<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
DELAWARE 91-1921377
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 L STREET, SUITE 500, ANCHORAGE, ALASKA 99501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (907) 297-3000
FORMER NAME, FORMER ADDRESS AND FORMER THREE MONTHS, IF CHANGED SINCE LAST
REPORT: Not Applicable
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 [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999 (unaudited) .......................3
Consolidated Statement of Operations
For the Three Months Ended March 31, 2000 (unaudited).........................4
Consolidated Statement of Stockholder's Equity
For the Three Months Ended March 31, 2000 (unaudited).........................5
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2000 (unaudited).........................6
Notes to Consolidated Financial Statements (unaudited)........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................16
Item 2. Changes in Securities and Use of Proceeds....................................16
Item 3. Defaults upon Senior Securities..............................................16
Item 4. Submission of Matters to a Vote of Security Holders..........................16
Item 5. Other Information; Risk Factors..............................................16
Item 6. Exhibits and Reports on Form 8-K.............................................16
SIGNATURE...................................................................................17
</TABLE>
2
<PAGE> 3
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,249 $ 9,006
Accounts receivable-trade, net of allowance of $6,210 and $5,203 52,886 49,323
Accounts receivable-affiliates 84,747 97,676
Materials and supplies 6,059 5,923
Prepayments and other current assets 3,398 3,533
--------- ---------
Total current assets 151,339 165,461
Property, plant and equipment 916,424 902,131
Less: accumulated depreciation 466,205 452,304
--------- ---------
Property, plant and equipment, net 450,219 449,827
Goodwill, net of accumulated amortization of $4,595 and $4,243 250,698 250,346
Investments 1,531 1,673
Other assets 70,397 70,404
--------- ---------
Total assets $ 924,184 $ 937,711
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt 4,839 4,944
Accounts payable-trade 19,162 30,688
Accounts payable-affiliates 300 610
Advance billings and customer deposits 6,997 7,521
Accrued and other current liabilities 21,755 20,324
--------- ---------
Total current liabilities 53,053 64,087
Long-term debt, net of current portion 597,360 593,463
Unamortized investment tax credits 286 394
Other deferred credits and long-term liabilities 10,792 13,226
Commitments and contingencies - -
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares authorized, 1 share
issued and outstanding - -
Contributed capital 287,242 287,242
Accumulated deficit (24,549) (20,701)
--------- ---------
Total stockholder's equity 262,693 266,541
--------- ---------
Total liabilities and stockholder's equity $ 924,184 $ 937,711
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
Operating revenues:
Local telephone:
Local network service $ 24,511
Network access revenue 28,964
Directory advertising 6,593
Deregulated and other revenue 4,392
--------
Total local telephone 64,460
Cellular 8,636
Interexchange network, data services and other 5,228
--------
Total operating revenues 78,324
Operating expenses:
Local telephone 37,467
Cellular 6,084
Interexchange network, data services and other 6,418
Depreciation and amortization 17,126
--------
Total operating expenses 67,095
--------
Operating income 11,229
Other income and expense:
Interest expense (15,303)
Interest income and other 253
Equity in earnings (loss) of investments (142)
--------
Total other income and expense (15,192)
--------
Loss before income taxes (3,963)
Income tax benefit 115
--------
Net loss $ (3,848)
========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 $ - $ 287,242 $ (20,701) 266,541
Net loss - - (3,848) (3,848)
------- --------- ---------- ---------
Balance, March 31, 2000 $ - $ 287,242 $ (24,549) $ 262,693
======= ========= ========== =========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,848)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 17,126
Amortization of debt issuance costs 1,126
Investment tax credits (108)
Other deferred credits (1,105)
Capitalized interest (29)
Changes in components of working capital:
Accounts receivable and other current assets 9,348
Accounts payable and other current liabilities (10,929)
Other (1,158)
---------
Net cash provided by operating activities 10,423
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and capital expenditures, net of
capitalized interest (13,012)
Cost of acquisitions, net of cash received (792)
---------
Net cash used by investing activities (13,804)
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on long-term debt (1,376)
---------
Decrease in cash (4,757)
Cash and cash equivalents at beginning of the period 9,006
---------
Cash and cash equivalents at the end of the period $ 4,249
=========
SUPPLEMENTAL CASH FLOW DATA:
Interest paid $ 10,741
Income taxes paid -
SUPPLEMENTAL NONCASH TRANSACTIONS:
Property acquired under capital lease 2,918
Note payable in connection with acquisition 2,250
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alaska Communications Systems Holdings, Inc. and Subsidiaries (the
"Company" or "ACS Holdings") (formerly ALEC Acquisition Corporation.), a
Delaware corporation, is engaged principally in providing local telephone,
wireless, and interexchange network and data services to its customers in the
State of Alaska through its telecommunications subsidiaries. The Company was
organized in July of 1998 for the purpose of acquiring and operating
telecommunications properties. The principal activities in 1998 and through May
14, 1999 were the preparation of systems and obtaining financing for pending
acquisitions. On May 14, 1999, the Company was acquired and became a wholly
owned subsidiary of Alaska Communications Systems Group, Inc. (the "Parent" or
"ACS Group") (formerly ALEC Holdings, Inc.).
The financial statements for the Company represent the consolidated
financial position, results of operations and cash flows of the following
entities:
- Alaska Communications Systems Holdings, Inc.
- Telephone Utilities of Alaska, Inc. ("TUA")
- Telephone Utilities of the Northland, Inc. ("TUNI")
- PTI Communications of Alaska, Inc. ("PTIC")
- Alaska Communications Systems, Inc. ("ACS") (formerly Anchorage
Telephone Utility)
- ACS Wireless, Inc. (formerly MACtel Inc.)
- ATU Long Distance, Inc. ("ATULD")
- Alaskan Choice Television, LLC ("ACTV")
- ACS Internet, Inc. (formerly PTINet, Inc.)
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission; however the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. The consolidated financial statements and
footnotes included in the Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
In the opinion of management, the financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the consolidated financial position, consolidated results of operations,
and cash flow for all periods presented. The results of operations for the first
three months of the year are not necessarily indicative of the results of
operations which might be expected for the entire year or any other interim
periods.
2. STOCK INCENTIVE PLANS
The Company's employees participate in various plans of ACS Group, which
through the Compensation Committee of the board of directors, may grant stock
options, stock appreciation rights and other awards to officers, employees and
non-employee directors. At March 31, 2000, ACS Group has reserved a total of
6,060 shares of authorized common stock for issuance under the various plans. In
general, options under the plans vest ratably over three, four or five years and
the plans terminate in approximately 10 years.
7
<PAGE> 8
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
2. STOCK INCENTIVE PLANS (CONTINUED)
ALEC Holdings, Inc. 1999 Stock Incentive Plan
The Parent has reserved 3,410 shares under this plan, which was adopted
in connection with the completion of the acquisition of TUA, TUNI, PTIC, ACS,
ATULD and MACtel, Inc. on May 14, 1999. At March 31, 2000, 3,423 options have
been granted under the Plan at an exercise price of $6.1542 per share, generally
vesting ratably over five years or after nine years subject to acceleration upon
the attainment of certain performance goals. Of the options granted under the
plan, 233 have been exercised, and 90 have been forfeited upon termination of
the grantee. At March 31, 2000 3,100 shares are outstanding. The plan allows
forfeited options to be reissued and 77 remain available for grant under the
plan. The plan will terminate on May 14, 2009.
Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan
This plan was adopted by the Parent in November 1999 in connection with
its initial public offering. The Parent has reserved 1,500 shares under this
plan. At March 31, 2000, 887 options have been granted under the plan and 613
shares are available for grant under the plan. The term of options granted under
the plan may not exceed 10 years. Unless otherwise determined by the
Compensation Committee, options will vest ratably on each of the first four
anniversaries after the grant date and will have an exercise price equal to the
fair market value of the common stock on the date of grant.
On February 9, 2000, the Board of Directors approved the grant of
options under the plan to purchase 887 shares to certain members of management
at an exercise price of $14.1354 per share, generally vesting over four years
ratably.
Alaska Communications Systems Group, Inc. 1999 Non-Employee Director Stock
Compensation Plan
The non-employee director stock compensation plan was adopted by the
Parent in connection with its initial public offering. The Parent has reserved
150 shares under this plan. At March 31, 2000, 139 shares are available for
grant under the plan. Directors are required to receive not less than 25% of
their annual retainer and meeting fees in the form of the Parent's stock, and
may elect to receive up to 100% of director's compensation in the form of stock.
During January of 2000, eight shares under the plan were awarded to a director.
At March 31, 2000, three shares under the plan were awarded to directors, of
which two were elected to be deferred until termination of service by the
directors.
Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan
This plan was also adopted in connection with the Parent's initial
public offering in November 1999. At March 31, 2000 1,000 shares are available
for issuance and sale. The plan will terminate on December 31, 2009. 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 or is for not more than five
months in a calendar year, or who are ineligible to participate due to
restrictions under the Internal Revenue Code. No shares have been issued under
this plan as of March 31, 2000.
3. BUSINESS SEGMENTS
The Company has two reportable segments: (1) local telephone, which
provides landline telecommunications services, and consists of local telephone
service, network access, directory advertising, deregulated and other revenues;
and (2) cellular, which provides wireless telecommunications service. Each
reportable segment is a strategic business under separate management and
offering different services than those offered by the other segments. The
Company has aggregated interexchange network, data services
8
<PAGE> 9
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
and wireless cable television segments into "All Other" below. The Company also
incurs interest expense, 3.
3. BUSINESS SEGMENTS (CONTINUED)
interest income, equity in earnings (loss) of minority investments and other non
operating income and expense at the corporate level which are not allocated to
the business segments, nor are they evaluated by the chief operating decision
maker in analyzing the performance of the business segments. These non operating
income and expense items are provided in the accompanying table under the
caption "All Other" in order to assist the users of these financial statements
in reconciling the operating results and total assets of the business segments
to the consolidated financial statements. Common use assets are held at ACS
Holdings and are allocated below based on operating revenues. The accounting
policies of the segments are the same as those in the summary of significant
accounting policies described in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
The following table illustrates selected financial data for each segment
for the three months ended March 31, 2000.
<TABLE>
<CAPTION>
LOCAL
TELEPHONE CELLULAR ALL OTHER TOTAL
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 64,460 $ 8,636 $ 5,228 $ 78,324
Depreciation and amortization 13,776 1,129 2,221 17,126
Operating income (loss) 13,461 1,423 (3,655) 11,229
Interest expense (287) (2) (15,014) (15,303)
Interest income 74 41 68 183
Income tax provision (benefit) 4,616 565 (5,296) (115)
Net income (loss) 8,637 906 (13,391) (3,848)
Total assets $ 739,606 $ 117,258 $ 67,320 $ 924,184
Capital expenditures $ 7,560 $ 3,971 $ 4,399 $ 15,930
</TABLE>
Operating revenues disclosed above include intersegment operating
revenues of $1,489 for local telephone, $206 for the cellular, and $1,295 for
all other.
4. RELATED PARTY TRANSACTIONS
Fox Paine & Company, the majority stockholder, receives an annual
management fee in the amount of 1% of the Company's net income before interest
expense, interest income, income taxes, depreciation and amortization, and
equity in earnings (losses) of minority investments, calculated without regard
to the fee. The management fee expense for the three months ended March 31, 2000
is $324 of which $300 remains payable.
5. COMMITMENTS AND CONTINGENCIES
The Company has a commitment to acquire additional fiber optic circuit
capacity in the first quarter of 2001 at a purchase price of $19,500.
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND ANALYSTS' REPORTS
This report contains forward looking statements within the meaning of
the federal securities laws, including statements concerning future rates,
revenues, costs, capital expenditures, and financing needs and availability and
statements of management's expectations and beliefs. Actual results could differ
materially from these statements as a result of many factors, including future
economic, regulatory and political conditions in Alaska and the United States.
Investors should also be aware that while ACS Holdings does, at various
times, communicate with securities analysts, it is against ACS Holdings' policy
to disclose to them any material non-public information or other confidential
information. Accordingly, shareholders should not assume that ACS Holdings
agrees 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 the responsibility of ACS Holdings.
INTRODUCTION
On May 14, 1999, the Company acquired the incumbent providers of local
telephone services in Anchorage, Juneau, Fairbanks and approximately 70 rural
communities in Alaska, making it the largest provider of local telephone service
in the state and the fifteenth largest provider of local exchange services in
the United States. The Company also acquired on May 14, 1999 long distance
operations primarily serving the Anchorage market and cellular and Internet
services providing statewide coverage. The Company is in the process of unifying
its state-wide branding under the ACS name.
Prior to the completion of these acquisitions, ACS Holdings had no
operations. Accordingly, the following discussion should be read in conjunction
with the Company's consolidated financial statements and the related notes
included herein.
Today, ACS Holdings generates revenue through:
- the provision of local telephone services, including:
- basic local service to retail customers within ACS
Holdings' service areas,
- wholesale service to competitive local exchange carriers,
- network access services to interexchange carriers for
origination and termination of interstate and intrastate
long distance phone calls,
- enhanced services,
- ancillary services, such as billing and collection, and
- universal service payments;
- the provision of wireless services;
- the provision of interexchange network services, data services
and other services, and;
- the provision of wireless cable television services.
ACS Holdings also recognizes its proportionate share of the net income
or loss of its minority-owned investments.
10
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
The following unaudited table summarizes ACS Holdings' consolidated
operations for the three months ended March 31, 2000 and the combined operations
for the three months ended March 31, 1999. For the three months ended March 31,
1999, the summary information represents the historical combined operating
results of companies acquired on May 14, 1999 prior to their ownership by ACS
Holdings. Certain reclassifications have been made to the 1999 combined
financial statements to conform with the current presentation of ACS Holdings'
financial data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
CONSOLIDATED COMBINED
------------ --------
(in thousands)
<S> <C> <C>
Operating revenues
Local telephone:
Local network service $ 24,511 $ 23,141
Network access revenue 28,964 25,990
Directory advertising 6,593 6,014
Deregulated revenue and other 4,392 4,643
-------- --------
Total local telephone 64,460 59,788
Cellular 8,636 7,256
Interexchange network, data services and other 5,228 4,074
-------- --------
Total operating revenues 78,324 71,118
Operating expenses
Local telephone 37,467 34,910
Cellular 6,084 5,136
Interexchange network, data services and other 6,418 4,447
Depreciation and amortization 17,126 16,801
-------- --------
Total operating expenses 67,095 61,294
-------- --------
Operating income 11,229 9,824
Other income and expense:
Interest expense (15,303) (2,961)
Interest and other income 253 1,184
Equity in earnings (loss) of minority investments (142) (509)
-------- --------
Total other income and expense (15,192) (2,286)
-------- --------
Income (loss) before income taxes (3,963) 7,538
Income tax benefit (expense) 115 (2,709)
-------- --------
Net income (loss) $ (3,848) $ 4,829
======== ========
</TABLE>
11
<PAGE> 12
OPERATING REVENUES
Operating revenues increased $7.2 million, or 10.1% for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. Local
telephone, cellular and interexchange network, data services and other revenues
all increased compared to the prior three-month period.
Local Telephone
Local telephone revenues, which consist of local network service,
network access revenue, directory advertising and deregulated and other
revenues, increased $4.7 million, or 7.8%, for the three months ended March 31,
2000 compared to the three months ended March 31, 1999.
The local service revenue component of local telephone revenues was
$24.5 million during 2000 compared with $23.1 million during 1999 -- an increase
of $1.4 million or 5.9% over the prior year. This increase corresponds with the
growth in average total access lines in service of 6.0%, partially offset by
increased market penetration of lower margin wholesale and unbundled network
element lines as a component of access line growth in the Anchorage market.
Although there can be no assurances, management believes that retail line losses
to competition will be minimal in the future. ACS Holdings also experienced
revenue increases in local service revenues from increased penetration of
enhanced features such as call waiting, caller ID and call forwarding.
Network access revenues increased by $3.0 million, or 11.4%, from $26.0
million in 1999 to $29.0 million in 2000. Network access revenues are based on a
regulated return on rate base and recovery of allowable expenses associated with
the origination and termination of toll calls. The increase in telephone access
revenues over the corresponding quarter of 1999 is due primarily to changes
relating to cost allocation factors, rate base and expenses from period to
period. Management expects that access revenues will grow at a lesser rate than
access line growth for the foreseeable future.
Directory advertising revenues increased by $0.6 million, or 9.6%, from
$6.0 million in 1999 to $6.6 million in 2000. This growth corresponds with the
growth in average access lines in service during 2000 over 1999 from 308,033
during 1999 to 326,422 during 2000, or an increase of 6.0%.
Deregulated and other revenues, consists principally of billing and
collection services, space and power rents, deregulated equipment sales,
paystation revenues and other miscellaneous telephone revenues.
Cellular
Cellular revenues increased $1.4 million, or 19.0%, to $8.6 million for
the three months ended March 31, 2000 compared to $7.3 million for the three
months ended March 31, 1999. This growth in revenue is due to growth in average
cellular subscribers in service to 72,669 during the quarter ended March 31,
2000 from 66,884 during 1999, or 8.6%, and an increase in average revenue per
unit from $36.16 in 1999 to $39.61 in 2000.
Interexchange Network, Data Services and Other
Interexchange network, data services and other revenues include
principally long distance, data transmission and Internet services revenues.
These revenues increased from $4.1 million in 1999 to $5.2 million in 2000 -- an
increase of $1.2 million, or 28.3%. This growth is principally due to an
increase in long distance revenues from $2.6 million to $3.8 million caused by
an increase in long distance minutes of use from 16.9 million minutes to 19.0
million minutes for 1999 and 2000, respectively.
OPERATING EXPENSES
Operating expenses increased $5.8 million, or 9.5%, from $61.3 million
for the three months ended March 31, 1999 to $67.1 million for the three months
ended March 31, 2000. Operating expenses were 85.7% of revenues for the three
months ended March 31, 2000 compared to 86.2% of revenues for the three months
ended March 31, 1999.
12
<PAGE> 13
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. Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expenses increased from
$34.9 million for the three months ended March 31, 1999 to $37.5 million for the
three months ended March 31, 2000 - an increase of $2.6 million, or 7.3%. As a
percentage of revenue, local telephone expense decreased from 58.4% for 1999 to
58.1% for 2000.
Cellular
Cellular expenses increased $0.9 million, or 18.5%, for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. Cellular
expense was 70.8% of cellular revenues for 1999 and 70.4% of cellular revenues
for 2000. Management expects that cellular expenses as a percentage of cellular
revenue will continue to decline as cellular penetration and subscribers
increase over time.
Interexchange Network, Data Services and Other
Interexchange network, data services and other expenses increased by
$2.0 million, or 44.3%, and increased as a percentage of revenue from 109.2% in
1999 to 122.8% in 2000. The increase in interexchange network, data services and
other was the result of additional circuit and other costs associated with
developing the Company's statewide network and Internet infrastructure and
increases in minutes of use for long distance as discussed above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $0.3 million, or 1.9%,
due principally to increases in plant in service for the three months ended
March 31, 2000 over the corresponding period of 1999.
INTEREST EXPENSE
Interest expense increased $12.3 million, or 416.8%, for the three
months ended March 31, 2000 as compared to the three months ended March 31, 1999
due to $591.7 million of debt incurred in connection with the acquisitions by
ACS Holdings on May 14, 1999 of substantially all of its operations.
INCOME TAXES
ACS Holdings has fully reserved the income tax benefit resulting from
the consolidated losses incurred since May 14, 1999 - the date of the
acquisition of substantially all of its operations. Income taxes reflected in
the combined financial statements are substantially those of the predecessor
entities.
NET INCOME
The decrease in net income is primarily a result of the factors
discussed above and, in particular, the increase in interest expense of $12.3
million as a result of the financing of the acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
ACS Holdings has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and debt
financing. The Company's cash flows from operations for the three months ended
March 31, 2000 were $10.4 million. At March 31, 2000, the Company had
approximately $98.3 million in working capital, including approximately $4.2
million in cash and cash equivalents. Additionally, the Parent has $82.5 million
in cash. As of March 31, 2000 the Company had $75.0 million of remaining
capacity under its revolving credit facility, representing 100% of available
capacity.
13
<PAGE> 14
The Company has a $435.0 million credit agreement ("senior credit
facility") and $150.0 million in senior subordinated notes representing
substantially all of the Company's long-term debt. As of March 31, 2000 the
Company had $602.2 million of long-term debt. In addition $17.3 million in
senior discount debentures are recorded at ACS Group and are collateralized by
substantially all assets of the Company. Interest on ACS Group's senior discount
debentures and ACS Holdings' senior subordinated notes is payable semiannually.
Interest on borrowings under the senior credit facility is payable monthly,
quarterly or semi-annually at the Company's option, and the senior credit
facility requires annual principal payments commencing on May 14, 2002.
The Company employs an interest rate hedge transaction which fixed at
5.99% the underlying variable rate on one-half of the borrowings under the
senior credit facility, or $217.5 million, for a three-year period.
The local telephone network requires the timely maintenance of plant and
infrastructure. ACS Holdings' local network is of high quality and is
technically advanced and will have relatively predictable annual capital needs.
The Company's historical capital expenditures have been significant. The
construction and geographic expansion of ACS Holdings' cellular network required
a substantial amount of capital. The implementation of the Company's
interexchange network and data services strategy is also capital intensive. The
Company recently purchased fiber capacity for $19.5 million, which was funded
with monies borrowed to finance the acquisition of substantially all of its
operations. The Company also has agreed to purchase additional fiber capacity
for $19.5 million in the second quarter of 2001. ACS Holdings anticipates total
capital expenditures of approximately $92.0 million in 2000. Capital
expenditures for the first three months of 2000 were $15.9 million, including
$2.9 in a capital lease. The Company intends to fund these capital expenditures
through internally generated cash flow, a portion of the net proceeds from the
recent public offering and if necessary, through additional borrowings under the
revolving credit facility.
ACS Holdings' capital requirements may change, however, due to, among
other things: the Company's decision to pursue specific acquisition
opportunities, changes in technology, the effects of competition or changes in
the Company's business strategy.
ACS Holdings' ability to satisfy its capital requirements will be
dependent upon its future financial performance, which is, in turn, subject to
future economic conditions and to financial, business and other factors, many of
which are beyond the Company's control.
On September 30, 1999, the Company acquired an additional one-third
interest in Alaskan Choice Television for $1.9 million, increasing its ownership
to a two-thirds majority interest. On October 6, 1999, the Company entered into
an agreement to acquire the remaining one-third interest and on February 14,
2000, the Company completed the acquisition of the remaining one-third interest
in ACTV for $3.0 million.
ACS Holdings believes that it will have sufficient working capital
provided by operations and borrowings under the existing revolving credit
facility to fund its operations and capital expenditures over the next 12
months.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has issued senior subordinated notes and has entered into a
bank credit facility. These on-balance sheet financial instruments, to the
extent they provide for variable rates of interest, expose the Company to
interest rate risk, with the primary interest rate risk exposure resulting from
changes in LIBOR or the prime rate, which are used to determine the interest
rates that are applicable to borrowings under the Company's bank credit
facilities. The Company uses off-balance sheet derivative financial instruments,
in particular an interest rate swap agreement, to partially hedge variable
interest transactions. The Company's derivative financial instrument transaction
has been entered into for non-trading purposes. The terms and characteristics of
the derivative financial instruments are matched with the underlying on-balance
sheet instrument or anticipated transactions and do not constitute speculative
or leveraged positions independent of these exposures. There have been no
material changes to the Company's outstanding debt instruments since December
31, 1999.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows.
The Company's incumbent local exchange carriers (ILECS) in the
Anchorage, Fairbanks, and Juneau markets have received additional requests for
interconnection under section 251 of the Telecommunications Act of 1996 ("1996
Act"), as well as requests for arbitration or to "pick and choose" provisions of
existing interconnection agreements under section 252 of the 1996 Act. The
Company expects that additional such requests will be received over time in the
future as additional entities seek to enter these markets.
On February 25, 2000, ALLTEL Publishing Corporation filed a complaint in
the Alaska Superior Court directed against certain of the Company's subsidiaries
and alleging breach of contract and other claims in connection with directory
publishing agreements. The exact amount of damages sought was not specified, but
appears to exceed $400,000. On March 21, 2000, the Company caused an answer and
appropriate counterclaims to be filed, asserting, among other matters, breach of
agreement, misrepresentation, and unjust enrichment. No date for trial of these
issues has been established. While the outcome of this matter cannot be
predicted with certainty, management does not anticipate such outcome to result
in a material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended March 31,
2000.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 3, 2000 ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
/s/ Michael E. Holmstrom
-----------------------------------
Michael E. Holmstrom
Senior Vice President and
Chief Financial Officer
(signing both in his capacity as
Senior Vice President on behalf of
the Registrant and as Chief
Financial Officer of the Registrant)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,249,000
<SECURITIES> 0
<RECEIVABLES> 143,843,000
<ALLOWANCES> 6,210,000
<INVENTORY> 6,059,000
<CURRENT-ASSETS> 151,339,000
<PP&E> 916,424,000
<DEPRECIATION> 466,205,000
<TOTAL-ASSETS> 924,184,000
<CURRENT-LIABILITIES> 53,053,000
<BONDS> 597,360,000
0
0
<COMMON> 0
<OTHER-SE> 262,693,000
<TOTAL-LIABILITY-AND-EQUITY> 924,184,000
<SALES> 0
<TOTAL-REVENUES> 78,324,000
<CGS> 0
<TOTAL-COSTS> 67,095,000
<OTHER-EXPENSES> 142,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,303,000
<INCOME-PRETAX> (3,963,000)
<INCOME-TAX> (115,000)
<INCOME-CONTINUING> (3,848,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,848,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
