plan for 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Interest cost |
|
$ |
762 |
|
|
$ |
757 |
|
|
$ |
748 |
|
Expected return on plan assets |
|
|
(858 |
) |
|
|
(813 |
) |
|
|
(754 |
) |
Amortization of loss |
|
|
444 |
|
|
|
474 |
|
|
|
502 |
|
Amortization of prior service cost |
|
|
203 |
|
|
|
203 |
|
|
|
203 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
551 |
|
|
$ |
621 |
|
|
$ |
699 |
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Company expects amortization of prior service costs of $203 and amortization
of net gains and losses of $308.
F-25
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
14. RETIREMENT PLANS (Continued)
The following table reconciles the net amounts recognized in the balance sheet at December 31,
2006 and 2005. The presentation discloses the net effect of the implementation as a reduction in
our pension liability now reflecting only the unfunded balance, an elimination of our pension
assets and the movement of unfunded prior service costs to accumulated other comprehensive
income/loss.
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Unrecognized prior service cost: |
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
|
|
|
$ |
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension asset: |
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
|
|
|
|
942 |
|
Funded status |
|
|
|
|
|
|
(2,967 |
) |
Unrecognized net loss |
|
|
|
|
|
|
4,422 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional pension liability: |
|
|
|
|
|
|
|
|
Funded status |
|
|
(891 |
) |
|
|
(2,967 |
) |
Prepaid benefit cost |
|
|
|
|
|
|
(2,397 |
) |
|
|
|
|
|
|
|
|
|
$ |
(891 |
) |
|
$ |
(5,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Accumulated other comprehensive income/loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
738 |
|
|
|
|
|
|
|
|
|
Net loss |
|
|
3,450 |
|
|
|
4,422 |
|
|
|
4,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,188 |
|
|
$ |
4,422 |
|
|
$ |
4,531 |
|
|
|
|
|
|
|
|
|
|
|
The assumptions used to account for the plan as of December 31, 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
Discount rate for benefit obligation |
|
|
5.89 |
% |
|
|
5.79 |
% |
Discount rate for pension expense |
|
|
5.79 |
% |
|
|
5.75 |
% |
Expected long-term rate of return on assets |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
0.00 |
% |
|
|
0.00 |
% |
The discount rates were independently calculated by a consulting firm using a proprietary
yield curve based on the top 30% of the universe of bonds included in the bond pool. The expected
long-term rate of return on assets rate is the best estimate of future expected return for the
asset pool, given the expected returns and allocation targets for the various classes of assets.
The plans asset allocations at December 31, 2006 and 2005, by asset category are as follows:
|
|
|
|
|
|
|
|
|
Asset Category |
|
2006 |
|
2005 |
Equity securities* |
|
|
64 |
% |
|
|
70 |
% |
Debt securities* |
|
|
30 |
% |
|
|
27 |
% |
Other/Cash |
|
|
6 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Note that mutual funds that may contain both stock and bonds may be included in these
categories. |
The fundamental investment objective of the plan is to generate a consistent total investment
return sufficient to pay plan benefits to retired employees, while minimizing the long term cost to
the Company. The long-term (10 year and beyond) plan asset growth objective is to achieve a rate of
return that exceeds the actuarial interest assumption after fees and expenses.
F-26
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
14. RETIREMENT PLANS (Continued)
Because of the Companys long-term investment objectives, the Plan administrator is directed
to resist being reactive to short-term capital market developments and to maintain an asset mix
that is continuously rebalanced to adhere to the plan investment mix guidelines. The Plans
investment goal is to protect the assets longer term purchasing power. The Plans assets are
managed in a manner that emphasizes a higher exposure to equity markets versus other asset classes.
It is expected that such a strategy will provide a higher probability of meeting the plans
actuarial rate of return assumption over time.
Based on risk and return history for capital markets along with asset allocation risk and
return projections, the following asset allocation guidelines were developed for the plan:
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
Maximum |
Equity securities |
|
|
40 |
% |
|
|
100 |
% |
Fixed income |
|
|
20 |
% |
|
|
60 |
% |
Cash equivalents |
|
|
0 |
% |
|
|
10 |
% |
The benefits expected to be paid in the each of the next five years, and in the aggregate
for the five fiscal years thereafter, are as follows:
|
|
|
|
2007 |
|
$ |
713 |
2008 |
|
|
761 |
2009 |
|
|
807 |
2010 |
|
|
849 |
2011 |
|
|
871 |
2012-2016 |
|
|
4,744 |
The Company also has a separate executive post retirement health benefit plan. The Alaska
Communications Systems Executive Retiree Health Benefit Plan (The ACS Health Plan) was adopted by
the Company in November 2001 and amended in October 2002. The ACS Health Plan covers a select group
of former management employees. The ACS Health Plan provides a graded subsidy for medical, dental,
and vision coverage. The Compensation Committee of the Board of Directors decided to terminate the
ACS Health Plan in January 2004. In February 2005, the Board adopted a resolution to exclude a
former employee from the plan, causing a $90 decrease in the accumulated post retirement benefit.
Three people qualified under the plan are eligible for future benefits, but the plan is closed to
future participants.
The Company uses the projected unit credit method for the determination of post retirement
health cost for financial reporting and funding purposes and complies with the funding requirements
under ERISA. The Company made a contribution of $51 to the ACS Health Plan during 2004. No
contribution was made for 2006, or 2005 and no contribution is expected in 2007. The Company uses a
December 31 measurement date for the plan.
The following is a reconciliation of the beginning and ending balances for 2006 and 2005 for
the projected benefit obligation and the plan assets for the ACS Health Plan:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Change in accumulated postretirement benefit obligation: |
|
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation at beginning of the year |
|
$ |
171 |
|
|
$ |
199 |
|
Interest cost |
|
|
10 |
|
|
|
11 |
|
Actuarial (gain)/loss |
|
|
(12 |
) |
|
|
(38 |
) |
Benefits paid |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Accumulated postretirement benefit obligation at end of the year |
|
$ |
168 |
|
|
$ |
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
205 |
|
|
$ |
199 |
|
Actual return on plan assets |
|
|
14 |
|
|
|
7 |
|
Benefits paid |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
218 |
|
|
$ |
205 |
|
|
|
|
|
|
|
|
F-27
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
14. RETIREMENT PLANS (Continued)
The following represents the net periodic postretirement benefit expense for the ACS Health
Plan for 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
6 |
|
Interest cost |
|
|
10 |
|
|
|
11 |
|
|
|
16 |
|
Expected return on plan assets |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(11 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
7 |
|
Curtailment loss |
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit expense |
|
$ |
(2 |
) |
|
$ |
|
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
The following table represents the funded status of the ACS Health Plan at December 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Accumulated postretirement benefit obligation |
|
$ |
(168 |
) |
|
$ |
(171 |
) |
Plan assets at fair value |
|
|
218 |
|
|
|
205 |
|
|
|
|
|
|
|
|
Funded status |
|
|
50 |
|
|
|
34 |
|
Unrecognized net (gain) or loss |
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
Prepaid (accrued) benefit costs |
|
$ |
50 |
|
|
$ |
(25 |
) |
|
|
|
|
|
|
|
The Company expects to incur no net periodic costs associated with this plan in 2007. The
actuarial assumptions used to account for the ACS Health Plan as of December 31, 2006 and 2005 is
an assumed discount rate of 5.89% and 5.79% for projected benefit obligation and an assumed
discount rate of 5.79% and 5.75% for plan expense, respectively, and an expected long term rate of
return on plan assets of 6.00% and 6.00%, respectively. The discount rate is based on Moodys AA
Corporate bonds. The expected long-term rate of return on assets is the best estimate of future
expected return for the asset pool, given the expected returns and allocation targets for the
various classes of assets.
For measurement purposes, the assumed annual rates of increase in health care costs are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Pre 65 premiums |
|
Post 65 premiums |
|
1 |
|
|
|
9.00 |
% |
|
|
7.00 |
% |
|
2 |
|
|
|
8.00 |
% |
|
|
7.00 |
% |
|
3 |
|
|
|
7.00 |
% |
|
|
7.00 |
% |
|
4 |
|
|
|
7.00 |
% |
|
|
7.00 |
% |
5 and thereafter |
|
|
7.00 |
% |
|
|
7.00 |
% |
Assumed health care cost trend rates have a significant effect on the amounts reported for the
ACS Health Plan. A one-percentage-point change in assumed health care cost trend rates
would have the following effects for 2006:
|
|
|
|
|
|
|
|
|
|
|
+1% |
|
-1% |
Effect on total of service and interest cost components |
|
|
|
|
|
|
(1 |
) |
Effect on accumulated postretirement benefit obligation |
|
|
8 |
|
|
|
(10 |
) |
F-28
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
14. RETIREMENT PLANS (Continued)
The ACS Health Plans asset allocations at December 31, 2006 and 2005, by asset category, are
as follows:
|
|
|
|
|
|
|
|
|
Asset Category |
|
2006 |
|
2005 |
Equity securities* |
|
|
34 |
% |
|
|
33 |
% |
Debt securities* |
|
|
59 |
% |
|
|
63 |
% |
Other/Cash |
|
|
7 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Note that mutual funds that may contain both stock and bonds may be included in these
categories. |
The fundamental investment objective of the plan is to realize an annual total investment
return consistent with the conservative risk tolerance plan dictated by the Company. The investment
profile of the plan emphasizes liquidity and income, some capital stock investment and some
fluctuation of investment return. It is anticipated that the investment manager will achieve this
objective by investing the accounts assets in mutual funds. The portfolio may hold common stock,
fixed income securities, money market instruments and U.S. Treasury obligations.
Based on risk and return history for capital markets along with asset allocation risk and
return projections, the following asset allocation guidelines were developed for the plan:
|
|
|
|
|
|
|
Target |
Equity securities |
|
|
30 |
% |
Fixed income |
|
|
60 |
% |
Other/cash |
|
|
10 |
% |
The benefits expected to be paid in the each of the next five years, and in the aggregate
for the five fiscal years thereafter are as follows:
|
|
|
|
2007 |
|
$ |
16 |
2008 |
|
|
16 |
2009 |
|
|
16 |
2010 |
|
|
16 |
2011 |
|
|
16 |
2012-2016 |
|
|
58 |
15. BUSINESS SEGMENTS
The Company has four reportable segments: local telephone, wireless, Internet and
interexchange. Local telephone provides landline telecommunications services and consists of local
telephone service, network access and deregulated and other revenue; wireless provides wireless
telecommunications service; Internet provides Internet service and advanced IP based private
networks and interexchange provides switched and dedicated long distance services. Each reportable
segment is a strategic business and offers different services than those offered by the other
segments. The Company evaluates the performance of its segments based on operating income (loss)
and other quantitative factors related to the overall contribution of individual products and
services to total Company performance.
The Company incurs interest expense, interest income, equity in earnings of investments and
other operating and non-operating income and expense at the corporate level which are not allocated
to the business segments, or 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 either the Company or 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.
F-29
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
15. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the
year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone |
|
Wireless |
|
Internet |
|
Interexchange |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
192,062 |
|
|
$ |
115,627 |
|
|
$ |
25,473 |
|
|
$ |
25,317 |
|
|
$ |
10,702 |
|
|
$ |
(19,364 |
) |
|
$ |
349,817 |
|
Depreciation and amortization |
|
|
43,464 |
|
|
|
11,503 |
|
|
|
3,669 |
|
|
|
223 |
|
|
|
4,400 |
|
|
|
|
|
|
|
63,259 |
|
Operating income (loss) |
|
|
9,810 |
|
|
|
38,034 |
|
|
|
(8,851 |
) |
|
|
7,010 |
|
|
|
4,992 |
|
|
|
|
|
|
|
50,995 |
|
Interest expense |
|
|
(419 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
(177 |
) |
|
|
(30,503 |
) |
|
|
|
|
|
|
(31,103 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,650 |
) |
|
|
|
|
|
|
(9,650 |
) |
Interest income |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,834 |
|
|
|
|
|
|
|
1,835 |
|
Income tax (expense) benefit |
|
|
(3,821 |
) |
|
|
(15,578 |
) |
|
|
|
|
|
|
|
|
|
|
18,956 |
|
|
|
|
|
|
|
(443 |
) |
Net income (loss) |
|
|
5,571 |
|
|
|
22,451 |
|
|
|
(8,851 |
) |
|
|
6,833 |
|
|
|
(6,010 |
) |
|
|
|
|
|
|
19,994 |
|
Total assets |
|
|
402,331 |
|
|
|
146,650 |
|
|
|
37,614 |
|
|
|
25,563 |
|
|
|
5,124 |
|
|
|
(54,961 |
) |
|
|
562,321 |
|
Capital expenditures |
|
|
29,958 |
|
|
|
14,341 |
|
|
|
6,598 |
|
|
|
2,315 |
|
|
|
6,149 |
|
|
|
|
|
|
|
59,361 |
|
Operating revenue disclosed above includes inter-segment operating revenue of $52,178 of which
$19,364 is eliminated. By segment, intercompany revenue balances are as follows: local telephone,
$29,265 of which $19 is eliminated; wireless, $2,632 of which $43 is eliminated; Internet, $465 of
which $252 is eliminated; interexchange, $9,129 of which $8,363 is eliminated; and all other,
$10,687 of which $10,687 is eliminated. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above. Also eliminated above, is
$54,961 of Internet intercompany payable balances which are recorded in the consolidated statements
net of affiliate receivables.
The following table illustrates selected financial data for each segment as of and for the
year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone |
|
Wireless |
|
Internet |
|
Interexchange |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
202,845 |
|
|
$ |
86,279 |
|
|
$ |
21,924 |
|
|
$ |
21,434 |
|
|
$ |
22,624 |
|
|
$ |
(28,297 |
) |
|
$ |
326,809 |
|
Depreciation and amortization |
|
|
52,655 |
|
|
|
10,521 |
|
|
|
3,950 |
|
|
|
301 |
|
|
|
15,392 |
|
|
|
|
|
|
|
82,819 |
|
Operating income (loss) |
|
|
3,209 |
|
|
|
23,577 |
|
|
|
(6,427 |
) |
|
|
284 |
|
|
|
6,498 |
|
|
|
|
|
|
|
27,141 |
|
Interest expense |
|
|
(454 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(182 |
) |
|
|
(35,256 |
) |
|
|
|
|
|
|
(35,894 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,882 |
) |
|
|
|
|
|
|
(34,882 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,253 |
|
|
|
|
|
|
|
2,253 |
|
Income tax (expense) benefit |
|
|
(1,267 |
) |
|
|
(9,694 |
) |
|
|
|
|
|
|
|
|
|
|
10,961 |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,488 |
|
|
|
13,861 |
|
|
|
(6,427 |
) |
|
|
102 |
|
|
|
(50,659 |
) |
|
|
|
|
|
|
(41,635 |
) |
Total assets |
|
|
423,815 |
|
|
|
127,777 |
|
|
|
35,226 |
|
|
|
21,847 |
|
|
|
11,668 |
|
|
|
(43,920 |
) |
|
|
576,413 |
|
Capital expenditures |
|
|
30,173 |
|
|
|
12,148 |
|
|
|
15,296 |
|
|
|
455 |
|
|
|
6,325 |
|
|
|
|
|
|
|
64,397 |
|
Operating revenue disclosed above includes inter-segment operating revenue of $60,516 of which
$28,297 is eliminated. By segment, intercompany revenue balances are as follows: local telephone,
$28,782 of which $17 is eliminated; wireless, $2,524 of which $44 is eliminated; Internet, $453 of
which $252 is eliminated; interexchange, $6,147 of which $5,374 is eliminated; and all other,
$22,610 of which $22,610 is eliminated. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above. Also eliminated above, is
$1,644 and $42,276 of wireless and Internet intercompany payable balances which are recorded in the
consolidated statements net of affiliate receivables.
F-30
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
15. BUSINESS SEGMENTS (Continued)
The following table illustrates selected financial data for each segment as of and for the
year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone |
|
Wireless |
|
Internet |
|
Interexchange |
|
All Other |
|
Eliminations |
|
Total |
Operating revenues |
|
$ |
211,169 |
|
|
$ |
56,743 |
|
|
$ |
20,280 |
|
|
$ |
17,067 |
|
|
$ |
23,097 |
|
|
$ |
(25,649 |
) |
|
$ |
302,707 |
|
Depreciation and amortization |
|
|
52,368 |
|
|
|
7,480 |
|
|
|
3,925 |
|
|
|
430 |
|
|
|
14,184 |
|
|
|
|
|
|
|
78,387 |
|
Operating income (loss) |
|
|
13,298 |
|
|
|
4,257 |
|
|
|
(10,304 |
) |
|
|
(3,402 |
) |
|
|
6,269 |
|
|
|
|
|
|
|
10,118 |
|
Interest expense |
|
|
(311 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
(187 |
) |
|
|
(47,130 |
) |
|
|
|
|
|
|
(47,641 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,423 |
) |
|
|
|
|
|
|
(3,423 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,633 |
|
|
|
|
|
|
|
1,633 |
|
Income tax (expense) benefit |
|
|
(5,254 |
) |
|
|
(1,854 |
) |
|
|
|
|
|
|
|
|
|
|
7,327 |
|
|
|
|
|
|
|
219 |
|
Net income (loss) |
|
|
7,733 |
|
|
|
2,390 |
|
|
|
(10,304 |
) |
|
|
(3,589 |
) |
|
|
(35,524 |
) |
|
|
|
|
|
|
(39,294 |
) |
Total assets |
|
|
482,062 |
|
|
|
120,053 |
|
|
|
27,628 |
|
|
|
22,695 |
|
|
|
16,423 |
|
|
|
(31,734 |
) |
|
|
637,127 |
|
Capital expenditures |
|
|
26,426 |
|
|
|
13,935 |
|
|
|
4,654 |
|
|
|
5 |
|
|
|
6,402 |
|
|
|
|
|
|
|
51,422 |
|
Operating revenue disclosed above includes inter-segment operating revenue of $53,576 of which
$25,649 is eliminated. By segment, intercompany revenue balances are as follows: local telephone,
$25,612, of which $38 is eliminated; wireless, $2,046 of which $49 is eliminated; Internet, $210,
of which $107 is eliminated; interexchange, $2,667 of which $2,414 is eliminated; and all other,
$23,041 of which $23,041 is eliminated. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above. Also eliminated above, is
$7,029 and $24,705 of wireless and Internet intercompany payable balances which are recorded in the
consolidated statements net of affiliate receivables.
16. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Fox Paine & Company, LLC (Fox Paine), previously ACS Groups largest stockholder, was
entitled to receive an annual management fee in the amount of 1% of the Companys net income before
interest expense, interest income, income taxes, depreciation and amortization and equity in
earnings (loss) of investments, calculated without regard to the fee pursuant to an agreement dated
May 14, 1999. The annual management fee obligation to Fox Paine was terminated for periods
beginning after December 31, 2004. A $2,700 transaction fee was paid to Fox Paine in February 2005
in connection with assistance rendered in structuring a stock offering and refinancing transaction
that the Company completed during the first quarter of 2005. The transaction fee agreement was
approved by the Companys board of directors. The management fee expense for the years ended
December 31, 2005 and 2004 was $38 and $943, respectively.
On September 19, 2003, Fox Paine entered into a consulting agreement with a now retired
officer of the Company. The consulting term began on January 1, 2004, continued for one year, and
was terminated on December 31, 2004. During the consulting term, the retired officer advised Fox
Paine on and evaluated potential opportunities in the telecommunications industry, and Fox Paine
paid the former officer a monthly fee of $20 for those services.
During 2003, the Company spun off its Directory Business to ACS Media LLC and subsequently
sold 99.9% of its interest in ACS Media LLC to the public through a Canadian income fund. As part
of that transaction, the Company entered into several long-term contracts with ACS Media LLC,
including a 50-year publishing agreement, a 50-year license agreement, and a 45-year non-compete
agreement and a 10-year billing and collection agreement. At December 31, 2006, the Company had
recorded in Accounts payable-affiliates, $2,942 due to ACS Media LLC under these contracts,
primarily under the billing and collection agreement. In November 2006, ACS Media LLC was sold to
new owners and taken private. At December 31, 2006, the Company had a right to minority
representation of one manager of the permitted nine managers of ACS Media LLC as long as its
contracts with ACS Media LLC were in effect. Leonard A. Steinberg, an officer of the Company, was a
manager of ACS Media LLC at December 31, 2006. Subsequent to year end, the Company sold its
remaining interest to the new owners and relinquished its right to be a manager of ACS Media LLC
for cash of $162 and other valuable consideration.
F-31
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
16. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (Continued)
On September 14, 2003, the Company entered into an agreement with a retiring officer to
reacquire 267 shares of the Companys stock owned by the officer in January 2004, at a purchase
price per share equal to the highest average closing price of a share of the Companys stock during
any 5-consecutive day trading period in January 2004. The officer delivered the shares to the
Company in 2004, and the Company made repurchase payments totaling $1,262 to the officer in four
equal quarterly installments commencing on March 31, 2004.
On May 14, 1999, the Company entered into a stockholders agreement with Fox Paine Capital
Fund, investors affiliated with Fox Paine Capital Fund, and several non-fund investors, including
co-investors and some of the Companys former officers. Under the stockholders agreement, subject
to limited exceptions, Fox Paine Capital Fund and its affiliates, as a group, could make up to six
demands for registration under the Securities Act of their shares of common stock, and the Company
was obligated to bear the fees and expenses of such registration and offering other than
underwriting discounts.
On November 29, 2005, the Company filed a preliminary prospectus supplement relating to a
proposed offering of 10,000 shares of its common stock by Fox Paine. This offering was completed on
December 7, 2005, after which Fox Paine beneficially owned 22.8% of our outstanding common stock.
The Company incurred approximately $500 in transaction fees associated with the offering.
On March 10, 2006, the Company entered into an Underwriting Agreement, dated March 10, 2006,
among the Company, certain affiliates of Fox Paine, LLC (Fox Paine), and RBC Capital Markets
Corporation, as the underwriter, for the sale by Fox Paine of 9,549 shares of the Companys common
stock, representing substantially all of Fox Paines remaining holdings of the Companys common
stock. The transaction was priced at $11.00 per share, and on March 15, 2006, the transaction
closed. The Company did not receive any proceeds from the sale of these shares. The Company
incurred $188 in transaction fees associated with the offering.
17. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has used derivative financial instruments to partially hedge variable interest
transactions in the past and expects to do so in the future, when appropriate, for managing
interest rate risk. To the extent that derivative financial instruments are outstanding as of a
period end, the fair value of those instruments, represented by the estimated amount the Company
would receive or pay to terminate the agreement, is reported on the balance sheet.
On February 1, 2005 and March 21, 2005, the Company entered into floating-to-fixed interest
rate swaps with total notional amounts of $135,000, and $85,000, respectively, which swap the
floating interest rate on a portion of the term loan borrowings under the 2005 senior credit
facility for a five year term at a fixed rate of 6.13% and 6.50%, per year, respectively, inclusive
of a 2.00% premium over LIBOR. On July 15, 2005, the Company entered into a six year $40,000
notional amount fixed to floating swap arrangement, effectively fixing the rate on the new term
loan at 6.43% per year inclusive of a 2.00% premium over LIBOR. In February 2006, the Company
renegotiated the 2005 senior secured credit facility from LIBOR plus 2.00% to LIBOR plus 1.75%,
reducing the rate for the credit facility by 0.25%.
In February 2006, the Company and ACS Holdings executed $115,000 and $52,900 notional amount
floating-to-fixed interest rate swap agreements related to its $375,000 term loan under its 2005
senior secured bank credit facility. The swaps effectively fix the LIBOR rate on $115,000 and
$52,900 principal amount of senior secured bank debt at 6.71% and 6.75%, inclusive of a 1.75%
premium over LIBOR, through December 2011.
On December 31, 2005 and 2006, all swaps were effective. The swaps have been marked to market
with $5,754 recorded at December 31, 2006 as other comprehensive income on the Companys
Consolidated Statement of Stockholders Equity (Deficit) and Comprehensive Income (Loss) with a
corresponding asset recorded in Deferred charges on the Consolidated Balance Sheet.
F-32
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts receivable and payable, and other
short-term monetary assets and liabilities approximate carrying values due to their short-term
nature. The fair value for the Companys 2006 senior credit facility, senior unsecured notes,
capital leases and other long-term obligations were estimated based on quoted market prices. The
Company held in-the-money interest rate swaps at December 31, 2006 that were marked to market. The
carrying value of $5,754 and fair value are equal on that date.
The following table summarizes the Companys carrying values and fair values of the debt
components of its financial instruments at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
New senior credit facility term loan |
|
$ |
427,900 |
|
|
$ |
430,040 |
|
9 7/8% senior unsecured notes due 2011 |
|
|
3,957 |
|
|
|
4,254 |
|
Capital leases and other long-term obligations |
|
|
6,356 |
|
|
|
6,356 |
|
|
|
|
|
|
|
|
|
|
$ |
438,213 |
|
|
$ |
440,650 |
|
|
|
|
|
|
|
|
The following table summarizes the Companys carrying values and fair values of the debt
components of its financial instruments at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
New senior credit facility term loan |
|
$ |
375,000 |
|
|
$ |
378,281 |
|
9 7/8% senior unsecured notes due 2011 |
|
|
63,360 |
|
|
|
69,221 |
|
Capital leases and other long-term obligations |
|
|
7,218 |
|
|
|
7,218 |
|
|
|
|
|
|
|
|
|
|
$ |
445,578 |
|
|
$ |
454,720 |
|
|
|
|
|
|
|
|
F-33
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
ACS Group and ACS Holdings subsidiaries are guarantors under ACS Holdings 9
7/8/% senior unsecured notes. All ACS Groups and Holdings subsidiaries (the Combined
Subsidiaries) are 100% owned. The guarantees are full and unconditional. In addition, all
guarantees are joint and several. Accordingly, the interim condensed consolidating financial
statements are presented below:
Condensed Consolidating
Balance Sheet
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
142 |
|
|
$ |
36,718 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
36,860 |
|
Restricted cash |
|
|
|
|
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
1,700 |
|
Short term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable-trade, net |
|
|
17,557 |
|
|
|
22,244 |
|
|
|
|
|
|
|
|
|
|
|
39,801 |
|
Accounts receivable-affiliates |
|
|
34,215 |
|
|
|
(44,940 |
) |
|
|
10,725 |
|
|
|
|
|
|
|
|
|
Materials and supplies |
|
|
7,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,977 |
|
Prepayments and other current assets |
|
|
1,598 |
|
|
|
1,916 |
|
|
|
|
|
|
|
|
|
|
|
3,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
61,489 |
|
|
|
17,638 |
|
|
|
10,725 |
|
|
|
|
|
|
|
89,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
10 |
|
|
|
380,966 |
|
|
|
(35,381 |
) |
|
|
(345,585 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,050,926 |
|
|
|
113,524 |
|
|
|
|
|
|
|
|
|
|
|
1,164,450 |
|
Less: accumulated depreciation and amortization |
|
|
691,630 |
|
|
|
76,277 |
|
|
|
|
|
|
|
|
|
|
|
767,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
359,296 |
|
|
|
37,247 |
|
|
|
|
|
|
|
|
|
|
|
396,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,403 |
|
|
|
38,403 |
|
Intangible assets |
|
|
21,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,604 |
|
Debt issuance costs |
|
|
|
|
|
|
9,437 |
|
|
|
|
|
|
|
|
|
|
|
9,437 |
|
Deferred charges and other assets |
|
|
397 |
|
|
|
6,075 |
|
|
|
|
|
|
|
|
|
|
|
6,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
442,796 |
|
|
$ |
451,363 |
|
|
$ |
(24,656 |
) |
|
$ |
(307,182 |
) |
|
$ |
562,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
627 |
|
|
$ |
398 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,025 |
|
Accounts payable-affiliates |
|
|
2,845 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
2,942 |
|
Accounts payable, accrued and other current liabilities |
|
|
9,872 |
|
|
|
38,866 |
|
|
|
33 |
|
|
|
13,536 |
|
|
|
62,307 |
|
Advance billings and customer deposits |
|
|
10,665 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
10,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
24,009 |
|
|
|
39,363 |
|
|
|
33 |
|
|
|
13,536 |
|
|
|
76,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
|
3,046 |
|
|
|
434,142 |
|
|
|
|
|
|
|
|
|
|
|
437,188 |
|
Deferred income taxes |
|
|
(12,348 |
) |
|
|
12,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferred credits and long-term liabilities |
|
|
85,526 |
|
|
|
891 |
|
|
|
|
|
|
|
(13,536 |
) |
|
|
72,881 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2 |
|
|
|
|
|
|
|
423 |
|
|
|
(2 |
) |
|
|
423 |
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid in capital in excess of par value |
|
|
491,240 |
|
|
|
261,083 |
|
|
|
288,055 |
|
|
|
(752,323 |
) |
|
|
288,055 |
|
Retained earnings (accumulated deficit) |
|
|
(148,679 |
) |
|
|
(298,030 |
) |
|
|
(314,733 |
) |
|
|
446,709 |
|
|
|
(314,733 |
) |
Accumulated other comprehensive loss |
|
|
|
|
|
|
1,566 |
|
|
|
1,566 |
|
|
|
(1,566 |
) |
|
|
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
342,563 |
|
|
|
(35,381 |
) |
|
|
(24,689 |
) |
|
|
(307,182 |
) |
|
|
(24,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
442,796 |
|
|
$ |
451,363 |
|
|
$ |
(24,656 |
) |
|
$ |
(307,182 |
) |
|
$ |
562,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating
Balance Sheet
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
132 |
|
|
$ |
28,745 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,877 |
|
Restricted cash |
|
|
|
|
|
|
4,415 |
|
|
|
|
|
|
|
|
|
|
|
4,415 |
|
Short term investments |
|
|
|
|
|
|
10,525 |
|
|
|
|
|
|
|
|
|
|
|
10,525 |
|
Accounts receivable-trade, net |
|
|
18,391 |
|
|
|
22,689 |
|
|
|
|
|
|
|
|
|
|
|
41,080 |
|
Accounts receivable-affiliates |
|
|
6,854 |
|
|
|
(8,372 |
) |
|
|
1,518 |
|
|
|
|
|
|
|
|
|
Materials and supplies |
|
|
7,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,885 |
|
Prepayments and other current assets |
|
|
1,720 |
|
|
|
1,725 |
|
|
|
|
|
|
|
|
|
|
|
3,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
34,982 |
|
|
|
59,727 |
|
|
|
1,518 |
|
|
|
|
|
|
|
96,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
10 |
|
|
|
354,952 |
|
|
|
(20,346 |
) |
|
|
(334,606 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
1,006,723 |
|
|
|
110,057 |
|
|
|
|
|
|
|
|
|
|
|
1,116,780 |
|
Less: accumulated depreciation and amortization |
|
|
644,820 |
|
|
|
73,930 |
|
|
|
|
|
|
|
|
|
|
|
718,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
361,903 |
|
|
|
36,127 |
|
|
|
|
|
|
|
|
|
|
|
398,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,403 |
|
|
|
38,403 |
|
Intangible assets |
|
|
21,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,688 |
|
Debt issuance costs |
|
|
|
|
|
|
11,733 |
|
|
|
|
|
|
|
|
|
|
|
11,733 |
|
Deferred charges and other assets |
|
|
552 |
|
|
|
9,770 |
|
|
|
|
|
|
|
|
|
|
|
10,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
419,135 |
|
|
$ |
472,309 |
|
|
$ |
(18,828 |
) |
|
$ |
(296,203 |
) |
|
$ |
576,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations |
|
$ |
596 |
|
|
$ |
87 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
683 |
|
Accounts payable-affiliates |
|
|
2,773 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
2,844 |
|
Accounts payable, accrued and other current
liabilities |
|
|
12,133 |
|
|
|
39,810 |
|
|
|
36 |
|
|
|
2,941 |
|
|
|
54,920 |
|
Advance billings and customer deposits |
|
|
9,706 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
9,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
25,208 |
|
|
|
39,974 |
|
|
|
36 |
|
|
|
2,941 |
|
|
|
68,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations, net of current portion |
|
|
3,561 |
|
|
|
441,334 |
|
|
|
|
|
|
|
|
|
|
|
444,895 |
|
Deferred income taxes |
|
|
(5,984 |
) |
|
|
5,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other deferred credits and long-term liabilities |
|
|
79,801 |
|
|
|
5,363 |
|
|
|
|
|
|
|
(2,941 |
) |
|
|
82,223 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2 |
|
|
|
|
|
|
|
462 |
|
|
|
(2 |
) |
|
|
462 |
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
(18,443 |
) |
|
|
|
|
|
|
(18,443 |
) |
Paid in capital in excess of par value |
|
|
491,240 |
|
|
|
297,356 |
|
|
|
333,522 |
|
|
|
(788,596 |
) |
|
|
333,522 |
|
Retained earnings (accumulated deficit) |
|
|
(174,693 |
) |
|
|
(318,024 |
) |
|
|
(334,727 |
) |
|
|
492,717 |
|
|
|
(334,727 |
) |
Accumulated other comprehensive loss |
|
|
|
|
|
|
322 |
|
|
|
322 |
|
|
|
(322 |
) |
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
316,549 |
|
|
|
(20,346 |
) |
|
|
(18,864 |
) |
|
|
(296,203 |
) |
|
|
(18,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
419,135 |
|
|
$ |
472,309 |
|
|
$ |
(18,828 |
) |
|
$ |
(296,203 |
) |
|
$ |
576,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating
Statement of Operations
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
$ |
192,062 |
|
|
$ |
10,702 |
|
|
$ |
|
|
|
$ |
(10,706 |
) |
|
$ |
192,058 |
|
Wireless |
|
|
115,627 |
|
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
|
115,584 |
|
Internet |
|
|
25,473 |
|
|
|
|
|
|
|
|
|
|
|
(252 |
) |
|
|
25,221 |
|
Interexchange |
|
|
25,317 |
|
|
|
|
|
|
|
|
|
|
|
(8,363 |
) |
|
|
16,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
358,479 |
|
|
|
10,702 |
|
|
|
|
|
|
|
(19,364 |
) |
|
|
349,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone (exclusive of depreciation and amortization) |
|
|
138,788 |
|
|
|
697 |
|
|
|
|
|
|
|
(9,307 |
) |
|
|
130,178 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
66,067 |
|
|
|
|
|
|
|
|
|
|
|
(4,045 |
) |
|
|
62,022 |
|
Internet (exclusive of depreciation and amortization) |
|
|
30,186 |
|
|
|
|
|
|
|
|
|
|
|
(561 |
) |
|
|
29,625 |
|
Interexchange (exclusive of depreciation and amortization) |
|
|
18,084 |
|
|
|
|
|
|
|
|
|
|
|
(5,451 |
) |
|
|
12,633 |
|
Depreciation and amortization |
|
|
58,859 |
|
|
|
4,400 |
|
|
|
|
|
|
|
|
|
|
|
63,259 |
|
Gain on disposal of assets, net |
|
|
492 |
|
|
|
613 |
|
|
|
|
|
|
|
|
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
312,476 |
|
|
|
5,710 |
|
|
|
|
|
|
|
(19,364 |
) |
|
|
298,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
46,003 |
|
|
|
4,992 |
|
|
|
|
|
|
|
|
|
|
|
50,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(600 |
) |
|
|
(30,503 |
) |
|
|
|
|
|
|
|
|
|
|
(31,103 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(9,650 |
) |
|
|
|
|
|
|
|
|
|
|
(9,650 |
) |
Interest income |
|
|
1 |
|
|
|
1,834 |
|
|
|
|
|
|
|
|
|
|
|
1,835 |
|
Other |
|
|
16 |
|
|
|
34,358 |
|
|
|
19,994 |
|
|
|
(46,008 |
) |
|
|
8,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(583 |
) |
|
|
(3,961 |
) |
|
|
19,994 |
|
|
|
(46,008 |
) |
|
|
(30,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
45,420 |
|
|
|
1,031 |
|
|
|
19,994 |
|
|
|
(46,008 |
) |
|
|
20,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
(19,406 |
) |
|
|
18,963 |
|
|
|
|
|
|
|
|
|
|
|
(443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
26,014 |
|
|
$ |
19,994 |
|
|
$ |
19,994 |
|
|
$ |
(46,008 |
) |
|
$ |
19,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating
Statement of Operations
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
$ |
202,845 |
|
|
$ |
22,624 |
|
|
$ |
|
|
|
$ |
(22,627 |
) |
|
$ |
202,842 |
|
Wireless |
|
|
86,279 |
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
86,235 |
|
Internet |
|
|
21,924 |
|
|
|
|
|
|
|
|
|
|
|
(252 |
) |
|
|
21,672 |
|
Interexchange |
|
|
21,434 |
|
|
|
|
|
|
|
|
|
|
|
(5,374 |
) |
|
|
16,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
332,482 |
|
|
|
22,624 |
|
|
|
|
|
|
|
(28,297 |
) |
|
|
326,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone (exclusive of depreciation and amortization) |
|
|
146,980 |
|
|
|
734 |
|
|
|
|
|
|
|
(20,732 |
) |
|
|
126,982 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
52,665 |
|
|
|
|
|
|
|
|
|
|
|
(3,258 |
) |
|
|
49,407 |
|
Internet (exclusive of depreciation and amortization) |
|
|
24,070 |
|
|
|
|
|
|
|
|
|
|
|
(772 |
) |
|
|
23,298 |
|
Interexchange (exclusive of depreciation and amortization) |
|
|
20,849 |
|
|
|
|
|
|
|
|
|
|
|
(3,535 |
) |
|
|
17,314 |
|
Depreciation and amortization |
|
|
67,427 |
|
|
|
15,392 |
|
|
|
|
|
|
|
|
|
|
|
82,819 |
|
Loss on disposal of assets, net |
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
311,839 |
|
|
|
16,126 |
|
|
|
|
|
|
|
(28,297 |
) |
|
|
299,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20,643 |
|
|
|
6,498 |
|
|
|
|
|
|
|
|
|
|
|
27,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(638 |
) |
|
|
(35,256 |
) |
|
|
|
|
|
|
|
|
|
|
(35,894 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
(34,882 |
) |
|
|
|
|
|
|
|
|
|
|
(34,882 |
) |
Interest income |
|
|
|
|
|
|
2,253 |
|
|
|
|
|
|
|
|
|
|
|
2,253 |
|
Other |
|
|
(3 |
) |
|
|
8,784 |
|
|
|
(41,635 |
) |
|
|
32,601 |
|
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(641 |
) |
|
|
(59,101 |
) |
|
|
(41,635 |
) |
|
|
32,601 |
|
|
|
(68,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
20,002 |
|
|
|
(52,603 |
) |
|
|
(41,635 |
) |
|
|
32,601 |
|
|
|
(41,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
(10,968 |
) |
|
|
10,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,034 |
|
|
$ |
(41,635 |
) |
|
$ |
(41,635 |
) |
|
$ |
32,601 |
|
|
$ |
(41,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Operations
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Operating revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone |
|
$ |
211,169 |
|
|
$ |
23,097 |
|
|
$ |
|
|
|
$ |
(23,079 |
) |
|
$ |
211,187 |
|
Wireless |
|
|
56,743 |
|
|
|
|
|
|
|
|
|
|
|
(49 |
) |
|
|
56,694 |
|
Internet |
|
|
20,280 |
|
|
|
|
|
|
|
|
|
|
|
(107 |
) |
|
|
20,173 |
|
Interexchange |
|
|
17,067 |
|
|
|
|
|
|
|
|
|
|
|
(2,414 |
) |
|
|
14,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
305,259 |
|
|
|
23,097 |
|
|
|
|
|
|
|
(25,649 |
) |
|
|
302,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local telephone (exclusive of depreciation and amortization) |
|
|
145,507 |
|
|
|
2,585 |
|
|
|
|
|
|
|
(20,174 |
) |
|
|
127,918 |
|
Wireless (exclusive of depreciation and amortization) |
|
|
42,179 |
|
|
|
|
|
|
|
|
|
|
|
(4,261 |
) |
|
|
37,918 |
|
Internet (exclusive of depreciation and amortization) |
|
|
26,689 |
|
|
|
|
|
|
|
|
|
|
|
(950 |
) |
|
|
25,739 |
|
Interexchange (exclusive of depreciation and amortization) |
|
|
20,037 |
|
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
19,773 |
|
Depreciation and amortization |
|
|
64,203 |
|
|
|
14,184 |
|
|
|
|
|
|
|
|
|
|
|
78,387 |
|
Loss on disposal of assets, net |
|
|
2,795 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
301,410 |
|
|
|
16,828 |
|
|
|
|
|
|
|
(25,649 |
) |
|
|
292,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,849 |
|
|
|
6,269 |
|
|
|
|
|
|
|
|
|
|
|
10,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(511 |
) |
|
|
(46,010 |
) |
|
|
(1,120 |
) |
|
|
|
|
|
|
(47,641 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(3,423 |
) |
|
|
|
|
|
|
(3,423 |
) |
Interest income |
|
|
|
|
|
|
1,633 |
|
|
|
|
|
|
|
|
|
|
|
1,633 |
|
Other |
|
|
16 |
|
|
|
(2,482 |
) |
|
|
(34,751 |
) |
|
|
37,017 |
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(495 |
) |
|
|
(46,859 |
) |
|
|
(39,294 |
) |
|
|
37,017 |
|
|
|
(49,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
3,354 |
|
|
|
(40,590 |
) |
|
|
(39,294 |
) |
|
|
37,017 |
|
|
|
(39,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
(5,620 |
) |
|
|
5,839 |
|
|
|
|
|
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,266 |
) |
|
$ |
(34,751 |
) |
|
$ |
(39,294 |
) |
|
$ |
37,017 |
|
|
$ |
(39,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided (used) by operating activities |
|
$ |
54,575 |
|
|
$ |
30,168 |
|
|
$ |
33,134 |
|
|
$ |
(27,138 |
) |
|
|
90,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(54,017 |
) |
|
|
(6,199 |
) |
|
|
|
|
|
|
|
|
|
|
(60,216 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(57,500 |
) |
|
|
|
|
|
|
|
|
|
|
(57,500 |
) |
Sale of short-term investments |
|
|
|
|
|
|
68,025 |
|
|
|
|
|
|
|
|
|
|
|
68,025 |
|
Liquidation of long-term investments |
|
|
|
|
|
|
7,663 |
|
|
|
|
|
|
|
|
|
|
|
7,663 |
|
Release of funds from escrow |
|
|
|
|
|
|
2,715 |
|
|
|
|
|
|
|
|
|
|
|
2,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(54,017 |
) |
|
|
14,704 |
|
|
|
|
|
|
|
|
|
|
|
(39,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(548 |
) |
|
|
(61,312 |
) |
|
|
|
|
|
|
|
|
|
|
(61,860 |
) |
Proceeds from the issuance of long-term debt |
|
|
|
|
|
|
52,900 |
|
|
|
|
|
|
|
|
|
|
|
52,900 |
|
Debt issuance costs |
|
|
|
|
|
|
(1,349 |
) |
|
|
|
|
|
|
|
|
|
|
(1,349 |
) |
Payment of cash dividend on common stock |
|
|
|
|
|
|
|
|
|
|
(35,475 |
) |
|
|
|
|
|
|
(35,475 |
) |
Dividends |
|
|
|
|
|
|
(27,138 |
) |
|
|
|
|
|
|
27,138 |
|
|
|
|
|
Issuance of common stock, net |
|
|
|
|
|
|
|
|
|
|
2,341 |
|
|
|
|
|
|
|
2,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(548 |
) |
|
|
(36,899 |
) |
|
|
(33,134 |
) |
|
|
27,138 |
|
|
|
(43,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
10 |
|
|
|
7,973 |
|
|
|
|
|
|
|
|
|
|
|
7,983 |
|
Cash and cash equivalents, beginning of the period |
|
|
132 |
|
|
|
28,745 |
|
|
|
|
|
|
|
|
|
|
|
28,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
142 |
|
|
$ |
36,718 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
36,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided (used) by operating activities |
|
$ |
67,013 |
|
|
$ |
2,727 |
|
|
$ |
1,096 |
|
|
$ |
(14,500 |
) |
|
|
56,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(51,975 |
) |
|
|
(6,447 |
) |
|
|
|
|
|
|
|
|
|
|
(58,422 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(95,095 |
) |
|
|
|
|
|
|
|
|
|
|
(95,095 |
) |
Proceeds from sale of short-term investments |
|
|
|
|
|
|
119,770 |
|
|
|
|
|
|
|
|
|
|
|
119,770 |
|
Placement of funds in escrow |
|
|
|
|
|
|
(700 |
) |
|
|
|
|
|
|
|
|
|
|
(700 |
) |
Release of funds from escrow |
|
|
|
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(51,975 |
) |
|
|
18,503 |
|
|
|
|
|
|
|
|
|
|
|
(33,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(505 |
) |
|
|
(458,510 |
) |
|
|
|
|
|
|
|
|
|
|
(459,015 |
) |
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
|
375,000 |
|
Debt issuance costs |
|
|
|
|
|
|
(11,307 |
) |
|
|
|
|
|
|
|
|
|
|
(11,307 |
) |
Payment of dividends on common stock |
|
|
|
|
|
|
|
|
|
|
(30,393 |
) |
|
|
|
|
|
|
(30,393 |
) |
Dividends |
|
|
(14,500 |
) |
|
|
|
|
|
|
|
|
|
|
14,500 |
|
|
|
|
|
Capital contributions |
|
|
|
|
|
|
51,771 |
|
|
|
(51,771 |
) |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
88,885 |
|
|
|
|
|
|
|
88,885 |
|
Stock issuance costs |
|
|
|
|
|
|
|
|
|
|
(7,817 |
) |
|
|
|
|
|
|
(7,817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(15,005 |
) |
|
|
(43,046 |
) |
|
|
(1,096 |
) |
|
|
14,500 |
|
|
|
(44,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
33 |
|
|
|
(21,816 |
) |
|
|
|
|
|
|
|
|
|
|
(21,783 |
) |
Cash and cash equivalents, beginning of the period |
|
|
99 |
|
|
|
50,561 |
|
|
|
|
|
|
|
|
|
|
|
50,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
132 |
|
|
$ |
28,745 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
19. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined |
|
|
ACS Holdings |
|
|
ACS Group |
|
|
|
|
|
|
ACS Group |
|
|
|
Subsidiaries |
|
|
Parent Only |
|
|
Parent Only |
|
|
Eliminations |
|
|
Consolidated |
|
Net cash provided (used) by operating activities |
|
$ |
89,264 |
|
|
$ |
16,669 |
|
|
$ |
8,837 |
|
|
$ |
(55,745 |
) |
|
|
59,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(52,105 |
) |
|
|
683 |
|
|
|
|
|
|
|
|
|
|
|
(51,422 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(154,650 |
) |
|
|
|
|
|
|
|
|
|
|
(154,650 |
) |
Proceeds from sale of short-term investments |
|
|
|
|
|
|
162,672 |
|
|
|
|
|
|
|
|
|
|
|
162,672 |
|
Placement of funds in escrow |
|
|
|
|
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
(1,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(52,105 |
) |
|
|
7,650 |
|
|
|
|
|
|
|
|
|
|
|
(44,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(499 |
) |
|
|
(9,150 |
) |
|
|
(17,313 |
) |
|
|
|
|
|
|
(26,962 |
) |
Issuance of common stock |
|
|
|
|
|
|
|
|
|
|
9,801 |
|
|
|
|
|
|
|
9,801 |
|
Dividends |
|
|
(36,700 |
) |
|
|
(19,045 |
) |
|
|
|
|
|
|
55,745 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(1,325 |
) |
|
|
|
|
|
|
(1,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
(37,199 |
) |
|
|
(28,195 |
) |
|
|
(8,837 |
) |
|
|
55,745 |
|
|
|
(18,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(40 |
) |
|
|
(3,876 |
) |
|
|
|
|
|
|
|
|
|
|
(3,916 |
) |
Cash and cash equivalents, beginning of the period |
|
|
139 |
|
|
|
54,437 |
|
|
|
|
|
|
|
|
|
|
|
54,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
99 |
|
|
$ |
50,561 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
50,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20. 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 $75 as of December 31, 2006
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.
The Company pledges substantially all property, assets and revenue as collateral on its
outstanding debt instruments.
21. OTHER EVENTS
In January 2006, the Company executed definitive agreements to assume ownership of strategic
fiber optic cable network assets from Crest Communications, LLC (Crest). The Company exercised
its option in April 2005 to assume ownership of such assets. On April 17, 2006, the closing
occurred whereby ACS assumed ownership of significant fiber optic transport facilities then owned
by Crest in Alaska between Whittier and Anchorage, and between Anchorage and Fairbanks. The Company
determined that there was no observable market price for the Crest assets. Accordingly, the Company
used a discounted cash flow method based on existing revenue contracts; potential future business
and internal savings the Company could generate by using the asset, together with the stand alone
costs of operating the asset, and determined the fair value of the Crest assets was nominal.
Consistent with the provisions of SFAS 114, Accounting by Creditors for Impairment of Loans, and
the determination that the fair value was nominal, the amount recognized as income was the cash
settlement of $1,979 upon taking possession of the asset.
F-40
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
21. OTHER EVENTS (Continued)
On April 11, 2006, the Company received $7,663 in cash from the liquidation of the Rural
Telephone Bank (RTB) and the Company recognized a gain of $6,685 from the liquidation of its
investment in Class C RTB stock, which had a carrying value of $978.
22. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Financial Data |
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
82,642 |
|
|
$ |
85,071 |
|
|
$ |
90,376 |
|
|
$ |
91,728 |
|
|
$ |
349,817 |
|
Operating income |
|
|
8,904 |
|
|
|
12,186 |
|
|
|
16,024 |
|
|
|
13,881 |
|
|
|
50,995 |
|
Net income (loss) |
|
|
(8,372 |
) |
|
|
13,506 |
|
|
|
8,720 |
|
|
|
6,140 |
|
|
|
19,994 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.20 |
) |
|
|
0.32 |
|
|
|
0.21 |
|
|
|
0.15 |
|
|
|
0.48 |
|
Diluted |
|
|
(0.20 |
) |
|
|
0.31 |
|
|
|
0.20 |
|
|
|
0.14 |
|
|
|
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
77,408 |
|
|
$ |
81,225 |
|
|
$ |
85,701 |
|
|
$ |
82,475 |
|
|
$ |
326,809 |
|
Operating income |
|
|
6,991 |
|
|
|
8,183 |
|
|
|
7,229 |
|
|
|
4,738 |
|
|
|
27,141 |
|
Net loss |
|
|
(28,530 |
) |
|
|
(312 |
) |
|
|
(7,863 |
) |
|
|
(4,930 |
) |
|
|
(41,635 |
) |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
(0.78 |
) |
|
|
(0.01 |
) |
|
|
(0.19 |
) |
|
|
(0.12 |
) |
|
|
(1.04 |
) |
23. PRIOR YEAR RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of its financial statements for the year ended December 31, 2004,
the Company determined, based upon supplemental accounting interpretation regarding the financial
statement classification of auction-rate securities, the planned implementation of SFAS No. 123(R)
and consultation with the audit committee that the following restatements should be made to its
2004 annual report:
Short-Term Investments
The Company invests in auction-rate securities and other short-term investments as part of its
cash management strategy. These investments had been historically classified as cash and cash
equivalents because of the short duration of their interest reset periods. The Company determined,
based upon supplemental accounting interpretation regarding the financial statement classification
of auction-rate securities and in consultation with the audit committee that these investments and
other short-term investments should not be classified as cash equivalents due to their underlying
long-term stated maturities. As a result, the 2004 financial statements were restated to change the
classification of auction-rate securities and other short-term investments to a separate line item
within current assets and the 2004 financial statements have been restated to reflect purchases and
sales of auction-rate securities and other short-term investments as investing activity in the
statements of cash flows.
Cash Paid to Affiliate
The Company also restated its 2004 financial statements to reflect the cash payments of $1,262
made during the year ended December 31, 2004 related to the reacquisition of 267 shares of the
Companys stock owned by a retired officer.
The restatement resulted in an increase in cash flows from operations and an increase in cash
flows used in financing activities.
F-41
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2006, 2005, and 2004
(In Thousands, Except Per Share Amounts)
23. PRIOR YEAR RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
Stock Incentive Plans
Subsequent to year end, the Company also reassessed its stock compensation plan models in
anticipation of adopting SFAS No. 123(R), Share-Based Payment, in 2005. The primary cause of this
restatement relate to the treatment of forfeitures and the period over which the compensation cost
should be recorded. During the reassessment the Company also identified certain corrections to the
stock option valuation model assumptions. The 2004 footnote disclosure in Note 1 was restated to
correct these factors. As no stock-based compensation expense had yet been recorded by the Company,
there was no change to the underlying financial statements other than Note 1.
On November 3, 2005, the Company filed a 2004 Form 10-K/A restating these items. The 2004 and
2003 balances presented within the 2005 Form 10-K are also reflective of the restatements.
F-42
ALASKA
COMMUNICATIONS SYSTEMS GROUP, INC.
Schedule II Valuation and Qualifying Accounts
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
costs and |
|
|
other |
|
|
|
|
|
|
End |
|
Description |
|
of Period |
|
|
expenses |
|
|
accounts (1) |
|
|
Deductions (2) |
|
|
of Period |
|
2006 Allowance for doubtful accounts |
|
$ |
6,206 |
|
|
$ |
5,121 |
|
|
$ |
(61 |
) |
|
$ |
(3,832 |
) |
|
$ |
7,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Allowance for doubtful accounts |
|
$ |
4,869 |
|
|
$ |
4,494 |
|
|
$ |
(26 |
) |
|
$ |
(3,131 |
) |
|
$ |
6,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Allowance for doubtful accounts |
|
$ |
4,865 |
|
|
$ |
2,922 |
|
|
$ |
948 |
|
|
$ |
(3,866 |
) |
|
$ |
4,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the reserve for accounts receivable collected on behalf of others, net
of recovery. |
|
(2) |
|
Represents credit losses, net of recovery. |
F-43