<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1999
REGISTRATION NO. 333-88753
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 52-2126573
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
510 L. STREET, SUITE 500
ANCHORAGE, ALASKA 99501
(907) 297-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------------
MICHAEL E. HOLMSTROM
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
510 L. STREET, SUITE 500
ANCHORAGE, ALASKA 99501
(907) 297-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for services)
---------------------------
COPIES TO:
<TABLE>
<S> <C>
MITCHELL S. PRESSER, ESQ. WILLIAM P. ROGERS, JR., ESQ.
WACHTELL, LIPTON, ROSEN & KATZ CRAVATH, SWAINE & MOORE
51 WEST 52(ND) STREET 825 EIGHTH AVENUE
NEW YORK, NY 10019-6150 NEW YORK, NY 10019-7475
(212) 403-1000 (212) 474-1270
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, check the following box. / /
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[Inside front cover page images, under the heading "Telephone, Cellular and
Long Distance Coverage", consist of: a map of Alaska displaying our "Local
Telephone Exchanges" (including Anchorage, Fairbanks, Juneau, Kenai, Kodiak and
Sitka) and our "Cellular Coverage" and "Long Distance Originating Service" areas
in Alaska (800 service is available statewide); the Alaska Communications
Systems' brand logo; and a picture of the Anchorage, Alaska skyline and
surrounding mountains intended to provide a view of the city that is home to our
corporate headquarters.]
<PAGE>
SUBJECT TO COMPLETION. DATED NOVEMBER 17, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[LOGO]
10,000,000 Shares
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Common Stock
-------------
This is an initial public offering of shares of common stock of Alaska
Communications Systems Group, Inc. All of the shares are being sold by Alaska
Communications Systems Group.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $13.00 and $15.00. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "ALSK".
SEE "RISK FACTORS" ON PAGE 12 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Alaska Communications Systems
Group..................................................... $ $
</TABLE>
To the extent that the underwriters sell more than 10,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,500,000 shares from Alaska Communications Systems Group at the initial public
offering price less the underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
------------------
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
CIBC WORLD MARKETS
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
------------------
Prospectus dated , 1999.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS.
OUR BUSINESS
We are the leading diversified, facilities-based telecommunications provider
in Alaska, offering local telephone, wireless, long distance, data and Internet
services to business and residential customers throughout the state. We are the
only telecommunications provider in Alaska using its own network facilities to
provide end-to-end communications services to its customers.
LOCAL TELEPHONE. With over 320,000 access lines, representing 75% of the
access lines in Alaska, we are the largest local exchange carrier in Alaska and
the 15th largest in the U.S. We provide service to all of the state's major
population centers, including Anchorage, Juneau and Fairbanks.
WIRELESS. We are the largest and only statewide provider of wireless
services in Alaska, currently serving over 70,000 subscribers. Our wireless
network covers over 460,000 residents, including all major population centers
and highway corridors. We are in the process of upgrading our network to be
fully digital in all of our service areas by year-end 1999.
LONG DISTANCE. We provide long distance and other interexchange services to
approximately 26,000 customers primarily in Anchorage and intend to market these
services statewide beginning in the first quarter of 2000. We recently migrated
long distance traffic from leased circuits onto our own network infrastructure,
which we believe will result in significant cost savings over time.
DATA AND INTERNET. We are the third largest provider of Internet access
services in Alaska, with approximately 16,000 customers. We also own 28.5% of
the second largest Internet services provider in Alaska, with approximately
28,000 customers. We currently offer dedicated and dial-up Internet access to
our customers and intend to offer digital subscriber line, or DSL, services by
year-end 1999.
In addition, we recently acquired a majority interest in a provider of
wireless cable television services in our Anchorage and Fairbanks service areas
and expect to expand our offering of wireless cable services using digital
compression technology.
Our telecommunications network includes over 485 miles of fiber optic cable,
176 switching facilities and a statewide cellular network. In addition, we
recently purchased fiber capacity for high speed links within Alaska and for
termination of traffic in the lower 48 states. We plan to continue enhancing our
network to meet customer demand for increased bandwidth and advanced services.
For the year ended December 31, 1998, on a pro forma basis, we would have
had combined revenues of $281.6 million, operating income of $40.6 million,
Adjusted EBITDA, as defined under "Summary Unaudited Pro Forma Combined
Financial and Operating Data", of $106.1 million and a net loss of
$17.3 million.
We were formed in 1998 by Fox Paine & Company, LLC, members of the former
senior management team of Pacific Telecom, Inc., and other experienced
telecommunications industry executives. In May 1999, we acquired the Alaska
telecommunications properties of Century Telephone Enterprises, Inc. and
substantially all of the assets and liabilities of the Anchorage Telephone
Utility, or ATU. Century's Alaska properties were the incumbent provider of
local telephone services in Juneau, Fairbanks and more than 70 rural communities
in Alaska and provided Internet services to customers statewide. ATU was the
largest local exchange carrier in Alaska and provided local telephone and long
distance services primarily in Anchorage and cellular services statewide. On
October 28,1999, we changed our name from ALEC Holdings, Inc. to Alaska
Communications Systems Group, Inc.
3
<PAGE>
OUR BUSINESS OPPORTUNITY
Alaska is characterized by its large geographic size, widely dispersed
population and large distance between urban areas. Over 60% of the state's
population resides in its three largest cities, Anchorage, Juneau and Fairbanks.
Alaska lacks an effective ground transportation infrastructure, and many of the
state's communities are accessible only by air or water. As a result, Alaskans
are particularly dependent on telecommunications services to access resources
and information unavailable in their communities. We estimate that Alaskan
telecommunications businesses generated aggregate revenues of $1 billion in
1998.
Alaska's income and demographic characteristics provide opportunities for
significant growth of telecommunications services. Alaska has the highest median
household income in the U.S. In addition, Alaskans pay no state personal income
taxes and receive an annual per capita payment from the Alaska Permanent Fund.
The population in Alaska has been growing at a compound annual rate of 1.3% over
the last ten years, compared to 1.0% for the U.S. as a whole. The U.S. Census
Bureau projects that Alaska's population will grow at a compound annual rate of
1.9%, as compared to 0.8% for the U.S. as a whole, through 2005.
We believe that the outlook for growth in our businesses is favorable due to
the fundamental demand for telecommunications, including:
- continued demand for core telephone services and enhanced service
offerings, such as voice mail and call waiting,
- access line growth due to population growth and the demand for multiple
lines,
- increasing demand for wireless services and
- DSL and Internet access growth due to higher business and consumer
bandwidth needs for data and Internet services.
4
<PAGE>
OUR BUSINESS STRATEGY
As part of our business strategy, we intend to:
LEVERAGE OUR NETWORK AND CUSTOMER BASE. Our competitive position as the
leading diversified, facilities-based telecommunications provider in Alaska
affords us a valuable opportunity to capitalize on the growing demand for
communications services. In particular, we intend to:
PROVIDE ONE-STOP COMMUNICATIONS SERVICES. We intend to offer a complete
suite of telecommunications and data services, including:
- local telephone,
- wireless,
- long distance and
- data and Internet services.
INCREASE PENETRATION OF ENHANCED SERVICES. We seek to achieve a higher
penetration of high-margin enhanced services. Offered services include:
- call waiting,
- caller ID,
- call forwarding and
- voice mail.
OFFER COMPLEMENTARY COMMUNICATIONS AND MEDIA SERVICES. We currently
offer ISDN and other high-speed data services and intend to expand our
service offerings to include:
- DSL services by year-end 1999,
- virtual private networks and
- statewide Centrex services, such as four-digit dialing.
PROVIDE SUPERIOR CUSTOMER SERVICE. We are committed to building strong
customer relationships by providing high-quality customer care. We intend to
increase customer loyalty and retention by:
- improving call response times,
- providing one-call customer solutions and
- offering online customer account management services.
BUILD THE LEADING COMMUNICATIONS BRAND IN ALASKA. Through future promotion
of all of our service offerings under the "Alaska Communications Systems" brand
name, we intend to take advantage of our statewide presence and centralized
marketing to:
- build superior brand awareness,
- drive greater penetration of our products and services and
- create higher demand for premium-priced branded services.
REALIZE OPERATING EFFICIENCIES. We seek to realize significant operating
efficiencies by:
- eliminating duplicative overhead from our recent acquisitions,
- investing in new cost-effective information technology and
- creating an integrated, low cost network.
PURSUE SELECTED STRATEGIC ACQUISITIONS. We intend to pursue selected
investments in or acquisitions of:
- local exchange carriers in Alaska and
- entities whose businesses complement our existing product and service
offerings.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares of common stock offered.............................. 10,000,000 shares
Shares of common stock outstanding after the offering....... 31,829,273 shares
</TABLE>
---------------------
<TABLE>
<S> <C>
Nasdaq National Market Symbol................ "ALSK"
Use of Proceeds.............................. We estimate that we will receive net proceeds
from the offering of approximately $128.3
million. We intend to use $26.5 million of
the net proceeds to repay debt, including:
- $10.5 million to redeem a portion of our
senior discount debentures, including a
$1.2 million redemption premium, and
- $16.0 million of borrowings under our
revolving credit facility.
We intend to use the balance of the net
proceeds for capital expenditures, strategic
investments and acquisitions, including
acquisitions of access lines, and general
corporate purposes. Depending on the timing
of these expenditures, we may also use a
portion of the proceeds to repay a portion of
our outstanding term loans.
This discussion of our use of proceeds
assumes the effectiveness of an amendment to
the credit agreement for our senior credit
facility that we recently entered into with
our senior lenders. If the amendment does not
become effective, we will seek another
amendment or continue to operate our business
in a manner consistent with the credit
agreement.
The senior discount debentures, the senior
credit facility and the amendment to the
credit agreement are described under
"Description of Indebtedness--The Senior
Credit Facility" and "--The Alaska
Communications Systems Group Senior Discount
Debentures". Our use of proceeds is more
fully described under "Use of Proceeds".
</TABLE>
6
<PAGE>
The calculation of the shares outstanding after the offering is based upon
the number of shares outstanding on November 15, 1999. The calculation of the
shares outstanding after the offering does not include (1) 3,157,500 shares of
common stock issuable upon exercise of outstanding options granted to our
directors, officers, employees and consultants under the ALEC Holdings, Inc.
1999 Stock Incentive Plan and (2) approximately 828,000 shares of common stock
that we expect to issue upon the cashless exercise of 828,261 outstanding
warrants in connection with the offering. We also expect to have 2,650,000
shares of common stock reserved for issuance under the stock incentive,
non-employee director compensation and stock purchase plans we intend to adopt
in connection with the offering. These plans are described under
"Management--Compensation of Directors--Alaska Communications Systems Group,
Inc. 1999 Non-Employee Director Stock Compensation Plan", "--ALEC Holdings, Inc.
1999 Stock Incentive Plan", "--Alaska Communications Systems Group, Inc. 1999
Stock Incentive Plan" and "--Alaska Communications Systems Group, Inc. 1999
Employee Stock Purchase Plan". Also, the calculation of the shares outstanding
after the offering assumes that the underwriters will not exercise the option
granted by us to purchase up to 1,500,000 additional shares of common stock in
the offering, as described under "Underwriting".
7
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL AND OPERATING DATA
The following summary unaudited pro forma combined financial and operating
data are based on the financial statements of Century's Alaska properties and
ATU, as adjusted to illustrate the estimated effects of:
- the acquisition in May 1999 of Century's Alaska properties,
- the acquisition in May 1999 of ATU,
- the purchase in June 1999 of fiber capacity for $19.5 million,
- the financings entered into to complete these acquisitions and
- the offering and the application of the net proceeds of the offering, as
described under "Use of Proceeds",
as if they had occurred at the beginning of the periods presented with respect
to the operating, financial and other data and on September 30, 1999 with
respect to the balance sheet data.
The summary unaudited pro forma combined financial and operating data do not
purport to be indicative of what our financial position or results of operations
would actually have been had these transactions been completed on the dates
indicated, or to project our results of operations for any future period, and
should be read in conjunction with "Unaudited Pro Forma Combined Financial
Statements", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and the related notes which
are included elsewhere in this prospectus.
You should also keep the following points in mind as you read the table.
- "Other income (expense)" includes the equity in losses of minority
investments, which were $2,945,000 for the year ended December 31, 1998
and $1,452,000 for the nine months ended September 30, 1999.
- Net cash data includes information from ATU's financial statements
prepared according to governmental accounting standards. The differences
between governmental accounting standards and the standards promulgated by
the Financial Accounting Standards Board, and their impact on ATU's
financial statements, are discussed in Note 1 to the financial statements
of Municipality of Anchorage Telephone Utility Fund which are included
elsewhere in this prospectus.
- "EBITDA" is net income before interest expense, income taxes, depreciation
and amortization. EBITDA is not intended to represent cash flow from
operations as defined under generally accepted accounting principles, and
should not be considered as an alternative to net income as an indicator
of our operating performance or cash flows. EBITDA is included in this
prospectus because management believes it is a useful financial
performance measure for comparing companies in the telecommunications
industry in terms of operating performance and ability to satisfy debt
service, capital expenditure and working capital requirements.
- "Adjusted EBITDA" for the year ended December 31, 1998 is EBITDA increased
by:
- the net effect of the elimination of one-time duplicative
administrative charges resulting from Century's acquisition of Pacific
Telecom, and the related loss of revenues, in the amount of
$1,399,000,
- unrealized access revenues in the amount of $417,000 that were not
recovered in 1998 but are being recovered in 1999,
- the net effect of reduced operating expenses, primarily leased circuit
expenses, partially offset by higher maintenance expenses, that would
have been experienced had the purchase of fiber capacity occurred
8
<PAGE>
on January 1, 1998, in the amount of $2,047,000 and
- the equity in losses of minority investments, which were $2,945,000.
- "Adjusted EBITDA" for the nine months ended September 30, 1999 is EBITDA:
- increased by (1) $1,535,000 net cost savings related to the purchase
of fiber capacity, (2) $7,695,000 of non-recurring expense and
transaction costs associated with our acquisitions of Century's Alaska
properties and ATU and (3) the equity in losses of minority
investments, which were $1,452,000, and
- decreased by $1,570,000 of revenues related to prior periods.
- Operating cash flows would have been increased by $2,047,000 for the year
ended December 31, 1998 and by $1,535,000 for the nine months ended
September 30, 1999, had the purchase of fiber capacity occurred on
January 1, 1998.
- "Pro forma cash interest expense" is defined as interest expense exclusive
of amortization of deferred financing costs.
- "Access lines in service" includes all revenue producing lines connected
to retail or wholesale customers.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- -------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Operating revenues....................................... $281,606 $221,346
Operating expenses....................................... 240,986 192,567
-------- --------
Operating income......................................... 40,620 28,779
Interest expense, net.................................... (55,356) (43,073)
Other income (expense)................................... (2,540) (1,078)
-------- --------
Loss before income taxes................................. (17,276) (15,372)
Income tax expense (benefit)............................. -- (174)
-------- --------
Net loss................................................. $(17,276) $(15,198)
======== ========
OTHER FINANCIAL DATA:
Net cash provided by operating activities................ $ 43,974 $ 41,587
Net cash used by investing activities.................... (32,323) (696,282)
Net cash provided by financing activities................ 103,240 753,551
EBITDA................................................... 99,301 72,990
Adjusted EBITDA.......................................... 106,109 82,102
Pro forma cash interest expense.......................... 51,538 40,386
Capital expenditures..................................... 56,443 46,218
OTHER DATA (END OF PERIOD):
Access lines in service.................................. 305,334 324,980
Cellular subscribers..................................... 66,572 70,856
Cellular penetration..................................... 14.5% 15.4%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------
<S> <C> <C>
AS ADJUSTED
ACTUAL FOR OFFERING
-------- --------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $ 63,442 $174,327
Net property, plant and equipment......................... 428,596 428,596
Total assets.............................................. 804,472 915,357
Current liabilities....................................... 51,921 41,921
Long-term debt including current portion.................. 615,433 608,018
Stockholders' equity...................................... 127,669 255,969
</TABLE>
9
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA--CENTURY'S ALASKA PROPERTIES
The following table sets forth summary historical combined financial data of
Century's Alaska properties. You should keep the following points in mind as you
read the table.
- We derived the summary historical combined financial data included in the
table from the combined financial statements and the related notes of
Century's Alaska properties, some of which are included elsewhere in this
prospectus.
- Century acquired its Alaska properties on December 1, 1997 as part of its
acquisition of Pacific Telecom. This acquisition was accounted for as a
purchase, resulting in a pushdown of $208.0 million of goodwill to
Century's Alaska properties.
- The data for the year ended December 31, 1997 represent the results of
Century's Alaska properties for the first 11 months of the year, as owned
by Pacific Telecom, and the last month of the year, as owned by Century.
- The data include the results of the telephone operation of the City of
Fairbanks from October 6, 1997, the date of its acquisition. This
acquisition was accounted for as a purchase.
- On December 31, 1997, the cellular operations of Fairbanks were sold to
ATU.
The summary historical combined financial data should be read in conjunction
with "Selected Historical Combined Financial Data--Century's Alaska Properties",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the combined financial statements and the related notes of
Century's Alaska properties which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues.............................. $ 69,402 $ 75,071 $ 80,773 $ 94,886 $ 124,509 $ 28,375 $ 31,361
Operating expenses.............................. 52,795 55,506 60,518 70,356 104,595 23,990 25,451
-------- -------- -------- -------- --------- -------- --------
Operating income................................ 16,607 19,565 20,255 24,530 19,914 4,385 5,910
Interest expense, net........................... (2,459) (2,331) (1,996) (2,340) (1,405) (302) (358)
Other income (expense).......................... 1,094 (1,020) (33) (245) 356 357 80
-------- -------- -------- -------- --------- -------- --------
Income before income taxes...................... 15,242 16,214 18,226 21,945 18,865 4,440 5,632
Income taxes.................................... 5,962 5,713 6,737 8,482 9,218 2,214 2,709
-------- -------- -------- -------- --------- -------- --------
Net income...................................... $ 9,280 $ 10,501 $ 11,489 $ 13,463 $ 9,647 $ 2,226 $ 2,923
======== ======== ======== ======== ========= ======== ========
OTHER FINANCIAL DATA:
Net cash provided by operating activities....... $ 22,510 $ 29,917 $ 34,589 $ 26,801 $ 38,291 $ 11,025 $ 14,103
Net cash provided (used) by investing
activities.................................... (21,151) (19,587) (20,611) (16,833) (26,664) 1,947 (2,339)
Net cash used by financing activities........... (1,659) (10,578) (12,947) (10,772) (6,770) (11,587) (6,753)
EBITDA.......................................... 30,790 32,861 35,570 42,574 50,729 11,951 13,775
EBITDA margin................................... 44.4% 43.8% 44.0% 44.9% 40.7% 42.1% 43.9%
Capital expenditures............................ $ 21,001 $ 19,437 $ 20,465 $ 16,400 $ 26,799 $ 2,321 $ 2,200
OTHER DATA (END OF PERIOD):
Access lines in service......................... 73,563 77,660 82,969 124,869 131,858 128,023 134,276
Cellular subscribers............................ 3,058 3,950 5,573 2,096 2,945 2,546 3,417
Cellular penetration............................ 2.1% 2.7% 3.8% 3.7% 5.2% 4.6% 5.2%
</TABLE>
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA--ATU
The following table sets forth summary historical financial data of ATU. You
should keep the following points in mind as you read the table.
- We derived the summary historical combined financial data included in the
table from the financial statements and related notes of ATU, some of
which are included elsewhere in this prospectus.
- ATU was a public utility of the Municipality of Anchorage and was exempt
from federal and state income taxes.
- Net cash data includes information from ATU's financial statements
prepared in accordance with governmental accounting standards. The
differences between governmental accounting standards and the standards
promulgated by the Financial Accounting Standards Board, and their impact
on ATU's financial statements, are discussed in Note 1 to the financial
statements of Municipality of Anchorage Telephone Utility Fund which are
included elsewhere in this prospectus.
The summary historical financial data below should be read in conjunction
with "Selected Historical Financial Data--ATU", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the related notes of ATU which are included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues............................ $117,911 $122,681 $130,314 $139,941 $157,097 $ 36,758 $ 39,757
Operating expenses............................ 96,970 102,009 109,398 120,932 134,204 31,276 34,261
-------- -------- -------- -------- -------- -------- --------
Operating income.............................. 20,941 20,672 20,916 19,009 22,893 5,482 5,496
Interest expense, net......................... (7,565) (6,706) (6,840) (6,768) (6,427) (1,840) (1,585)
Other income (expense)........................ (328) (322) (219) (123) 2,896 (183) (423)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.................... 13,048 13,644 13,857 12,118 13,570 3,459 3,488
Income taxes.................................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income.................................... $ 13,048 $ 13,644 $ 13,857 $ 12,118 $ 13,570 $ 3,459 $ 3,488
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Net cash provided by operating activities..... $ 42,382 $ 43,412 $ 42,120 $ 46,641 $ 53,207 $ 8,394 $ 10,735
Net cash provided (used) by investing
activities.................................. 13,577 1,057 (787) (3,665) (5,659) (8,044) (1,568)
Net cash provided (used) by financing
activities.................................. (57,169) (53,518) (30,095) (46,916) (33,580) 16,631 (12,150)
EBITDA........................................ 39,549 39,608 41,193 45,725 49,605 12,398 12,507
EBITDA margin................................. 33.5% 32.3% 31.6% 32.7% 31.6% 33.7% 31.5%
Capital expenditures.......................... $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
OTHER DATA (END OF PERIOD):
Access lines in service....................... 144,869 147,934 154,752 158,486 168,536 164,569 170,343
Cellular subscribers.......................... 13,684 24,855 37,651 53,035 63,627 54,436 63,779
Cellular penetration.......................... 4.7% 8.4% 12.6% 13.3% 15.8% 13.7% 15.8%
</TABLE>
11
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH THE OTHER INFORMATION IN
THIS PROSPECTUS, BEFORE DECIDING TO PURCHASE SHARES OF OUR COMMON STOCK.
THE TELECOMMUNICATIONS INDUSTRY IS EXTREMELY COMPETITIVE, AND WE MAY HAVE
DIFFICULTY COMPETING EFFECTIVELY
As the incumbent local exchange carrier, we face competition mainly from
resellers, local providers who lease unbundled network elements from us and, to
a lesser degree, from facilities-based providers of local telephone services. In
September 1997, GCI, Inc. and AT&T Alascom, Inc., the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage: GCI principally through unbundled network element interconnection
with ATU's facilities, and AT&T Alascom through the resale of ATU's services. As
a result, ATU lost approximately 19% of its retail access lines in Anchorage to
these competitors during the first ten months of competition ended June 1998,
and these competitors currently have approximately 23% of the retail access
lines in Anchorage. We cannot be sure that we will not continue to lose
customers to GCI and AT&T Alascom or to other new providers of local telephone
service.
As "rural telephone companies" under the Telecommunications Act, our rural
local exchange carriers have historically been exempt from the obligation to
lease their facilities or resell their services on a wholesale discounted basis
to competitive local exchange carriers seeking interconnection. However, on June
30, 1999, the Alaska Public Utilities Commission, commonly know as the APUC,
ordered these exemptions terminated. We sought reconsideration of that order
from the new Regulatory Commission of Alaska, or RCA, which replaced the APUC on
July 1, 1999. On October 11, 1999, the RCA sustained the APUC order terminating
our rural exemptions. As a result, we may be subject to interconnection duties,
such as the provisioning of unbundled network elements and of wholesale
discounted resale services to competitors in some or all of our rural service
areas. Interconnection duties are governed by telecommunications rules and
regulations related to the unbundled network elements that must be provided.
These rules and regulations were recently revised and remain subject to ongoing
modifications. The termination of the rural exemptions is more fully described
under "--Revocation of the substantial protections from competition granted to
our rural local exchange carriers under the Telecommunications Act of 1996 could
result in increased competition". In addition, while cellular wireless services
have historically complemented traditional local exchange services, we
anticipate that existing and emerging wireless technologies may increasingly
compete with local exchange services in some or all of our service areas.
With respect to our wireless services, we currently compete with at least
one other cellular provider in each of our wireless service areas. In addition,
we have one PCS competitor in Anchorage. Some of our competitors are formidable,
with financial and technical resources greater than ours.
In long distance, we currently have less than 2.5% of total long distance
revenues in Alaska and face competition from AT&T Alascom and GCI, the two major
long distance providers in Alaska.
In the highly competitive Internet access services business, we expect that
competition will intensify in the future due to the absence of significant
barriers to entry. We currently compete with a number of established online
services companies, interexchange carriers and cable companies.
In seeking to compete in these businesses, we may be subject to regulatory
restrictions, such as those pertaining to bundled service offerings or use of
customer information, which will increase
12
<PAGE>
our difficulty in competing effectively. Further, aggressive competition in all
of the markets in which we operate could:
- reduce our customer base,
- require us to lower rates and other prices in order to compete,
- increase marketing expenditures and use of discounting and promotional
campaigns that would adversely affect our margins or,
- otherwise have an adverse effect on our results of operations.
FAILURE TO INTEGRATE OUR RECENT ACQUISITIONS SUCCESSFULLY MAY PREVENT US FROM
REALIZING PLANNED OPERATING GAINS AND EFFICIENCIES AND OTHERWISE FROM
IMPLEMENTING OUR BUSINESS STRATEGY
Our ability to operate successfully is dependent on our ability to integrate
the operations of Century's Alaska properties and ATU and manage the growth
expected to result from the combination of those businesses. Our success will
depend on our ability to, among other things:
- retain and assimilate qualified managerial, professional and technical
personnel from the acquired businesses,
- centralize general and administrative support services and information
technology platforms, and coordinate and integrate operational, financial
and management processes, systems and controls, including the development
of effective systems relating to ordering, provisioning and billing for
telecommunication services,
- successfully market all of our service and product offerings under a
unified brand name, while raising brand awareness among our customers,
- adopt and maintain uniform standards, control procedures and policies,
- manage growth in our service and product offerings, while avoiding
disruption of our existing business and
- preserve good relationships with our suppliers, employees and customers.
The expansion of our operations also will depend on our ability to, among
other things, assess markets, forecast regulatory trends, identify, finance and
complete suitable acquisitions and continue to expand and upgrade our network
backbone, all in a timely manner, at reasonable cost and on satisfactory terms
and conditions.
Failure to successfully integrate our recent acquisitions or any businesses
we may acquire in the future could adversely impact our business strategy and
materially adversely effect our results of operations.
WE HAVE A SHORT OPERATING HISTORY WITH RESPECT TO OUR CURRENT BUSINESSES
Prior to May 1999, substantially all of our current businesses were
conducted as part of Century or the Municipality of Anchorage and their
affiliates. After our acquisitions of Century's Alaska properties and ATU in May
1999, we engaged in business as an independent entity for the first time and
have since made significant changes, including personnel and organizational
changes.
THE ESTABLISHMENT OF A NEW REGULATORY AGENCY IN ALASKA MAKES THE DIRECTION OF
INTRASTATE REGULATORY POLICY LESS CLEAR
Effective on July 1, 1999, the APUC was extinguished by legislative action
and a new Regulatory Commission of Alaska, or RCA, was established. The statutes
and regulations of the state applicable to our businesses remained largely
intact and are now administered by the RCA. None of the former APUC
commissioners was appointed to the RCA, and only one of the new RCA
commissioners has prior APUC experience. Given the large number of proceedings
currently before the RCA, including those addressing various aspects of local
exchange competition, access
13
<PAGE>
charges and universal service, the creation of a new commission increases
regulatory uncertainty regarding the timing and direction of state regulatory
policies.
REVOCATION OF THE SUBSTANTIAL PROTECTIONS FROM COMPETITION GRANTED TO OUR RURAL
LOCAL EXCHANGE CARRIERS UNDER THE TELECOMMUNICATIONS ACT OF 1996 COULD RESULT
IN INCREASED COMPETITION
On June 30, 1999, the APUC issued an order revoking the regulatory
exemptions that our rural local exchange carriers then held. These exemptions
permitted our local exchange carriers in rural areas to deny interconnection
elements and wholesale discounted resale services to competitors. In July 1999,
we sought reconsideration from the RCA. On October 11, 1999, the RCA issued an
order sustaining the APUC decision. The RCA expressed a preference for
establishing terms and conditions for interconnection through the process of
negotiations between carriers. Subsequently, on October 26, 1999, the RCA
dismissed our petitions seeking to establish open competitive markets in
Fairbanks and Juneau through tariffed interconnnection terms and conditions. On
November 10, 1999, we filed a formal appeal of the RCA's order terminating the
rural exemptions in the Alaskan Superior Court. On November 12, 1999, we filed a
parallel appeal of the RCA's order dimissing our petitions for tariffed
interconnection in the Alaskan Superior Court. Although we believe that the
appeals are well-founded, we cannot predict the timing and outcome of this
litigation.
We are negotiating with potential competitors the terms and conditions of
interconnection in our rural service areas. Under the RCA's order, either party
may request arbitration of any unresolved interconnection issue at any time
after December 10, 1999. Under the Telecommunications Act of 1996, all
arbitration issues must be resolved within nine months of the original request
for interconnection. If we are unable to charge rates which fairly compensate us
for providing unbundled network elements and/or wholesale discounted resale
services, our financial and operating results could be adversely affected.
A REDUCTION OF THE RATES WE CHARGE OUR CUSTOMERS BY THE RCA OR THE FCC 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 local exchange
carriers' networks. These authorized rates 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.
The APUC in the past indicated that one of our exchange carriers was earning
in excess of its historical authorized rate of return. Neither the RCA nor the
former APUC has initiated a proceeding to review or change the authorized rate
of return. As a condition to granting its approval of our recent acquisitions of
Century's Alaska properties and ATU, however, the APUC required that we file, by
June 30, 2001, revenue requirement, cost-of-service and rate design studies that
show our earnings levels for the year ended December 31, 2000. Based on
historical practice, the APUC did not generally initiate rate proceedings unless
a company, as a whole, was earning in excess of the average of its authorized
rates of return. We cannot assure you, however, that the RCA will not change
this practice, that our earnings levels, as disclosed in our studies, will not
exceed our authorized rates of return, or that the RCA will not initiate a rate
proceeding that results in the RCA ordering us to reduce our rates.
In October 1998 the FCC initiated proceedings, but has not yet reached any
decision, regarding the appropriate rate of return to be applied for federal
rate-making purposes to companies like us that are not subject to price cap
regulation.
REVENUES FROM ACCESS CHARGES MAY BE REDUCED OR LOST
We received 35.0% of our 1998 pro forma combined revenues from access
charges paid by interstate and intrastate interexchange carriers for originating
and terminating calls in their service
14
<PAGE>
areas. The amount of revenue that we receive from 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.
A REDUCTION IN THE UNIVERSAL SERVICE SUPPORT CURRENTLY RECEIVED BY SOME OF OUR
SUBSIDIARIES WOULD REDUCE OUR REVENUES AND EARNINGS
We received 4.8% of our 1998 pro forma combined revenues from the federal
Universal Service Fund, which was established under the direction of the FCC to
compensate carriers for the high cost of providing universal telecommunications
services in rural areas. We also receive payments from the Alaska Universal
Service Fund which, according to calculations made by the staff of the fund,
total approximately $1.5 million each year. If the subsidies received from these
funds were materially reduced or discontinued, some of our rural local exchange
carriers might not be able to operate profitably. The RCA has recently ordered
the suspension of certain payments from the Alaska Universal Service Fund to one
of our rural local exchange carriers and is also considering revisions to the
Alaska Universal Service Fund which, if adopted as proposed by the RCA, would
diminish the amount of support that some of our rural local exchange carriers
would receive from the Alaska Universal Service Fund.
Various reform proceedings are underway at the FCC to change the method of
calculating the amount of subsidies paid into and from the federal Universal
Service Fund, and future reforms are expected to replace the current historical
cost system with a system based on forward-looking economic costs. We cannot
predict at this time the effect that any change in the method of calculating
subsidies may have on our business. Also, because we provide interstate and
international services, we are required to contribute to the federal fund a
percentage of our revenue earned from our interstate and international services.
Although our rural local exchange carriers receive subsidies from the federal
fund, we cannot be certain of how, in the future, our contributions to the fund
will compare to the subsidies we receive from the fund.
Reform proceedings are also underway in Alaska to review carriers' support
from the state fund, and proposals have been made to require carriers to use
payments received from the fund to provide public interest pay telephones. In
addition, the existence of the state fund has been challenged in court. Any of
these reforms, proposals and challenges may result in a reduction or
discontinuation of the subsidies available to our rural operating companies.
WE MAY NOT BE ABLE TO OFFER LONG DISTANCE SERVICES ON A PROFITABLE BASIS
Our long distance operations have historically been modest in relation to
the long distance businesses of our competitors and have generated operating
losses of $3.7 million in 1998 and $3.2 million in 1997. We intend to expand our
long distance operations substantially and change the way in which we offer
those services by packaging them with complementary services. There is no
assurance that our operating losses from long distance services will not
increase in the future, even after taking account of revenue from complementary
services.
We have historically offered long distance services only in the Anchorage
area, and those services were provided on a "reseller" basis as we relied on
other carriers to provide the service. We recently acquired ownership of long
distance fiber optic transmission capacity connecting Juneau, Fairbanks and
Seattle with Anchorage and, where possible, we have transferred our long
distance traffic to our own network. We have also committed to purchase
additional fiber optic capacity in 2001. We plan to expand significantly our
marketing of long distance services by packaging them with complementary
telecommunications services, including statewide Centrex, Internet access and
high speed data services. Our existing long distance competitors can be expected
to respond to our initiatives and some of them have greater financial resources
than we have. We cannot predict that we will generate sufficient revenue from
these efforts to provide a
15
<PAGE>
satisfactory return on our recent $19.5 million investment in fiber optic
capacity or to fund $19.5 million in future investments in additional fiber
optic capacity that we are committed to make.
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 service. If we overestimate this demand, we may be
obligated 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 will not be able to meet this demand.
In 1996, the FCC issued an order that required nondominant interexchange
carriers, like us, to cease filing tariffs for our domestic interexchange
services. The order required mandatory detariffing and gave carriers nine months
to withdraw federal tariffs and move into contractual relationships with their
customers. This order subsequently was stayed by a federal appeals court. If the
FCC's order becomes effective, nondominant interstate services providers will no
longer be able to file tariffs with the FCC and we may need to implement
customer contracts which could result in substantial administrative expense.
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. If we were to lose one or more of these
key employees our ability to successfully implement our business plan and the
price of our common stock could be materially adversely affected. We do not
maintain any "key person" insurance on any of our personnel.
OUR SUBSTANTIAL DEBT MAY REDUCE OUR FLEXIBILITY AND IMPAIR OUR OPERATIONS
We have a significant amount of debt. As of September 30, 1999, we had
outstanding $625.4 million of debt, excluding unused commitments--of which
$21.2 million was our senior debt and $595.0 million was senior and senior
subordinated debt of our subsidiary, Alaska Communications Systems Holdings--and
stockholders' equity of $127.7 million. In addition, Alaska Communications
Systems Holdings' senior credit facility provides that Alaska Communications
Systems Holdings may borrow up to an additional $59.0 million under a revolving
credit facility as of November 15, 1999. The senior credit facility and the
indentures governing our senior discount debentures and senior subordinated
notes limit our and our subsidiaries' ability to incur additional debt and
impose significant restrictions on our ability to:
- pay cash dividends and make other restricted payments,
- sell assets or stock,
- enter into transactions with affiliates,
- effect mergers or other business combinations and
- engage in other lines of business.
In addition, the senior credit facility restricts our ability to prepay
existing debt and the amount of capital expenditures we can make in each year,
and requires us to meet specified financial ratios and tests.
Our debt could adversely affect our operations by:
- impairing our ability to borrow additional money on favorable terms,
- requiring us to use a substantial portion of our operating cash flow to
service debt, which would reduce the funds available for operations,
capital expenditures, acquisitions and other investments in our business,
- placing us at a competitive disadvantage against competitors with lesser
debt burdens and
- making us more vulnerable to a worsening of conditions in the markets in
which we operate or in the U.S. economy generally.
16
<PAGE>
Although we intend to repay a portion of our indebtedness with the proceeds
of the offering, we will continue to have a significant amount of debt. We also
expect to incur additional debt in the future for capital expenditures, possible
future investments and acquisitions and working capital.
BECAUSE WE AND OUR DIRECT SUBSIDIARY, ALASKA COMMUNICATIONS SYSTEMS HOLDINGS,
ARE HOLDING COMPANIES, WE BOTH RELY ON DISTRIBUTIONS FROM OUR SUBSIDIARIES TO
SATISFY OUR OBLIGATIONS. IF WE DO NOT RECEIVE THOSE DISTRIBUTIONS FROM OUR
SUBSIDIARIES, WE MAY NOT BE ABLE TO SERVICE OUR SUBSTANTIAL DEBT
We cannot assure you that we will be able to meet our debt obligations.
Because we are a holding company with no significant assets or independent
operations other than the equity of Alaska Communications Systems Holdings, if
we do not receive dividends or other distributions from Alaska Communications
Systems Holdings that are sufficient for us to satisfy our obligations under our
senior discount debentures, or if Alaska Communications Systems Holdings, which
is also a holding company, does not receive dividends or other distributions
from its subsidiaries that are sufficient to satisfy its obligations under its
senior credit facility and senior subordinated notes, then, unless we can
refinance those obligations, a default could occur and payment of those
obligations could be accelerated. While we expect sufficient dividends to be
available to meet our debt service obligations, dividends from our subsidiaries
could be unavailable if those subsidiaries are unable to produce sufficient
operating cash flow or if dividends or other payments to us are otherwise
restricted by the agreements to which our subsidiaries are parties or by law or
regulatory order. In the event of an insolvency, bankruptcy or similar
proceedings involving one of our or Alaska Communications Systems Holdings'
subsidiaries, creditors of that subsidiary would generally be entitled to
priority over us with respect to the assets of the subsidiary.
The lenders under Alaska Communications Systems Holdings' senior credit
facility have a first priority lien on all of the capital stock of Alaska
Communications Systems Holdings we own as well as on the common stock of all of
its subsidiaries. This stock accounts for substantially all of our assets, and
the stock of its subsidiaries accounts for substantially all of Alaska
Communications Systems Holdings' assets. If Alaska Communications Systems
Holdings defaults under the senior credit facility or if we default on our
guarantee of the senior credit facility, the lenders under the senior credit
facility could foreclose upon the capital stock of Alaska Communications Systems
Holdings and its subsidiaries. A foreclosure sale of our Alaska Communications
Systems Holdings stock could force us to accept a depressed value for our Alaska
Communications Systems Holdings common stock, and a foreclosure sale of the
common stock of Alaska Communications Systems Holdings' subsidiaries could force
Alaska Communications Systems Holdings to accept a depressed value for its
subsidiaries' common stock.
WE MAY NOT HAVE SUFFICIENT FUNDS TO REPAY OR REDEEM OUR DEBT IF WE ARE REQUIRED
TO DO SO
At maturity or upon the occurrence of a "change of control", as defined in
the documentation governing our debt obligations, we cannot assure you that we
will have sufficient funds or would be able to arrange for additional financing
to repay our debt obligations under the senior credit facility, our senior
discount debentures or the senior subordinated notes. There is no sinking fund
with respect to our senior discount debentures or the senior subordinated notes,
and at maturity the entire outstanding principal amount of those securities will
become due and payable. In addition, if a "change of control" occurs, each
holder of the debentures or notes will have the right to require us to
repurchase all or a portion of the holder's notes or debentures. However:
- the senior credit facility effectively prevents the repurchase of our
senior discount debentures and the senior subordinated notes in the event
of a change of control, unless all amounts outstanding under the senior
credit facility are repaid in full;
17
<PAGE>
- our failure to repurchase our senior discount debentures and the senior
subordinated notes would be a default under the indentures governing them,
which would be a default under the senior credit facility; and
- our failure to repay all amounts outstanding under the senior credit
facility upon a default would be a default under the indentures governing
our senior discount debentures and the senior subordinated notes.
Because we will probably not have sufficient cash flow from operations to
repay our senior discount debentures and the senior subordinated notes upon a
change of control, we may need to borrow additional amounts or seek other
sources of financing to repay them. We cannot guarantee that such additional
financing will be available or available on favorable terms.
WE COULD EXPERIENCE SIGNIFICANT BUSINESS DISRUPTIONS IF WE FAIL TO IDENTIFY AND
RESOLVE POTENTIAL YEAR 2000 PROBLEMS IN A TIMELY MANNER
Many existing computer systems and microprocessors use only two digits to
identify a year in the date field, which assumes that the first two digits of
the year are always "19". As a result, beginning on January 1, 2000, computers
that are not year 2000 compliant may interpret the year as "1900" instead of
"2000". Systems that calculate, compare or sort data using the incorrect date
may malfunction.
We are significantly dependent upon the proper functioning of our computer
systems, digital switches and electronic transmission equipment. A failure of
our systems to be year 2000 compliant would have a material adverse effect on
our business. For example, failure could seriously disrupt our switches and
network, potentially resulting in business interruptions or shutdown.
We also believe that, if we or our important vendors or suppliers experience
year 2000 problems, the problems could materially disrupt our business processes
and relationships with our customers or could require the expenditure of
material financial and other resources. We have conducted a review of the
computer systems and related software, digital switches and electronic
transmission equipment that we acquired upon completion of our acquisitions of
Century's Alaska properties and ATU. We have identified a number of systems that
are not year 2000 compliant and have implemented a plan that we believe will
ensure that these systems, software and equipment store and process information
properly in the year 2000. The action items required by this plan have been
largely completed as of the date of this prospectus.
We have also made efforts to verify the year 2000 readiness of our important
vendors and suppliers. Although we believe the processes we have initiated are
adequate to remedy year 2000 deficiencies, we cannot assure you that these
remedies will be timely or effectively implemented or that we will be immune to
year 2000 deficiencies suffered by third parties that may in some way affect our
business in a materially adverse manner. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a more detailed
discussion of our year 2000 readiness.
YOU WILL NOT RECEIVE CASH DIVIDENDS ON YOUR INVESTMENT IN OUR COMMON STOCK
We have never declared or paid any cash dividends on our common stock. We
intend to retain our earnings, if any, to finance the development and expansion
of our business, and, therefore, we do not anticipate paying any cash dividends
in the foreseeable future. Moreover, our ability to declare and pay cash
dividends on our common stock is restricted by covenants in our senior credit
facility and in the indentures governing our senior discount debentures and
senior subordinated notes. As a result, capital appreciation, if any, of our
common stock will be your sole source of gain for the foreseeable future.
18
<PAGE>
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
COMMON STOCK IF YOU PURCHASE COMMON STOCK IN THE OFFERING
Purchasers of common stock in the offering will experience immediate and
substantial dilution in the net tangible book value of their common stock. We
currently have a substantial net tangible book deficit per share of common
stock. At an assumed initial public offering price of $14.00, which is the
midpoint of the initial public offering price range set forth on the cover of
this prospectus, the dilution will be $15.71 per share in net tangible book
value of common stock from the initial public offering price, as more fully
described under "Dilution".
YOUR INTERESTS AS HOLDERS OF THE COMMON STOCK MAY CONFLICT WITH THOSE OF OUR
CONTROLLING STOCKHOLDER
Fox Paine & Company beneficially owns 89.6% of the outstanding shares of our
voting capital stock and after the offering will continue to own approximately
61.4%, without giving effect to the exercise of the underwriters' over-allotment
option. As a result, Fox Paine & Company has and will continue to have control
over the outcome of matters requiring stockholder approval, including the power
to:
- elect all of our directors and the directors of our subsidiaries,
- amend our charter or by-laws and
- adopt or prevent mergers, consolidations or the sale of all or
substantially all of our assets or our subsidiaries' assets.
Fox Paine & Company also will be able to prevent or cause a change of
control relating to us. Fox Paine & Company's control over us and our
subsidiaries, and its ability to prevent or cause a change in control relating
to us, may delay or prevent a change in control of us, which could adversely
affect the market price of the common stock.
Fox Paine & Company may in the future make significant investments in other
telecommunications companies. Some of these companies may be our competitors.
Fox Paine & Company and its affiliates are not obligated to advise us of any
investment or business opportunities of which they are aware, and they are not
restricted or prohibited from competing with us.
THE PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS AND MAY TRADE
BELOW THE INITIAL PUBLIC OFFERING PRICE
Although we and the underwriters examined many factors and determined the
initial public offering price after extensive negotiation, the market price of
common stock after the offering may vary from the initial public offering price.
Fluctuations in the price of our common stock may result from factors such as
the following, some of which are beyond our control:
- quarterly variations in our operating results,
- operating results that vary from the expectations of securities analysts
and investors,
- changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors,
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments,
- changes in the status of our intellectual property and other proprietary
rights,
- announcements by third parties of significant claims or proceedings
against us,
19
<PAGE>
- changes in law and regulation,
- future sales of common stock and
- stock market price and volume fluctuations.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of companies. As a result of these fluctuations, our
common stock may trade at prices below the initial public offering price.
OUR SHARE PRICE MAY DECLINE DUE TO THE LARGE NUMBER OF SHARES ELIGIBLE FOR
FUTURE SALE
Sales of substantial amounts of our common stock after the offering, or the
possibility of such sales, could adversely affect the market price of our common
stock and impede our ability to raise capital through the issuance of equity
securities. See "Shares Eligible for Future Sale" for a discussion of possible
future sales of common stock.
After this offering, we will have 31,829,273 outstanding shares of common
stock, 61.4% of which will be beneficially owned by Fox Paine, our controlling
stockholder, and we will have reserved an additional 3,157,500 shares of common
stock for issuance pursuant to outstanding stock options, of which
70,000 shares were subject to vested options. All of the shares of common stock
to be sold in the offering will be freely tradable without restriction or
further registration under the federal securities laws unless purchased by one
of our "affiliates", as that term is defined in Rule 144 under the Securities
Act of 1933. The remaining 21,829,273 shares of outstanding common stock,
representing approximately 68.6% of the outstanding common stock upon completion
of the offering, as well as approximately 828,000 shares issuable upon exercise
of outstanding warrants, will be available for future sale subject to
restrictions on the timing, manner and volume of sales imposed by the Securities
Act of 1933, or otherwise generally, upon expiration of lockup agreements with
the underwriters 180 days after the date of this prospectus.
In connection with the offering, we intend to file a registration statement
on Form S-8 to register 6,060,486 shares of common stock that are or will be
reserved for issuance under our stock incentive, non-employee director
compensation and stock purchase plans.
20
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $14.00 per share, which is the
midpoint of the initial public offering price range set forth on the cover of
this prospectus, and no exercise by the underwriters of their over-allotment
option, we will receive net proceeds from the offering of $128.3 million, after
deducting underwriting discounts and estimated offering expenses of $11.7
million. We intend to use $26.5 million of the net proceeds we receive to repay:
- $10.5 million of our senior discount debentures due May 15, 2011, on which
interest accrues at an annual rate of 13.00% and is payable semiannually,
including $9.3 million in aggregate accreted value and a redemption
premium of $1.2 million on these debentures and
- $16.0 million in aggregate principal amount outstanding under our
revolving credit facility, with an estimated weighted average annual
interest rate of 8.26%. After this repayment, our $75.0 million revolving
credit facility will continue to be in effect.
We intend to use the balance of the net proceeds from the offering to fund a
portion of our capital expenditures, and for strategic investments and
acquisitions, including acquisitions of access lines, and general corporate
purposes. Depending on the timing of these expenditures, we may also use a
portion of the proceeds to repay a portion of our outstanding term loans.
We currently expect that for the balance of 1999 and 2000, capital
expenditures will total approximately $118.0 million, including expenditures for
upgrades and replacements of switch and transmission capacity in our local
exchange operations, expansion of digital wireless capacity in our cellular
operations and the introduction of DSL services.
We are actively pursuing selected regional acquisitions in Alaska. There are
19 local exchange carriers remaining in Alaska with an aggregate of
approximately 120,000 access lines, presenting us with the potential for
significant expansion of our network. In addition, we may pursue other selected
strategic acquisitions and investments which will complement our existing
product and service offerings.
We have entered into an amendment to our credit agreement that will become
effective upon receipt of at least $140.0 million in gross proceeds from the
offering, and the preceding discussion assumes the effectiveness of that
amendment. If we receive less than $140.0 million in gross proceeds from the
offering, the amendment will not become effective. In that event, we intend to
seek a new amendment providing for all or a portion of the flexibility currently
contemplated.
If the lenders under the credit agreement do not consent to that new
amendment, our use of the proceeds from the offering will differ from that
discussed above in that we will not be permitted under the credit agreement to
redeem any of our senior discount debentures. Additionally, while we will
continue to use available proceeds to reduce the outstanding balance under our
revolving credit facility and for general corporate purposes, our flexibility to
pursue strategic investments or acquisitions will be limited to the extent
currently provided in the credit agreement. In such event, we will also be
required to adjust our planned capital expenditures to satisfy covenants
contained in the credit agreement.
DIVIDEND POLICY
We anticipate that we will retain all of our earnings in the foreseeable
future to finance the expansion of our business and, therefore, we do not
anticipate paying any cash dividends in the foreseeable future. Our future
dividend policy will depend on our earnings, capital requirements and financial
condition and the requirements of the financing agreements to which we may be a
party and other factors considered relevant by our board of directors. In
addition, covenants in our senior credit facility and indentures governing our
senior discount debentures and the senior subordinated notes limit our ability
to declare and pay cash dividends on our common stock.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Alaska Communications
Systems Group as of September 30, 1999:
- on an actual basis and
- as adjusted for the sale of 10,000,000 shares of common stock in the
offering at an initial public offering price of $14.00 per share, which is
the midpoint of the initial public offering price range set forth on the
cover of this prospectus, and the application of the net proceeds received
from the sale as described under "Use of Proceeds".
You should read this table together with "Summary Unaudited Pro Forma
Combined Financial and Operating Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
------------------------
AS ADJUSTED
ACTUAL FOR OFFERING
------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,554 $112,439
======== ========
Revolving debt(1)........................................... $ 10,000 $ --
======== ========
Long-term debt:
Senior credit facility.................................... $435,000 $435,000
9 3/8% Senior subordinated notes due 2009................. 150,000 150,000
13% Senior discount debentures due 2011(2)................ 21,186 13,771
Capital lease obligations................................. 7,267 7,267
Note to Municipality of Fairbanks......................... 1,602 1,602
Other..................................................... 378 378
-------- --------
Total long-term debt.................................... 615,433 608,018
Stockholders' equity:
Common stock ($0.01 par value) 40,000,000 shares
authorized; 21,790,276 shares issued and outstanding;
31,790,276 as adjusted shares issued and
outstanding(3).......................................... 218 318
Paid-in capital........................................... 140,837 269,037
Unearned compensation..................................... (1,864) --
Notes receivable from officers............................ (862) (862)
Retained earnings (deficit)............................... (10,660) (12,524)
-------- --------
Total stockholders' equity.............................. 127,669 255,969
-------- --------
Total capitalization.................................... $743,102 $863,987
======== ========
</TABLE>
- ------------------------------
(1) Additional borrowings of $6.0 million have been made under the revolving
credit facility since September 30, 1999. The revolving credit facility
allows for borrowings of up to $75.0 million, and $59.0 million of
additional borrowings are available under the revolving credit facility.
(2) On May 14, 1999, we issued our senior discount debentures and warrants to
purchase 828,261 shares of common stock for aggregate gross proceeds of
$25.0 million. For purposes of calculating the original issue discount
related to our senior discount debentures, $5.1 million of value was
attributed to the warrants. The value of our senior discount debentures
adjusted for the offering reflects repayment of 35% of their accreted value,
net of original issue discount and exclusive of the redemption premium, as
of September 30, 1999. On November 15, 1999, our senior discount debentures
will have an accreted value of $26.6 million, exclusive of original issue
discount. Assuming the amendment to our credit agreement becomes effective,
we intend to repay 35% of the accreted value of our senior discount
debentures at a redemption price of 113% of accreted value with proceeds
from the offering.
(3) The calculations of shares issued and outstanding do not include
(A) 3,157,500 shares issuable upon exercise of options granted under the
ALEC Holdings, Inc. 1999 Stock Incentive Plan, (B) approximately 828,000
shares issuable under outstanding warrants exercisable at $0.01 per share,
all of which are expected to be issued in connection with the offering, and
(C) 38,997 shares issued in October 1999. We also expect to have 2,650,000
shares of common stock reserved for issuance under the stock incentive and
non-employee director compensation plans we intend to adopt in connection
with the offering. We do not expect to have any options granted outstanding
under these plans at the time of the offering. Our stock incentive and
non-employee director compensation plans are described under
"Management--Compensation of Directors--Alaska Communications Systems Group,
Inc. 1999 Non-Employee Director Stock Compensation Plan", "--ALEC Holdings,
Inc. 1999 Stock Incentive Plan", "--Alaska Communications Systems Group,
Inc. 1999 Stock Incentive Plan" and "Alaska Communications Systems Group,
Inc. 1999 Employee Stock Purchase Plan".
22
<PAGE>
DILUTION
Our net tangible book deficit as of September 30, 1999 was approximately
$182.7 million, or approximately $8.38 per share of common stock, based on an
aggregate of 21,790,276 shares of common stock outstanding. The number of shares
outstanding as of September 30, 1999 excludes:
- 3,157,500 shares of common stock issuable upon exercise of outstanding
options granted to our directors, officers, employees and consultants
under the ALEC Holdings, Inc. 1999 Stock Incentive Plan;
- approximately 828,000 shares issuable under outstanding warrants
exercisable at $0.01 per share, which are expected to be issued in
connection with the offering, and
- 38,997 shares issued in October 1999.
We expect to have 2,650,000 shares of common stock reserved for issuance under
the stock incentive, non-employee director compensation and stock purchase plans
that we intend to adopt in connection with the offering. These plans are
described under "Management-- Compensation of Directors--Alaska Communications
Systems Group, Inc. 1999 Non-Employee Director Stock Compensation Plan",
"--Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan" and
"Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan".
"Net tangible book deficit" per share represents the amount of our total
consolidated tangible assets minus total combined liabilities, divided by the
shares of common stock outstanding, before giving effect to the sale of the
shares of common stock offered in the offering. After giving effect to the sale
of 10,000,000 shares of common stock in the offering at an assumed initial
public offering price of $14.00 per share, which is the midpoint of the initial
public offering price range set forth on the cover of this prospectus, and after
deducting estimated underwriting discounts and offering expenses of
$11.7 million, and applying the net proceeds from the offering as described
under "Use of Proceeds", our net tangible book deficit as of September 30, 1999
would have been approximately $54.4 million, or approximately $1.71 per share of
common stock. This represents an immediate decrease in net tangible book deficit
of $6.67 per share of common stock to existing stockholders and an immediate
dilution in net tangible book value of $15.69 per share of common stock to new
investors purchasing common stock in the offering at the assumed initial public
offering price. The following table illustrates this per share dilution, without
giving effect to the exercise of the underwriters' over-allotment option:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book deficit per share as of September 30,
1999.................................................... $(8.38)
Decrease in net tangible book deficit per share
attributable to the offerings(1)........................ 6.67
------
Pro forma net tangible book deficit per share after the
offering.................................................. (1.71)
------
Net tangible book value dilution per share to new
investors(2).............................................. $15.71
======
</TABLE>
- ------------------------
(1) After deducting the underwriting discounts and estimated expenses for the
offering.
(2) Dilution is determined by subtracting pro forma net tangible book deficit
per share from the assumed initial public offering price paid by a new
investor.
The following table summarizes, as of September 30, 1999, the difference
between the number of shares of common stock purchased, the total consideration
paid and the average price per share paid by our existing stockholders and by
new investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 21,790,276 68.5% $134,102,000 48.9% $ 6.15
New investors.......................... 10,000,000 31.5 140,000,000 51.1 14.00
---------- ----- ------------ ----- ------
Total.................................. 31,790,276 100.0% $274,102,000 100.0% $ 8.62
========== ===== ============ ===== ======
</TABLE>
23
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--ALASKA COMMUNICATIONS SYSTEMS
GROUP
The following table sets forth selected historical consolidated financial
data of Alaska Communications Systems Group. You should keep the following
points in mind as you read the table.
- The selected historical consolidated operating data for the nine months
ended September 30, 1999 include the operating results of Century's Alaska
properties and ATU from their acquisition on May 14, 1999 through
September 30, 1999.
- We derived the selected historical consolidated financial data for the
nine months ended September 30, 1999 and as of September 30, 1999 from the
unaudited consolidated financial statements of Alaska Communications
Systems Group, which are included elsewhere in this prospectus and which,
in the opinion of management, include all adjustments, consisting solely
of normal, recurring adjustments, necessary to present fairly the
information they contain.
- "EBITDA" is net income before interest expense, income taxes, depreciation
and amortization. EBITDA is not intended to represent cash flow from
operations as defined under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator
of our operating performance or cash flows. EBITDA is included in this
prospectus because management believes it is a useful financial
performance measure for comparing companies in the telecommunications
industry in terms of operating performance and ability to satisfy debt
service, capital expenditure and working capital requirements.
The selected historical consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the unaudited consolidated financial statements
of Alaska Communications Systems Group and the related notes which are included
elsewhere in this prospectus.
24
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
-------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
OPERATING DATA:
Operating revenues
Local telephone........................................... $ 95,640
Cellular.................................................. 14,735
Long distance............................................. 4,065
--------
Total operating revenues................................ 114,440
Operating expenses
Local telephone........................................... 63,612
Cellular.................................................. 9,053
Long distance............................................. 5,091
Depreciation and amortization............................. 23,708
--------
Total operating expenses................................ 101,464
--------
Operating income............................................ 12,976
Interest expense, net....................................... (23,017)
Other income (expense)...................................... (793)
--------
Income (loss) before income taxes........................... 10,834
Income taxes................................................ (174)
--------
Net loss.................................................... $(10,660)
========
Net loss per share.......................................... $ (.51)
========
Weighted average shares outstanding (in thousands).......... 21,085
========
OTHER FINANCIAL DATA:
Cash provided by operating activities....................... $ 19,201
Cash used by investing activities........................... (740,458)
Cash provided by financing activities....................... 722,811
EBITDA...................................................... 36,406
EBITDA margin............................................... 31.8%
Capital expenditures........................................ $ 46,218
OTHER DATA (END OF PERIOD):
Access lines in service..................................... 324,980
Cellular subscribers........................................ 70,856
Cellular penetration........................................ 15.4%
BALANCE SHEET DATA (END OF PERIOD):
Total assets................................................ $804,472
Long-term debt including current portion.................... 615,433
Stockholders' equity........................................ 127,669
</TABLE>
25
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA--CENTURY'S ALASKA PROPERTIES
The following table sets forth selected historical combined financial data
of Century's Alaska properties. You should keep the following points in mind as
you read the table.
- We derived the selected historical combined financial data for each of the
three years in the period ended December 31, 1998 and as of December 31,
1997 and 1998 from the audited combined financial statements and the
related notes of Century's Alaska properties which are included elsewhere
in this prospectus.
- We derived the selected historical combined financial data for each of the
two years in the period ended December 31, 1995 and as of December 31,
1994, 1995 and 1996, from the unaudited combined financial statements of
Century's Alaska properties which are not included in this prospectus.
- We derived the selected combined historical financial data for each of the
three month periods ended March 31, 1998 and 1999 and as of March 31, 1998
and 1999 from the unaudited combined financial statements of Century's
Alaska properties, which are included elsewhere in this prospectus and
which, in the opinion of management, include all adjustments, consisting
solely of normal, recurring adjustments, necessary to present fairly the
information they contain.
- Century acquired its Alaska properties on December 1, 1997 as part of its
acquisition of Pacific Telecom. This acquisition was accounted for as a
purchase, resulting in a pushdown of $208 million of goodwill to Century's
Alaska properties.
- The financial statements for the 11-month period ended November 30, 1997
and prior periods have been presented on Pacific Telecom's basis of
accounting, while the financial statements as of December 31, 1997, the
one-month period ended December 31, 1997 and subsequent periods have been
presented on Century's basis of accounting.
- The financial statements of Century's Alaska properties include the
results of the City of Fairbanks Telephone Operation from October 6, 1997,
the date of its acquisition. This acquisition was accounted for as a
purchase.
- On December 31, 1997, the cellular operations in Fairbanks were sold to
ATU. The Fairbanks cellular property had 5,497 subscribers at the time of
the sale.
The selected historical combined financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements of Century's
Alaska properties and the related notes which are included elsewhere in this
prospectus.
26
<PAGE>
<TABLE>
<CAPTION>
CENTURY'S ALASKA PROPERTIES
----------------------------------------------------------------------------------------------
PACIFIC TELECOM CENTURY
-------------------------------------------- -----------------------------------------------
JAN. 1, DEC. 1,
1997 1997 THREE MONTHS
YEAR ENDED DECEMBER 31, TO TO YEAR ENDED ENDED MARCH 31,
--------------------------------- NOV. 30, DEC. 31, DEC. 31, ---------------------
1994 1995 1996 1997 1997 1998 1998 1999
--------- --------- --------- -------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues
Local telephone....... $ 66,636 $ 70,540 $ 75,950 $79,330 $ 10,255 $121,933 $ 27,967 $ 30,815
Cellular.............. 2,766 4,531 4,823 5,120 181 2,576 408 546
-------- -------- -------- ------- -------- -------- -------- --------
Total operating
revenues............ 69,402 75,071 80,773 84,450 10,436 124,509 28,375 31,361
Operating expenses
Local telephone....... 37,664 38,043 41,789 42,404 6,434 72,008 16,451 17,270
Cellular.............. 2,042 3,147 3,381 3,082 147 2,128 330 396
Depreciation and
amortization........ 13,089 14,316 15,348 15,823 2,466 30,459 7,209 7,785
-------- -------- -------- ------- -------- -------- -------- --------
Total operating
expenses............ 52,795 55,506 60,518 61,309 9,047 104,595 23,990 25,451
-------- -------- -------- ------- -------- -------- -------- --------
Operating income........ 16,607 19,565 20,255 23,141 1,389 19,914 4,385 5,910
Interest expense, net... (2,459) (2,331) (1,996) (2,169) (171) (1,405) (302) (358)
Other income (expense).. 1,094 (1,020) (33) (298) 53 356 357 80
-------- -------- -------- ------- -------- -------- -------- --------
Income before income
taxes................. 15,242 16,214 18,226 20,674 1,271 18,865 4,440 5,632
Income taxes............ 5,962 5,713 6,737 7,746 736 9,218 2,214 2,709
-------- -------- -------- ------- -------- -------- -------- --------
Net income.............. $ 9,280 $ 10,501 $ 11,489 $12,928 $ 535 $ 9,647 $ 2,226 $ 2,923
======== ======== ======== ======= ======== ======== ======== ========
OTHER FINANCIAL DATA:
Net cash provided by
operating
activities............ $ 22,510 $ 29,917 $ 34,589 $21,213 $ 5,588 $ 38,291 $ 11,025 $ 14,103
Net cash provided (used)
by investing
activities............ (21,151) (19,587) (20,611) (13,554) (3,279) (26,664) 1,947 (2,339)
Net cash used by
financing
activities............ (1,659) (10,578) (12,947) (8,209) (2,563) (6,770) (11,587) (6,753)
EBITDA.................. 30,790 32,861 35,570 38,666 3,908 50,729 11,951 13,775
EBITDA margin........... 44.4% 43.8% 44.0% 45.8% 37.4% 40.7% 42.1% 43.9%
Capital expenditures.... $ 21,001 $ 19,437 $ 20,465 $14,575 $ 1,825 $ 26,799 $ 2,321 $ 2,200
OTHER DATA
(END OF PERIOD):
Access lines in
service............... 73,563 77,660 82,969 -- 124,869 131,858 128,023 134,276
Cellular subscribers.... 3,058 3,950 5,573 -- 2,096 2,945 2,546 3,417
Cellular penetration.... 2.1% 2.7% 3.8% -- 3.7% 5.2% 4.6% 5.2%
BALANCE SHEET DATA
(END OF PERIOD):
Total assets............ $157,536 $161,323 $162,834 -- $459,175 $472,660 $466,301 $473,669
Long-term debt including
current portion....... 43,089 43,616 44,294 -- 42,950 43,408 42,683 43,094
Stockholders' equity.... 82,317 90,841 92,137 -- 391,314 400,962 395,359 403,885
</TABLE>
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA--ATU
The following table sets forth selected historical financial data of ATU.
You should keep the following points in mind as you read the table.
- We derived the selected historical financial data for each of the three
years in the period ended December 31, 1998 and as of December 31, 1997
and 1998 from the audited financial statements and the related notes of
ATU which are included elsewhere in this prospectus.
- We derived the selected historical financial data for each of the two
years in the period ended December 31, 1995 and as of December 1994, 1995
and 1996 from the audited financial statements of ATU which are not
included in this prospectus.
- We derived the selected historical financial data for each of the three
month periods ended March 31, 1998 and 1999 and as of March 31, 1998 and
1999 from the unaudited financial statements of ATU, which are included
elsewhere in this prospectus and which, in the opinion of management,
include all adjustments, consisting solely of normal, recurring
adjustments, necessary to present fairly the information they contain.
- "Other income (expense)" includes the equity in earnings (losses) from
minority investments.
- During the periods presented, ATU was a public utility of the Municipality
of Anchorage and was exempt from federal and state income taxes.
- Net cash data includes information from ATU financial statements prepared
in accordance with governmental accounting standards. The differences
between governmental accounting standards and the standards promulgated by
the Financial Accounting Standards Board, and their impact on ATU's
financial statements are discussed in Note 1 to the financial statements
of Municipality of Anchorage Telephone Utility Fund which are included
elsewhere in this prospectus.
- On June 1, 1999, as part of the consolidation of our operating and billing
systems, we conformed the methodology by which we calculate our number of
access lines across all of our local exchanges to that used for Century's
Alaska properties. Due to limited data available to us, we have not
computed any adjustments to the access lines in service for any year prior
to 1998. If the number of access lines in service were computed using this
method, the number of access lines as of December 31, 1998 would increase
by 4,940 and the number of access lines as of March 31, 1999 would
increase by 6,113. We intend to use the method used to calculate access
lines in service for Century's Alaska properties to calculate our access
lines in all future periods.
The selected historical financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of ATU and the related notes which are
included elsewhere in this prospectus.
28
<PAGE>
<TABLE>
<CAPTION>
ATU
----------------------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues
Local telephone............................ $109,371 $110,011 $113,415 $116,555 $121,057 $ 29,735 $ 30,364
Cellular................................... 8,540 12,670 16,897 21,845 29,225 5,879 6,710
Long distance.............................. -- -- 2 1,541 6,815 1,144 2,683
-------- -------- -------- -------- -------- -------- --------
Total operating revenues................. 117,911 122,681 130,314 139,941 157,097 36,758 39,757
Operating expenses
Local telephone............................ 71,564 73,024 75,980 74,994 74,240 18,231 18,844
Cellular................................... 6,473 9,727 12,379 14,455 19,961 4,048 4,740
Long distance.............................. -- -- 543 4,644 10,395 1,898 3,243
Depreciation and amortization.............. 18,936 19,258 20,496 26,839 29,608 7,099 7,434
-------- -------- -------- -------- -------- -------- --------
Total operating expenses................. 96,970 102,009 109,398 120,932 134,204 31,276 34,261
-------- -------- -------- -------- -------- -------- --------
Operating income............................. 20,941 20,672 20,916 19,009 22,893 5,482 5,496
Interest expense, net........................ (7,565) (6,706) (6,840) (6,768) (6,427) (1,840) (1,585)
Other income (expense)....................... (328) (322) (219) (123) (2,896) (183) (423)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes................... 13,048 13,644 13,857 12,118 13,570 3,459 3,488
Income taxes................................. -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income................................... $ 13,048 $ 13,644 $ 13,857 $ 12,118 $ 13,570 $ 3,459 $ 3,488
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Net cash provided by operating activities.... $ 42,382 $ 43,412 $ 42,120 $ 46,641 $ 53,207 $ 8,394 $ 10,735
Net cash provided (used) by investing
activities................................. 13,577 1,057 (787) (3,665) (5,659) (8,044) (1,568)
Net cash provided (used) by financing
activities................................. (57,169) (53,518) (30,095) (46,916) (33,580) 16,631 (12,150)
EBITDA....................................... 39,549 39,608 41,193 45,725 49,605 12,398 12,507
EBITDA margin................................ 33.5% 32.3% 31.6% 32.7% 31.6% 33.7% 31.5%
Capital expenditures......................... $ 33,328 $ 27,958 $ 24,958 $ 35,187 $ 29,644 $ 8,404 $ 3,383
OTHER DATA (END OF PERIOD):
Access lines in service...................... 144,869 147,934 154,752 158,486 168,536 164,569 170,343
Cellular subscribers......................... 13,684 24,855 37,651 53,035 63,627 54,436 63,779
Cellular penetration......................... 4.7% 8.4% 12.6% 13.3% 15.8% 13.7% 15.8%
BALANCE SHEET DATA (END OF PERIOD):
Total assets................................. $288,857 $289,903 $308,810 $323,124 $350,245 $351,190 $346,696
Long-term debt including current portion..... 145,775 123,009 146,412 151,945 172,521 180,161 167,618
Fund equity.................................. 118,695 126,839 132,596 136,414 141,884 139,873 145,372
</TABLE>
29
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial and operating data are
based on the financial statements of Century's Alaska properties and ATU, as
adjusted for the estimated effects of:
- the acquisition in May 1999 of Century's Alaska properties,
- the acquisition in May 1999 of ATU,
- the purchase in June 1999 of fiber capacity for $19.5 million,
- the financings entered into to complete these transactions and
- the offering and the application of the net proceeds of the offering, as
described under "Use of Proceeds",
as if they had occurred at the beginning of the periods presented with respect
to the Unaudited Pro Forma Combined Statements of Operations and on
September 30, 1999 with respect to the Unaudited Pro Forma Consolidated Balance
Sheet.
Our operating data for the nine months ended September 30, 1999 include the
operations of Alaska Communications Systems Holdings, Century's Alaska
properties and ATU since May 14, 1999, the date of their acquisition.
The unaudited pro forma combined financial and operating data are not
necessarily indicative of what our financial position or results of operations
would actually have been had these transactions been completed on the dates
indicated and do not project our results of operations for any future date.
30
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------
CENTURY'S ADJUSTED
ALASKA ACQUISITION PRO FORMA OFFERING PRO FORMA
PROPERTIES ATU ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Local telephone............. $121,933 $121,057 $ -- $242,990 $ -- $242,990
Cellular.................... 2,576 29,225 -- 31,801 -- 31,801
Long distance............... -- 6,815 -- 6,815 -- 6,815
-------- -------- -------- -------- ------ --------
Total operating
revenues................ 124,509 157,097 -- 281,606 -- 281,606
Operating expenses
Local telephone............. 72,008 74,240 1,033 (a) 147,281 -- 147,281
Cellular.................... 2,128 19,961 -- 22,089 -- 22,089
Long distance............... -- 10,395 -- 10,395 -- 10,395
Depreciation and
amortization.............. 30,459 29,608 1,154 (b) 61,221 -- 61,221
-------- -------- -------- -------- ------ --------
Total operating
expenses................ 104,595 134,204 2,187 240,986 -- 240,986
-------- -------- -------- -------- ------ --------
Operating income.............. 19,914 22,893 (2,187) 40,620 -- 40,620
Interest expense, net......... (1,405) (6,427) (49,265)(c) (57,097) 1,741 (c) (55,356)
Equity in earnings (loss) of
subsidiaries................ -- (2,945) -- (2,945) -- (2,945)
Other income (expense)........ 356 49 -- 405 -- 405
-------- -------- -------- -------- ------ --------
Income (loss) before income
taxes..................... 18,865 13,570 (51,452) (19,017) 1,741 (17,276)
Income tax expense
(benefit)................... 9,218 -- (9,218)(d) -- -- --
-------- -------- -------- -------- ------ --------
Net income (loss)............. $ 9,647 $ 13,570 $(42,234) $(19,017) $1,741 $(17,276)
======== ======== ======== ======== ====== ========
Net loss per share............ $ (.87) $ (.54)
======== ========
Weighted average shares
outstanding................. 21,790 (e) 10,000 (e) 31,790
======== ====== ========
</TABLE>
31
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE
MONTHS
NINE MONTHS ENDED ENDED
JANUARY 1, 1999 TO SEPTEMBER 30, 1999 SEPTEMBER 30,
MAY 14, 1999 -------------------------- 1999
--------------------- ALASKA -------------
CENTURY'S COMMUNICATIONS ADJUSTED
ALASKA ACQUISITION SYSTEMS PRO FORMA OFFERING PRO FORMA
PROPERTIES ATU ADJUSTMENTS GROUP COMBINED ADJUSTMENTS COMBINED
---------- -------- ----------- -------------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Local telephone.... $45,538 $46,380 $ -- $ 95,640 $187,558 $ -- $187,558
Cellular........... 931 10,277 -- 14,735 25,943 -- 25,943
Long distance...... -- 3,780 -- 4,065 7,845 -- 7,845
------- ------- -------- -------- -------- ------- --------
Total operating
revenues....... 46,469 60,437 -- 114,440 221,346 -- 221,346
Operating expenses
Local telephone.... 27,305 29,120 378 (a) 63,612 120,415 -- 120,415
Cellular........... 957 7,677 -- 9,053 17,687 -- 17,687
Long distance...... -- 4,841 -- 5,091 9,932 -- 9,932
Depreciation and
amortization..... 8,912 11,655 258 (b) 23,708 44,533 -- 44,533
------- ------- -------- -------- -------- ------- --------
Total operating
expenses....... 37,174 53,293 636 101,464 192,567 -- 192,567
------- ------- -------- -------- -------- ------- --------
Operating income..... 9,295 7,144 (636) 12,976 28,779 -- 28,779
Interest expense,
net................ (700) (2,439) (18,272)(c) (23,017) (44,428) 1,355 (c) (43,073)
Equity in earnings
(loss) of
subsidiaries....... -- (1,282) -- (81) (1,363) -- (1,363)
Other income
(expense).......... 921 76 -- (712) 285 -- 285
------- ------- -------- -------- -------- ------- --------
Income (loss)
before taxes..... 9,516 3,499 (18,908) (10,834) (16,727) 1,355 (15,372)
Income tax expense
(benefit).......... 3,944 -- (3,944)(d) (174) (174) -- (174)
------- ------- -------- -------- -------- ------- --------
Net income (loss).... $ 5,572 $ 3,499 $(14,964) $(10,660) $(16,553) $ 1,355 $(15,198)
======= ======= ======== ======== ======== ======= ========
Net loss per share... $ (0.51) $ (0.76) $ (0.48)
======== ======== ========
Weighted average
shares
outstanding........ 21,086 21,790 (e) 10,000 (e) 31,790
======== ======== ======= ========
</TABLE>
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(a) For the periods presented, represents the estimated management fee to be
paid to Fox Paine & Company. This management fee is equal to 1% of annual
net income before interest expense, interest income, income taxes,
depreciation and amortization and equity in earnings (loss) of minority
investments, calculated without regard to the fee.
(b) Represents the increase in depreciation and amortization expense as a result
of the increase in goodwill due to the application of purchase accounting
and the $19.5 million purchase of fiber capacity. Goodwill is amortized over
40 years, and the fiber capacity is depreciated over 20 years.
(c) Represents the net adjustment to interest expense as a result of the
borrowings under our revolving credit facility, term loan facilities, senior
subordinated notes and senior discount debentures, calculated as follows:
<TABLE>
<CAPTION>
ACTUAL AT
SEPTEMBER 30,
AT MAY 14, 1999 AND
1999 AND FOR THE PERIOD
YEAR ENDED FOR THE PERIOD MAY 15, 1999 TO
DECEMBER 31, AS ADJUSTED JANUARY 1, 1999 SEPTEMBER 30, AS ADJUSTED
1998 FOR OFFERING TO MAY 14, 1999 1999 FOR OFFERING
-------------- ------------ -------------------- ---------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revolving credit
facility................. $ 523(1) $ -- $ 196(1) $ 378 $ 130
Term loan A facility....... 11,625(2) 11,625 4,359(2) 4,827 9,186
Term loan B facility....... 12,000(3) 12,000 4,500(3) 4,972 9,472
Term loan C facility....... 11,138(4) 11,138 4,177(4) 4,604 8,782
9 3/8% Senior subordinated
notes due 2009........... 14,063(5) 14,063 5,274(5) 5,355 10,629
13% Senior discount
debentures due 2011...... 3,250(6) 2,112 1,219(6) 1,221 1,586
Interest on long term
obligations assumed...... 600(7) 600 225(7) 376 601
------- ------- ------- ------- -------
Pro forma cash interest
expense.................. 53,199(8) 51,538 19,950(8) 21,733 40,386
Amortization of deferred
financing costs.......... 3,750(9) 3,722 1,406(9) 1,745 3,132
Amortization of OID on
discount debentures...... 148 96 55 54 70
------- ------- ------- ------- -------
Pro forma interest
expense.................. 57,097 55,356 21,411 23,532 43,588
Consolidated interest
income................... -- -- -- (515) (515)
Historical interest
expense, net............. (7,832) (7,832) (3,139) -- (3,139)
------- ------- ------- ------- -------
Total.................. $49,265 $47,524 $18,272 $23,017 $39,934
======= ======= ======= ======= =======
</TABLE>
- ------------------------------
(1) Represents interest on the $6.7 million that was drawn under the
revolving credit facility of Alaska Communications Systems Holdings on
May 14, 1999 using an assumed interest rate of 7.750%. As adjusted,
interest reflects retirement of debt from the net proceeds of the
offering.
(2) Represents interest on the $150.0 million term loan A facility using an
assumed interest rate of 7.750%.
(3) Represents interest on the $150.0 million term loan B facility using an
assumed interest rate of 8.000%.
(4) Represents interest on the $135.0 million term loan C facility using an
assumed interest rate of 8.250%.
(5) Represents interest on the $150.0 million senior subordinated notes
using an interest rate of 9.375%.
(6) Represents interest on our $25.0 million senior discount debentures
using an interest rate of 13.000%. As adjusted, interest reflects the
retirement of debt from the net proceeds of the offering.
33
<PAGE>
(7) Represents interest on $7.5 million of long-term obligations assumed by
us at an interest rate of 8.000%.
(8) A 1/8% change in interest rates for the variable rate debt above would
change interest expense by $552,000 for the year ended December 31, 1998
and by $414,000 for the nine months ended September 30, 1999.
(9) Deferred financing costs are amortized over the term of the related debt
(an average life of eight years for all borrowings). As adjusted,
amortization reflects the retirement of debt from the net proceeds of the
offering.
(d) Represents the elimination of historical tax expense, as on a pro forma
basis we would have been in a net loss position. No tax benefit for the net
loss is reflected in the Unaudited Pro Forma Combined Statement of
Operations, as we are uncertain when profitable operations will be achieved.
(e) Weighted average shares outstanding represent the shares outstanding at the
end of the period assuming all shares had been issued on the first day of
the period and do not include the effect of (1) 3,157,500 shares issuable
upon exercise of options granted under the ALEC Holdings, Inc. 1999 Stock
Incentive Plan, (2) 38,997 shares issued in October 1999 and
(3) approximately 828,000 shares issuable under outstanding warrants
exercisable at $.01 per share, because they would be accretive. We also
expect to have 2,650,000 shares reserved for issuance under the stock
incentive, non-employee director compensation and stock purchase plans we
intend to adopt in connection with the offering. These plans are described
under "Management--Compensation of Directors--Alaska Communications Systems
Group, Inc. 1999 Non-Employee Director Stock Compensation Plan", "--Alaska
Communications Systems Group, Inc. 1999 Stock Incentive Plan" and "Alaska
Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan".
Weighted average shares outstanding as adjusted for the offering are
increased for the 10,000,000 shares issued in the offering. Approximately
828,000 shares issuable under outstanding warrants are also expected to be
issued in connection with the offering.
Assuming the amendment to our credit agreement becomes effective, we intend
to use $10.5 million of the net proceeds from the offering to redeem a portion
of our senior discount debentures. See "Use of Proceeds". At the time of the
redemption, we will record charges of $3.3 million. These charges, which will be
recorded as extraordinary items, are not included in the Unaudited Pro Forma
Combined Statements of Operations.
Immediately following the offering, we will record compensation expense of
$1,997,000 related to the issuance on September 28, 1999 of 470,000 stock
options under the ALEC Holdings, Inc. 1999 Stock Incentive Plan and an
additional 4,000 stock options issued on October 25, 1999, an additional 8,000
stock options issued on November 1, 1999, and an additional 21,500 stock options
issued on November 15 under that plan. All of these options will vest
immediately upon the offering. This expense is not included in the Unaudited Pro
Forma Combined Statements of Operations. For a more detailed discussion of these
stock options, see Note 4 to the Alaska Communications Systems Group, Inc.
Consolidated Financial Statements for the Nine Months Ended September 30, 1999.
On May 14, 1999, we granted, along with other options, performance vesting
options to purchase 528,750 shares of common stock under the ALEC Holdings, Inc.
1999 Stock Incentive Plan that will vest upon completion of the offering.
Immediately following the offering, we will record a compensation expense of
$4,148,000 related to these options, based on a market price of the shares of
$14.00, which is the midpoint of the initial public offering price range set
forth on the cover of this prospectus. This expense is not included in the
Unaudited Pro Forma Combined Statements of Operations. For a more detailed
discussion of these stock options, see Note 4 to the Alaska Communications
Systems Group, Inc. Consolidated Financial Statements for the Nine Months Ended
September 30, 1999.
34
<PAGE>
UNAUDITED AS ADJUSTED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS ADJUSTED
BALANCE SHEET AT OFFERING BALANCE SHEET AT
SEPTEMBER 30, 1999 ADJUSTMENTS SEPTEMBER 30, 1999
------------------- ----------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents....................... $ 1,554 $110,885 (a) $112,439
Accounts receivable............................. 49,031 -- 49,031
Materials and supplies and other current
assets........................................ 12,857 -- 12,857
-------- -------- --------
Total current assets.......................... 63,442 110,885 174,327
Net property, plant and equipment............. 428,596 -- 428,596
Goodwill........................................ 244,209 -- 244,209
Other assets.................................... 68,255 -- 68,255
-------- -------- --------
Total Assets................................ $804,472 $110,885 $915,357
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable................................... $ 10,000 $(10,000)(a) $ --
Other current liabilities....................... 41,921 -- 41,921
-------- -------- --------
Total current liabilities................... 51,921 (10,000) 41,921
Long-term debt:
Senior credit facility........................ 435,000 -- 435,000
9 3/8% Senior subordinated notes due 2009..... 150,000 -- 150,000
13% Senior discount debentures due 2011....... 21,186 (7,415)(a) 13,771
Capital lease obligations..................... 7,267 -- 7,267
Note to Municipality of Fairbanks............. 1,602 1,602
Other 378 378
-------- -------- --------
Total long-term debt including current
portion................................... 615,433 (7,415) 608,018
Other liabilities............................... 8,027 -- 8,027
Minority interest............................... 1,422 1,422
Stockholders' equity............................ 127,669 128,300 (a) 255,969
-------- -------- --------
Total Liabilities and Stockholders'
Equity.................................... $804,472 $110,885 $915,357
======== ======== ========
</TABLE>
NOTE TO UNAUDITED AS ADJUSTED CONSOLIDATED BALANCE SHEET
(a) Represents the use of the estimated net proceeds of $128.3 million from the
offering to repay $10.0 million of borrowings under our revolving credit
facility at September 30, 1999 and, assuming effectiveness of the amendment
to our credit agreement, $7.4 million of accreted value of our senior
discount debentures, net of original issue discount, at September 30, 1999,
and the availability of $110.9 million of cash for capital expenditures,
acquisitions and working capital purposes.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
financial statements and related notes, the pro forma financial information and
the other financial information included elsewhere in this prospectus.
ALASKA COMMUNICATIONS SYSTEMS GROUP
We were formed in 1998 to acquire telecommunications properties in Alaska.
In May 1999, we acquired Century's Alaska properties and ATU. Century's Alaska
properties were the incumbent provider of local telephone services in Juneau,
Fairbanks and more than 70 rural communities in Alaska and provided Internet
services to customers statewide. ATU was the largest local exchange carrier in
Alaska and provided local telephone and long distance services primarily in
Anchorage and cellular services statewide. In addition, ATU held minority
interests in companies that delivered wireless cable television, Internet access
and wholesale long distance. On September 30, 1999, we acquired a two-thirds
majority interest in Alaskan Choice Television, LLC, a wireless cable television
company in which we had previously held a one-third minority interest. On
October 6, 1999, we entered into an agreement to acquire the remaining one-third
interest in Alaskan Choice Television, together with certain FCC licenses. The
closing of this transaction is subject to the satisfaction of several
conditions, including regulatory approval of the license transfers.
Prior to the consummation of the acquisitions of Century's Alaska properties
and ATU in May 1999, we had no operations. Accordingly, the following discussion
should be read in conjunction with our consolidated financial statements and the
related notes, the combined financial statements and the related notes of
Century's Alaska properties and the financial statements and the related notes
of ATU included in this prospectus.
Today, we generate revenue through:
- the provision of local telephone services, including:
- basic local service to retail customers within our 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,
- universal service payments and
- Internet and other services;
- the provision of wireless services; and
- the provision of long distance services.
We also recognize our proportionate share of the net income or loss of our
minority-owned investments.
Within the telecommunications industry, local exchange carriers have
historically enjoyed stable revenue and cash flow from local exchange operations
resulting from the need for basic telecommunications services, the highly
regulated nature of the telecommunications industry and, in the case of rural
local exchange carriers, the underlying cost recovery settlement and support
mechanisms applicable to local exchange operations. Basic local service is
generally provided at a
36
<PAGE>
flat monthly rate and allows the user to place unlimited calls within a defined
local calling area. Access revenues are generated by providing interexchange
carriers access to the local exchange carrier's local network and its customers.
Universal service revenues are a subsidy paid to rural local exchange carriers
to support the high cost of providing service in rural markets. Other service
revenue is generated from ancillary services, enhanced services and Internet
access.
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 residential subscriber,
- intrastate and interstate calling patterns,
- customers' selection of various local rate plan options,
- selection of enhanced calling services, such as voice mail, or other
packaged products, such as cellular and Internet and
- other subscriber usage characteristics.
Local exchange carriers have two basic tiers of customers:
- end users located in the local exchanges that pay for local telephone
service including, in our case, retail, resale and unbundled network
elements end users and
- interexchange carriers that pay the local exchange carrier for access to
customers located within that local exchange carrier's local service area.
Local exchange carriers 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.
ATU has historically provided long distance service both through leased
facilities and as a reseller of other carriers' long distance services. We
recently purchased $19.5 million of long distance fiber capacity for high speed
links within Alaska and for termination of traffic in the lower 48 states. We
have migrated long distance traffic from leased circuits onto our own network
infrastructure. As a result, we expect that in future periods operating expenses
relating to leased circuits will be lower, but depreciation relating to the
purchased capacity will be higher.
ALASKA COMMUNICATIONS SYSTEMS GROUP--NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
The following unaudited table summarizes our combined operations for the
nine month periods ended September 30, 1999 and September 30, 1998. For the nine
months ended September 30, 1999, the summary information represents the combined
historical results of Century's Alaska properties and ATU from January 1, 1999
through acquisition on May 14, 1999 and our consolidated operating results for
the period from May 15, 1999 to September 30, 1999. For the
37
<PAGE>
nine months ended September 30, 1998, the summary information represents the
historical combined operating results of Century's Alaska properties and ATU for
that nine month period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES:
Local telephone............................................. $180,284 $187,473
Cellular.................................................... 23,210 25,943
Long distance............................................... 4,543 7,930
-------- --------
Total operating revenues.................................. 208,037 221,346
OPERATING EXPENSES:
Local telephone............................................. 107,855 120,037
Cellular.................................................... 16,012 17,446
Long distance............................................... 7,135 9,932
Depreciation and amortization............................... 40,099 44,516
-------- --------
Total operating expenses.................................. 171,101 191,931
-------- --------
Operating income............................................ 36,936 29,415
Interest expense............................................ (9,804) (28,058)
Interest income............................................. 3,530 1,902
Other income (expense)...................................... (843) (1,078)
-------- --------
Income before taxes......................................... 29,819 2,181
Income taxes................................................ 7,436 3,770
-------- --------
Net income (loss)........................................... $ 22,383 $ (1,589)
======== ========
</TABLE>
OPERATING REVENUES
Operating revenues increased $13.3 million, or 6.4%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998. Local service, cellular and long distance revenues all increased as
compared to the prior nine-month period.
LOCAL TELEPHONE
Local telephone revenues, which consist of local service, network access
charges and other revenues, increased $7.2 million, or 4.0%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998. The increase in local service revenues corresponds to growth in
high-margin retail access lines of 4.7% with overall growth in access lines of
7.8%.
CELLULAR
Cellular revenues increased $2.7 million, or 11.8%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998, as cellular customers increased 11.9%.
LONG DISTANCE
Long distance revenues increased $3.4 million, or 74.6%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
due to a 98.8% increase in long distance minutes of use.
38
<PAGE>
OPERATING EXPENSES
Operating expenses increased $20.8 million, or 12.2%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998. Operating expenses increased to 86.7% of revenues for the nine months
ended September 30, 1999 as compared to 82.2% of revenues for the nine months
ended September 30, 1998. Adjusted for one-time and transaction related costs
associated with our acquisitions of Century's Alaska properties and ATU of
approximately $7.7 million, operating expenses would have been 83.2% of revenues
for the nine months ended September 30, 1999.
LOCAL TELEPHONE
Local telephone expenses increased $12.1 million, or 11.3%, for the nine
months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. Plant expense, customer service expense and corporate
operations represent $10.9 million of the $12.1 million increase. All three
expense categories included one-time costs as described in the preceding
paragraph. Without these non-recurring expenses, local telephone expense would
have been $112.3 million which represents a 4.2% increase as compared to the
nine months ended September 30, 1998. The increase in customer service expense
also includes marketing and sales expense which increased as the Company
responded to competition in the local market.
CELLULAR
Cellular expenses increased $1.4 million, or 9.0%, for the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998,
primarily due to the increased costs of supporting a larger customer base,
combined with the marketing expenses associated with customer sales and
retention. Increased corporate expense was also a significant component of the
increase.
LONG DISTANCE
Long distance expenses increased by $2.8 million, or 39.2%, but decreased as
a percentage of sales as long distance operations benefited from economies of
scale, particularly in general and administrative expenses.
DEPRECIATION AND AMORTIZATION
The increase of $4.4 million, or 11.0%, was due to increases in plant in
service for the nine months ended September 30, 1999, and amortization of
additional goodwill from May 14, 1999 to September 30, 1999.
INTEREST EXPENSE
Interest expense increased $18.3 million, or 186.2%, for the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
due to $611.6 million of debt incurred in connection with the acquisitions of
Century's Alaska properties and ATU.
OTHER INCOME (EXPENSE)
Other income (expense) for the nine months ended September 30, 1999 consists
primarily of non-operating income and expenses ancillary to telephone operations
and losses in minority interests. Ancillary income and expense, net was
approximately $0.4 million and loss in minority interests was approximately $1.5
million. This was a 27.9% increase in net expense as compared to
39
<PAGE>
the nine months ended September 30, 1998 and is primarily attributable to a
greater loss in minority interests for the current nine month period.
NET INCOME
The decrease in net income is primarily a result of the factors discussed
above and, in particular, the increase in operating expense as a percentage of
sales and the increase in interest expense.
CENTURY'S ALASKA PROPERTIES
Century acquired its Alaska properties on December 1, 1997 as part of its
acquisition of Pacific Telecom from PacifiCorp Holdings, Inc. On October 6,
1997, prior to their acquisition by Century, Century's Alaska properties
acquired the assets of the City of Fairbanks Telephone Operation. On
December 31, 1997, Century's Alaska properties sold their Alaska rural
statistical area, or RSA, #1 B-side cellular property in Fairbanks to ATU. The
operating results of this divested property are included in the historical
operating results of Century's Alaska properties.
The following table summarizes each component of Century's Alaska
properties' revenue sources for the years ended December 31, 1996, 1997 and 1998
and the three-month periods ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Local service.............................. $21,740 $26,937 $ 37,255 $ 8,961 $ 9,576
Network access............................. 45,056 50,298 64,321 14,292 15,305
Other...................................... 9,154 12,350 20,357 4,714 5,934
------- ------- -------- ------- -------
Local telephone............................ 75,950 89,585 121,933 27,967 30,815
Cellular................................... 4,823 5,301 2,576 408 546
------- ------- -------- ------- -------
Total...................................... $80,773 $94,886 $124,509 $28,375 $31,361
======= ======= ======== ======= =======
</TABLE>
Century's Alaska properties' operating expenses are categorized as: cost of
sales and operating expenses--telephone; cost of sales and operating
expenses--wireless; and depreciation and amortization. Cost of sales and
operating expenses--telephone are those operating expenses incurred by Century's
Alaska properties in connection with their local telephone business, including
the operation of their central offices and outside plant facilities and related
operations, customer service, marketing and other general and administrative
expenses and allocated corporate expenses. Cost of sales and operating
expenses--wireless are those operating expenses incurred by Century's Alaska
properties in connection with the operation of their wireless facilities and
transmission of wireless services, customer service, marketing and other general
and administrative expenses and allocated corporate expenses.
CENTURY'S ALASKA PROPERTIES--THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
OPERATING REVENUES
Combined operating revenues increased $3.0 million, or 10.5%, for the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998. Local service, network access and cellular revenues all increased as
compared to the prior three month period.
40
<PAGE>
LOCAL TELEPHONE
Local telephone revenues, which consist of local service, network access
charges and other revenues, increased $2.8 million, or 10.2%, for the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998. The increase in local service revenues corresponds with a 4.9% growth in
access lines from the prior period. Access revenues increased $1.0 million, or
7.1%, as compared to the prior three-month period.
CELLULAR
Cellular revenues increased $138,000, or 33.8%, for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998, as cellular
customers increased 34.3% as of March 31, 1999 as compared to March 31, 1998.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased by $819,000, or
5.0%, for the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998.
CELLULAR
Cost of sales and operating expenses--cellular increased $66,000, or 20.0%,
for the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998. This increase was due to the additional marketing and support
costs associated with the 34.3% increase in cellular customers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $576,000, or 8.0%, for the three
months ended March 31, 1999 as compared to the three months ended March 31, 1998
due to higher plant in service balances and amortization of goodwill associated
with purchase accounting.
INTEREST EXPENSE, NET
Interest expense, net increased to $358,000 for the three months ended
March 31, 1999 as compared to $302,000 for the three months ended March 31,
1998.
OTHER INCOME (EXPENSE)
Other income (expense) is related primarily to non-recurring income and
expenses ancillary to telephone operations. For the three months ended
March 31, 1999, other income (expense) decreased $277,000, or 77.6%, as compared
to the three months ended March 31, 1998. The decrease was primarily due to
recognition of non-recurring expense items in the current period.
INCOME TAXES
The provision for income taxes was $2.7 million for the three months ended
March 31, 1999 as compared to $2.2 million for the three months ended March 31,
1998 due to increased taxable income in the three month period ended March 31,
1999, as a result of the factors described above.
NET INCOME AND EBITDA
Increases of $697,000 in net income and of $1.8 million in EBITDA were a
result of the factors described above, and in particular, the increase in our
customer base as represented by increased access lines and increased cellular
customers.
41
<PAGE>
CENTURY'S ALASKA PROPERTIES--FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO
FISCAL YEAR ENDED DECEMBER 31, 1997
The financial statements of Century's Alaska properties reflect the combined
results of Century's Alaska properties, including Telephone Utilities of
Alaska, Inc., which operates in Juneau, Telephone Utilities of the
Northland, Inc., which operates in numerous rural communities, and the Alaska
RSA #3 cellular property for the years ended December 31, 1997 and 1998.
Additionally, the results of the City of Fairbanks Telephone Operation are
reflected from the date of acquisition, October 6, 1997. The Alaska RSA #1
B-side cellular property was divested on December 31, 1997 to comply with FCC
cross-ownership restrictions. The operating results of this property are
included in the financial statements for the years ended December 31, 1997 and
1996, respectively, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.............................................. $2,681 $3,100
Operating expenses.................................... 1,889 1,643
Depreciation.......................................... 457 424
------ ------
Operating income...................................... $ 335 $1,033
====== ======
</TABLE>
OPERATING REVENUES
Combined operating revenues increased 31.2% to $124.5 million for the year
ended December 31, 1998 as compared to $94.9 million for the year ended
December 31, 1997. Local telephone operating revenues increased 36.0% to
$121.9 million for the year ended December 31, 1998 as compared to
$89.6 million for the year ended December 31, 1997. Cellular revenues decreased
51.4% to $2.6 million for the year ended December 31, 1998 as compared to
$5.3 million for the year ended December 31, 1997. Ownership of the City of
Fairbanks Telephone Operation for a full year in 1998 versus a partial year in
1997 accounted for $21.0 million of the total $29.6 million increase in combined
operating revenues.
LOCAL TELEPHONE
Local telephone revenues increased 36.0% to $121.9 million for the year
ended December 31, 1998 as compared to $89.6 million for the year ended
December 31, 1997. Of this increase, $21.0 million was due to the full year of
ownership of the City of Fairbanks Telephone Operation in 1998 versus a partial
year in 1997, $4.2 million was due to higher access revenues at Telephone
Utilities of Alaska and Telephone Utilities of the Northland, $1.5 million was
due to higher local service revenues at Telephone Utilities of Alaska and
Telephone Utilities of the Northland and $0.4 million was due to higher other
revenues. The increase in local service revenues was due to a 5.6% growth in
access lines from December 31, 1997 to December 31, 1998. Growth in access
revenues was primarily the result of a higher revenue requirement due to higher
expenses for the year ended December 31, 1998 as compared to the year ended
December 31, 1997.
CELLULAR
Cellular revenues decreased 51.4% to $2.6 million for the year ended
December 31, 1998 as compared to $5.3 million for the year ended December 31,
1997. Improved results of the Alaska RSA #3 property increased revenues
$0.4 million for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The divestiture of the Alaska RSA #1 B-side
42
<PAGE>
cellular property decreased cellular revenue by $3.1 million for the year ended
December 31, 1998 as compared to the year ended December 31, 1997.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased 47.5% to
$72.0 million for the year ended December 31, 1998 as compared to $48.8 million
for the year ended December 31, 1997. Ownership of the City of Fairbanks
Telephone Operation for the full year 1998 versus a partial year in 1997
accounted for $15.0 million of the total increase in cost of sales and operating
expenses--telephone. The remaining increase was due primarily to higher expenses
at Telephone Utilities of Alaska and Telephone Utilities of the Northland local
telephone operations, attributable to increased costs necessary to support
growth in access lines and higher corporate allocated costs.
CELLULAR
Cost of sales and operating expenses--cellular decreased by 34.1% to
$2.1 million for the year ended December 31, 1998 as compared to $3.2 million
for the year ended December 31, 1997. In addition, $0.5 million of higher cost
of sales and operating expense--cellular was due to increased costs necessary to
support the increased number of customers for the Alaska RSA #3 cellular
property. The divestiture of the Alaska RSA #1 B-side cellular property
decreased expenses by $1.6 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $12.2 million to $30.5 million for
the year ended December 31, 1998 as compared to $18.3 million for the year ended
December 31, 1997. The increase in depreciation and amortization expense was due
to higher plant in service balances, amortization of goodwill associated with
purchase accounting, higher authorized depreciation rates effective January 1,
1998, as approved by the APUC, and a full year of ownership of the City of
Fairbanks Telephone Operation.
INTEREST EXPENSE, NET
Interest expense, net decreased 40.0% to $1.4 million for the year ended
December 31, 1998 as compared to $2.3 million for the year ended December 31,
1997. The decrease was due to an increase of $4.9 million in cash and cash
equivalents and an increase of $11.5 million in affiliated receivable balances
at December 31, 1998 as compared to December 31, 1997.
OTHER INCOME (EXPENSE)
Other income (expense) is related primarily to non-recurring and
non-operating income and expenses. For the year ended December 31, 1998, other
income (expense) was $356,000 as compared to $(245,000) for the year ended
December 31, 1997.
INCOME TAXES
Income taxes increased 8.7% to $9.2 million for the year ended December 31,
1998 as compared to $8.5 million for the year ended December 31, 1997. The
increase in income taxes was due to increased taxable income in 1998 as compared
to 1997.
43
<PAGE>
NET INCOME
As a result of the factors described above, net income decreased
$3.8 million to $9.6 million for the year ended December 31, 1998 as compared to
$13.4 million for the year ended December 31, 1997.
EBITDA
As a result of the factors described above, EBITDA increased by
$8.1 million to $50.7 million for the year ended December 31, 1998 as compared
to $42.6 million for the year ended December 31, 1997. In particular, an
increase in local telephone customers as represented by an increase in access
lines more than offset the effects of a decline in cellular customers.
CENTURY'S ALASKA PROPERTIES--FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO
FISCAL YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUES
Combined operating revenues increased 17.5% to $94.9 million for the year
ended December 31, 1997 as compared to $80.8 million for the year ended
December 31, 1996. Local telephone operating revenues increased 18.0% to
$89.6 million for the year ended December 31, 1997 as compared to $76.0 million
for the year ended December 31, 1996. Cellular revenues increased 9.9% to
$5.3 million for the year ended December 31, 1997 as compared to $4.8 million
for the year ended December 31, 1996. Ownership of the City of Fairbanks
Telephone Operation from October 6, 1997 through December 31, 1997 accounted for
$7.8 million of the total $14.1 million increase in combined operating revenues.
LOCAL TELEPHONE
Local telephone revenues increased 18.0% to $89.6 million for the year ended
December 31, 1997 as compared to $76.0 million for the year ended December 31,
1996. Of this increase, $7.8 million was due to partial year ownership of the
City of Fairbanks Telephone Operation in 1997, $1.2 million was due to higher
access revenues at Telephone Utilities of Alaska and Telephone Utilities of the
Northland, and $2.0 million was due to higher local service and other revenues
at Telephone Utilities of Alaska and Telephone Utilities of the Northland. The
increase in local service revenues was due to a 6.0% growth in access lines and
higher enhanced services revenue, in each case, without giving effect to the
City of Fairbanks Telephone Operation acquisition. Growth in access revenues was
primarily the result of a higher revenue requirement due to higher expenses for
the year ended December 31, 1997 as compared to the prior year.
CELLULAR
Cellular revenues increased 9.9% to $5.3 million for the year ended
December 31, 1997 as compared to $4.8 million for the year ended December 31,
1996. Improved results were primarily due to an increase in subscribers from
December 31, 1996 to December 31, 1997.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased 16.7% to
$48.8 million for the year ended December 31, 1997 as compared to $41.8 million
for the year ended December 31, 1996. Ownership of the City of Fairbanks
Telephone Operation for part of the year in 1997 accounted for $4.4 million of
the total increase. The remaining increase is due primarily to higher expenses
for
44
<PAGE>
Telephone Utilities of Alaska and Telephone Utilities of the Northland local
telephone operations, attributable to increased costs necessary to support
growth in access lines.
CELLULAR
Cost of sales and operating expenses--cellular decreased 4.5% to
$3.2 million for the year ended December 31, 1997 as compared to $3.4 million
for the year ended December 31, 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 19.2% to $18.3 million for the year
ended December 31, 1997 as compared to $15.3 million for the year ended
December 31, 1996. Ownership of the City of Fairbanks Telephone Operation for
part of the year in 1997 resulted in $2.1 million of the total increase. The
remaining portion of the total increase was due to higher plant in service
balances in 1997 as compared to 1996.
INTEREST EXPENSE, NET
Interest expense, net increased 17.2% to $2.3 million for the year ended
December 31, 1997 as compared to $2.0 million for the year ended December 31,
1996.
OTHER INCOME (EXPENSE)
Other income (expense) is related primarily to non-recurring and
non-operating income and expenses. For the year ended December 31, 1996, these
items resulted in other income (expense) of $0.0 million as compared to $(0.2)
million for the year ended December 31, 1997. This increase was due principally
to increased Internet revenues and increased payphone, equipment sales and
rental activity.
INCOME TAXES
Income taxes increased 25.9% to $8.5 million for the year ended
December 31, 1997 as compared to $6.7 million for the year ended December 31,
1996. The increase in income taxes was due to increased taxable income in 1997
as compared to 1996.
NET INCOME
As a result of the factors described above, net income increased
$1.9 million to $13.4 million for the year ended December 31, 1997 as compared
to $11.5 million for the year ended December 31, 1996.
EBITDA
As a result of the factors described above, EBITDA increased $7.0 million to
$42.6 million for the year ended December 31, 1997 as compared to $35.6 million
for the year ended December 31, 1996. In particular, this increase was the
result of increases in local telephone and cellular customers.
45
<PAGE>
ATU
The following table summarizes each component of ATU's revenue sources for
the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -------------------
1996 1997 1998 1998 1999
--------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Local service............................ $ 49,458 $ 52,007 $ 50,863 $12,913 $12,244
Network access........................... 34,800 34,369 34,740 8,035 10,686
Other.................................... 29,157 30,179 35,454 8,787 7,434
-------- -------- -------- ------- -------
Local telephone........................ 113,415 116,555 121,057 29,735 30,364
Cellular................................. 16,897 21,845 29,225 5,879 6,710
Long distance............................ 2 1,541 6,815 1,144 2,683
-------- -------- -------- ------- -------
Total.................................... $130,314 $139,941 $157,097 $36,758 $39,757
======== ======== ======== ======= =======
</TABLE>
ATU's operating expenses are categorized as: cost of sales and operating
expenses--local telephone; cost of sales and operating expenses--cellular; cost
of sales and operating expenses--long distance; and depreciation and
amortization. Cost of sales and operating expenses--local telephone are those
operating expenses incurred by ATU in connection with its local telephone
business, including the operation of its central offices and outside plant
facilities and related operations, customer service, marketing and other general
and administrative expenses and corporate expenses. These expenses included
allocations from the Municipality of Anchorage totaling $3.2 million,
$3.7 million and $3.2 million for the years ended December 31, 1996, 1997 and
1998, respectively. Management considers these expenses to be comparable to
those which would have been incurred on a stand-alone basis and to those we
expect to incur in future periods. Cost of sales and operating
expenses--cellular are those operating expenses incurred by ATU in connection
with the operation of its wireless facilities and transmission of wireless
services, customer service, marketing and other general and administrative
expenses and corporate expenses. Cost of sales and operating expenses--long
distance includes operating expenses incurred by ATU in connection with the
provisioning of long distance services.
ATU--THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1998
OPERATING REVENUES
Operating revenues increased $3.0 million, or 8.2%, for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998. ATU
reported revenue growth in all three service categories: local telephone,
cellular and long distance.
LOCAL TELEPHONE
Local telephone revenues, which consist of local service, network access
charges and other revenues, increased $629,000, or 2.1%, for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998. Local
service revenues decreased $669,000, or 5.2%, as a result of a 3.6% decrease in
retail access lines. Local service revenues include revenues for ATU's retail
local telephone service to business and residential customers and wholesale
customers that resell ATU's local telephone service. The decrease in retail
access lines was primarily due to the introduction of competition in ATU's
service area.
46
<PAGE>
Network access revenues increased $2.7 million, or 33.0%, for the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998, due primarily to prior period revenues which had been reserved in
connection with various regulatory matters that have been resolved.
Other revenues decreased $1.4 million, or 15.4%, for the three months ended
March 31, 1999 as compared to the three months ended March 31, 1998.
CELLULAR
Cellular revenues increased $831,000, or 14.1%, for the three months ended
March 31, 1999 as compared to the three months March 31, 1998. The number of
subscribers increased from 54,436 at March 31, 1998 to 63,779 at March 31, 1999.
LONG DISTANCE
Long distance revenues increased $1.5 million, or 134.5%, for the three
months ended March 31, 1999 as compared to the three months ended March 31, 1998
principally due to a 161.1% growth in minutes of use.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone increased $613,000, or 3.4%,
for the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998 due to a number of factors including increased labor and
consulting related to new information systems, increased customer service
expense and an increase in sales and marketing expense as a response to the
opening of the Anchorage local market to competition.
CELLULAR
Cost of sales and operating expenses--cellular increased $692,000, or 17.1%,
for the three months ended March 31, 1999 as compared to the three months ended
March 31, 1998 primarily due to the increase costs of supporting a larger
customer base.
LONG DISTANCE
Cost of sales and operating expenses--long distance increased $1.3 million,
or 70.9%, for the three months ended March 31, 1999 as compared to the three
months ended March 31, 1998. Expenses rose at a lower rate than revenues due to
economies of scale. Since ATU was not a facilities-based carrier, a primary
component of long distance cost of sales was the semi-fixed expense of leased
lines over a range of capacity. In addition, selling, general and administrative
expense, as a percentage of revenues, was significantly lower for the three
months ended March 31, 1999 as compared to the three months ended March 31,
1998.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $335,000, or 4.7%, for the
three months ended March 31, 1999 as compared to the three months ended
March 31, 1998 primarily due to increases in plant in service balances.
INTEREST EXPENSE, NET
Interest expense, net decreased $255,000, or 13.9%, for the three months
ended March 31, 1999 as compared to the three months ended March 31, 1998 due to
the decrease in outstanding long-term debt.
47
<PAGE>
OTHER INCOME (EXPENSE)
Other income (expense) includes equity in earnings (loss) of minority
interests and other income and expenses ancillary to telephone operations. Other
income decreased by $240,000 for the three months ended March 31, 1999 as
compared to the three months ended March 31, 1998.
NET INCOME AND EBITDA
Net income increased $29,000, or 0.8%, and EBITDA increased $109,000, or
0.9%, as a result of the factors described above. In particular, the increase in
the customer base for cellular and long distance services and the increase in
revenues from the resale of unbundled network elements more than offset the
competition-driven decrease in local telephone retail customers.
ATU--FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997
OPERATING REVENUES
Operating revenues increased 12.3% to $157.1 million for the year ended
December 31, 1998 as compared to $139.9 million for the year ended December 31,
1997. ATU reported revenue growth in all three service categories: local
telephone, cellular and long distance.
LOCAL TELEPHONE
Local telephone revenues, which consist of local service, network access
charges and other revenues, increased 3.9% to $121.1 million for the year ended
December 31, 1998 as compared to $116.6 million for the year ended December 31,
1997. Local service revenues decreased 2.2% to $50.9 million for the year ended
December 31, 1998 as compared to $52.0 million for the year ended December 31,
1997 as a result of a decrease in retail access lines. Local service revenues
include revenues for ATU's retail local telephone service to business and
residential customers and wholesale customers that resell ATU's local telephone
service. Although the total number of access lines increased from 158,486 at
December 31, 1997 to 168,536 at December 31, 1998, retail access lines decreased
14,492 from 150,720 at December 31, 1997 to 136,228 at December 31, 1998,
principally as a result of the introduction of competition in ATU's service
area. The number of access lines made available to competitors increased from
7,766 at December 31, 1997 to 32,308 at December 31, 1998. This decrease in
retail access lines resulted in a decrease in local service revenues.
Network access revenues increased 1.1% to $34.7 million for the year ended
December 31, 1998 as compared to $34.4 million for the year ended December 31,
1997. Market share losses relating to increased sales by competitors reduced
network access revenues by $1.9 million in 1998. We expect this competition to
continue. This decrease was partially offset by $2.4 million in higher
intrastate network access revenues from the settlement of a prior year access
charge dispute.
Other revenues increased 17.5% to $35.5 million for the year ended
December 31, 1998 as compared to $30.2 million for the year ended December 31,
1997. This increase was primarily attributable to higher revenues from unbundled
network element interconnection and directory advertising. Revenues from monthly
charges paid by competing carriers for unbundled network element interconnection
are accounted for as other revenue.
48
<PAGE>
CELLULAR
Cellular revenues increased 33.8% to $29.2 million for the year ended
December 31, 1998 as compared to $21.8 million for the year ended December 31,
1997. The increase was due to an increase in the number of cellular subscribers
in Anchorage and Alaska RSA #2, as well as the acquisition of the Alaska RSA #1
B-side cellular property on January 1, 1998. The number of subscribers increased
from 47,538, excluding the Alaska RSA #1 B-side property, at December 31, 1997
to 63,627 at December 31, 1998. The Fairbanks property increased from 5,497
subscribers at January 1, 1998 to 9,064 at December 31, 1998. Average revenue
per customer per month remained stable at $42 per customer per month.
LONG DISTANCE
Long distance revenues increased 342.2% to $6.8 million for the year ended
December 31, 1998 as compared to $1.5 million for the year ended December 31,
1997 principally due to customer growth. The number of customers increased to
25,670 customers at December 31, 1998 from approximately 10,600 customers at
December 31, 1997.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone decreased marginally to
$74.2 million for the year ended December 31, 1998 as compared to $75.0 million
for the year ended December 31, 1997. Product sales and advertising expenses
increased $2.4 million in 1998 due to increased advertising campaigns resulting
from heightened competition in the local telephone market in 1998. These
increased expenses were offset by $3.5 million of reduced expenses, primarily
due to lower labor expenses associated with reduced full-time local telephone
employee levels in 1998 as compared to 1997.
CELLULAR
Cost of sales and operating expenses--cellular increased 38.1% to
$20.0 million for the year ended December 31, 1998 as compared to $14.5 million
for the year ended December 31, 1997. An increase in customers from 47,538 at
December 31, 1997 to 63,627 at December 31, 1998 resulted in increases in sales
and marketing, general and administrative and other operating expenses. Of the
$5.5 million increase in cost of sales and operating expenses--cellular,
$2.1 million was due to the operation of the newly acquired Alaska RSA #1 B-side
cellular property for a full year in 1998.
LONG DISTANCE
Cost of sales and operating expenses--long distance increased 123.8% to
$10.4 million for the year ended December 31, 1998 as compared to $4.6 million
for the year ended December 31, 1997. Increased expenses were due to additional
dedicated facilities leases, access payments, advertising and administrative
expenses to support increasing long distance traffic volumes. Traffic volumes
increased due to increases in the total number of long distance customers. As a
result, ATU's long distance operations incurred losses of $3.7 million in 1998
and $3.2 million in 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 10.3% to $29.6 million for
the year ended December 31, 1998 as compared to $26.8 million for the year ended
December 31, 1997. Increases in plant in service balances and goodwill
amortization accounted for the increase. Higher
49
<PAGE>
depreciation and amortization expense of $1.5 million in the local telephone
operations and $1.3 million in the cellular and long distance operations was
incurred in 1998.
INTEREST EXPENSE, NET
Interest expense, net decreased 5.0% to $6.4 million for the year ended
December 31, 1998 as compared to $6.8 million for the year ended December 31,
1997. Interest expense increased by $1.1 million as a result of additional
outstanding long-term obligations associated with a bond issuance in 1998.
Increases in interest income from higher cash balances served to offset higher
interest expense. Reversal of previously accrued interest expense for revenue
that had been reserved in prior periods but recognized in 1998 reduced interest
expense for the year ended December 31, 1998 by $0.4 million.
OTHER INCOME (EXPENSE)
Other income (expense) includes equity in earnings (loss) of minority
interests and nonoperating other income and expenses ancillary to telephone
operations. ATU recognized losses in its minority investments of $2.9 million
for the year ended December 31, 1998 compared to earnings of $0.2 million for
the year ended December 31, 1997. For the year ended December 31, 1998, ATU
incurred $1.1 million in proportional losses from its minority investments, and
wrote down $1.5 million and $0.4 million of its investments in Alaskan Choice
Television and Internet Alaska, Inc., respectively.
NET INCOME AND INCOME TAXES
As a result of the factors described above, net income increased
$1.5 million to $13.6 million for the year ended December 31, 1998 as compared
to $12.1 million for the year ended December 31, 1997. Because ATU was a public
utility of the Municipality of Anchorage, it was exempt from U.S. federal and
state income taxes.
EBITDA
As a result of the factors described above, EBITDA increased $3.9 million to
$49.6 million for the year ended December 31, 1998 as compared to $45.7 million
for the year ended December 31, 1997. In particular, the increase in the
customer base for cellular and long distance services and the increase in
revenues from the resale of unbundled network elements more than offset the
competition-driven decrease in local telephone retail customers.
ATU--FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1996
OPERATING REVENUES
Operating revenues increased 7.4% to $139.9 million for the year ended
December 31, 1997 as compared to $130.3 million for the year ended December 31,
1996. ATU reported revenue growth in all three service categories: local
telephone, cellular and long distance.
LOCAL TELEPHONE
Local telephone revenues increased 2.8% to $116.6 for the year ended
December 31, 1997 as compared to $113.4 million for the year ended December 31,
1996. Local service revenues increased 5.2% to $52.0 million for the year ended
December 31, 1997 as compared to $49.5 million for the year ended December 31,
1996. The increase in local service revenues was
50
<PAGE>
primarily due to a 2.4% increase in access lines and increases in penetration of
enhanced services, such as caller ID and call forwarding. Access revenues
declined $0.4 million for the year ended December 31, 1997 due to lower
intrastate access revenues. Other revenues increased 3.4% to $30.2 million for
the year ended December 31, 1997 as compared to $29.2 million for the year ended
December 31, 1996, principally as a result of the commencement of unbundled
network element interconnection, resulting in the sale by ATU of unbundled
network elements to a competitor, and directory advertising revenues.
CELLULAR
Cellular revenues increased 29.3% to $21.8 million for the year ended
December 31, 1997 as compared to $16.9 million for the year ended December 31,
1996. The increase was principally attributable to a 26.3% increase in the
number of subscribers, from 37,651 at December 31, 1996 to 47,538 at
December 31, 1997, excluding the Alaska RSA #1 B-Side cellular property which
was acquired on January 1, 1998.
LONG DISTANCE
Long distance revenues increased to $1.5 million for the year ended
December 31, 1997 as compared to $2,000 for the year ended December 31, 1996.
The increase was attributable to the commencement of the long distance business
in the fall of 1996.
OPERATING EXPENSES
LOCAL TELEPHONE
Cost of sales and operating expenses--telephone decreased 1.3% to
$75.0 million for the year ended December 31, 1997 as compared to $76.0 million
for the year ended December 31, 1996. The decrease is primarily attributable to
lower labor expense as a result of a reduction in the number of employees and
lower expenses from regulatory consulting services.
CELLULAR
Cost of sales and operating expenses--cellular increased 16.8% to
$14.5 million for the year ended December 31, 1997 as compared to $12.4 million
for the year ended December 31, 1996. The increase is attributable to increases
in the number of employees to support growth in the customer base and increased
advertising expenses.
LONG DISTANCE
Cost of sales and operating expenses--long distance increased $4.1 million
to $4.6 million for the year ended December 31, 1997 as compared to
$0.5 million for the year ended December 31, 1996. The increase was due to
start-up expenses associated with commencing long distance operations, including
higher switching, facilities lease and access expenses to support the larger
base of customers.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased 30.9% to $26.8 million for the year ended
December 31, 1997 as compared to $20.5 million for the year ended December 31,
1996. The higher depreciation expense was attributable to higher telephone plant
in service, as well as higher depreciation rates authorized by the APUC that
became effective January 1, 1997.
51
<PAGE>
INTEREST EXPENSE, NET
Interest expense, net remained relatively unchanged. Higher interest expense
from additional outstanding long-term debt balances was offset by higher
interest income associated with higher average cash balances.
OTHER INCOME (EXPENSE)
Other income (expense) includes minority investment earnings of
$0.2 million and other expense of $0.3 million for the year ended December 31,
1997 as compared to other expense of $0.2 million for the year ended
December 31, 1996.
NET INCOME
As a result of the factors described above, net income decreased
$1.8 million to $12.1 million for the year ended December 31, 1997 as compared
to $13.9 million for the year ended December 31, 1996. Because ATU was a public
utility of the Municipality of Anchorage, it was exempt from U.S. federal and
state income taxes.
EBITDA
As a result of the factors described above, EBITDA increased $4.5 million to
$45.7 million for the year ended December 31, 1997 as compared to $41.2 million
for the year ended December 31, 1996. In particular, our customer base grew in
local, cellular and long distance services.
YEAR 2000
Some of our older computer programs identify years with two digits instead
of four. This may cause problems because these programs may recognize the year
2000 as the year 1900. These problems could result in a system failure or
miscalculations disrupting operations, including a temporary inability to
process transactions, send invoices or engage in similar, normal business
activities. In addition, we face the risk that suppliers of products, services
and systems purchased by us do not have business systems or products that comply
with the year 2000 requirements.
While we believe that the conversions or installations of replacement
systems will proceed smoothly, we cannot assure you that there will not be
interruptions or failures in our systems or in the systems of our suppliers. The
telecommunications industry is highly susceptible to the year 2000 issue. Should
the year 2000 issue cause problems across our infrastructure, service could be
interrupted. These events, if they occur, could materially adversely affect our
financial condition and results of operations.
In order to understand our vulnerability to the year 2000 issue, we
conducted a comprehensive systems assessment of our year 2000 compliance during
the process of evaluating the acquisitions of Century's Alaska properties and
ATU. Many of our systems have also been represented by the respective vendors of
these systems to be year 2000 compliant, and both Century's Alaska properties
and ATU have initiatives in progress that we believe will address all
outstanding year 2000 issues.
As of January 1, 1999, ATU completed its installation of an integrated
financial and accounting system. On March 12, 1999, ATU completed its
installation of Saville, a state-of-the-art customer care and billing system.
MACtel and ATU Long Distance will continue to operate their existing financial
management and billing systems. With respect to carrier access billing, ATU has
completed the transition to Century's Alaska properties' existing systems. Each
of the foregoing systems has been represented by the vendor to be year 2000
compliant.
52
<PAGE>
We have recently converted Century's Alaska properties' customer care and
billing systems to ATU's Saville platform. Century's Alaska properties recently
completed their installation of Platinum, an integrated financial and accounting
application. Facilities management and repair support systems for Century's
Alaska properties have also transitioned to ATU platforms, which have been
represented by the vendors as year 2000 compliant.
Since January 1, 1999, we have spent approximately $22.3 million to upgrade
and maintain our information technology systems to make them year 2000
compliant. Additional costs required in order to make our information technology
systems year 2000 compliant by the end of December 1999 are not expected to be
material.
Upgrades required to make ATU's network equipment year 2000 compliant are
mostly complete, with remaining upgrades expected to be finished by mid-November
1999. All of ATU's central office switches have been upgraded to year 2000
certified release levels. Upgrades required to make Century's Alaska properties'
network equipment year 2000 compliant are mostly complete, with remaining
upgrades expected to be finished by November 1999. All of Century's Alaska
properties' central office switches have been upgraded to year 2000 certified
release levels.
Upgrades required for MACtel's and Century's Alaska properties' cellular
switching networks are mostly complete, with remaining upgrades scheduled to be
completed by our third party switching vendor by mid-December.
Given the progress made to date, we do not anticipate delays in finalizing
and implementing year 2000 readiness solutions by December 1999. We cannot
accurately estimate the uncertainty of completing our year 2000 readiness plan,
particularly as it relates to any failure by third parties that have material
relationships with us and fail to achieve their own year 2000 readiness. We have
in the past and will continue to obtain assurances from third parties that their
systems are or will be year 2000 compliant no later than the end of
December 1999. Any failures by these third parties to appropriately address
their own year 2000 readiness challenges could materially adversely affect our
financial condition and results of operations.
We believe that the following several situations make up our most reasonably
likely worst case scenario:
FAILURE OF ELECTRICAL POWER SUPPLIES. Although most of our major switching
and information systems have emergency standby power supplies, in the event of
long-term power disruption we may be required to shut down our switching and
computer equipment. We believe the larger electrical utilities that provide
service to us are pursuing year 2000 readiness strategies. However, electric
utilities serving smaller rural communities may be particularly exposed to year
2000 readiness issues.
DISRUPTION OF SWITCHING AND INFORMATION TECHNOLOGY INFRASTRUCTURE. The most
significant risks related to our switching and information technology systems
are:
- the inability of our customers to make and receive calls,
- the inability of our cell sites, switching centers and other interfaces to
process and record call details of local telephone, long distance and
cellular traffic accurately and
- the inability of our billing systems to report and bill customers for
phone usage accurately.
We believe that we have adequately addressed each of these risks in our year
2000 readiness plan.
53
<PAGE>
INABILITY OF LARGE CUSTOMERS TO PAY INVOICES. Our largest customers are
interexchange carriers that are customers, vendors and competitors in some of
our markets. If interexchange carriers experience year 2000 readiness problems,
we may experience delays in collection of outstanding receivables and a decrease
in the cash available to fulfill our obligations.
We are developing contingency plans for potential year 2000 disruptions. We
are closely monitoring our year 2000 readiness plan and have developed
preliminary contingency plans for the most critical aspects of our year 2000
readiness plan. Details of these plans will be further developed and will depend
on our final assessment of the relevant situation and potential alternative
strategies.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from the sale of stock, debt
financing and operations. The nine months ended September 30, 1999 include
operations from acquired telephone operations for the period from May 15, 1999
to September 30, 1999. For this period, our cash flows from operating activities
were $19.2 million. Significant cashflows from the issuance of debt and stock
were used for the acquisitions of Century's Alaska properties and ATU and, to a
lesser extent, for capital expenditures. At September 30, 1999, we had
approximately $6.5 million in working capital, including approximately
$1.6 million in cash and cash equivalents. We also had $59.0 million of
remaining capacity under the $75.0 million revolving credit facility as of
November 15, 1999.
Our initial debt borrowings and equity contributions were sufficient to fund
the consummation of the acquisitions of Century's Alaska properties and ATU and
the purchase of fiber capacity. On May 14, 1999 Alaska Communications Systems
Holdings entered into a $435.0 million credit agreement and issued
$150.0 million aggregate principal amount of senior subordinated notes in a
private placement, and we issued senior discount debentures and warrants for
$25.0 million in gross proceeds in a private placement, and received an equity
capital infusion in the amount of $121.2 million. As a result of the financing
for these acquisitions, as of September 30, 1999 we had $615.4 million of
long-term debt. Interest payments on borrowings under the senior credit
facility, our senior discount debentures and the senior subordinated notes, as
well as amortization of borrowings under the senior credit facility, represent
significant obligations of ours and Alaska Communications Systems Holdings.
Interest on our senior discount debentures and the senior subordinated notes is
payable semiannually. Interest on borrowings under the senior credit facility is
payable quarterly, and the senior credit facility requires annual principal
payments commencing on May 14, 2002.
The local telephone network requires the timely maintenance of plant and
infrastructure. Our local network is of high quality and is technically advanced
and will have relatively predictable annual capital needs. Our historical
capital expenditures have been significant. The construction and geographic
expansion of our cellular network required a substantial amount of capital. The
implementation of our long distance and interexchange network strategy is also
capital intensive. We recently purchased fiber capacity for $19.5 million, which
was funded with monies borrowed to finance the acquisitions of Century's Alaska
properties and ATU. This purchase will enable us to use our own leased
facilities in developing our business. We also have agreed to purchase
additional fiber capacity for $19.5 million in the second quarter of 2001. In
addition to the purchase of fiber capacity, we anticipate, subject to
effectiveness of the credit agreement amendment, total capital expenditures of
approximately $28.2 million for the remainder of 1999, and approximately
$90.0 million in 2000, which we expect to fund through internally generated cash
flow, a portion of the net proceeds from the offering and additional borrowings
under our revolving credit facility. If we are unable to amend our credit
agreement as expected, we anticipate capital expenditures of $18.8 million for
the remainder of 1999 and of approximately $70.0 million in 2000.
54
<PAGE>
Our capital requirements may change, however, due to, among other things:
- the availability of additional fiber capacity,
- our decision to pursue specific acquisition opportunities,
- changes in technology,
- the effects of competition or
- changes in our business strategy.
Any of these changes could require additional financing that might not be
available or, if available, might not be on terms favorable to us. Our ability
to satisfy our capital requirements will be dependent upon our future financial
performance, which is, in turn, subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control.
Subsequent to the acquisition of ATU and Century's Alaska properties, we
issued 1,746,402 shares of our common stock, including the sale of 1,624,907
shares to Cook Inlet Region, Inc. for $10.0 million in cash. Proceeds of the
stock sales were subsequently contributed to Alaska Communications Systems
Holdings as additional equity capital. In connection with Cook Inlet's
investment, it became a party to the stockholders' agreement, which is described
under "Management--Stockholders' Agreement".
On July 24, 1999 we entered into a hedging 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.
On September 30, 1999, we acquired an additional one-third interest in
Alaskan Choice Television for $1.9 million, increasing our ownership to a
two-thirds majority interest. On October 6, 1999, we entered into an agreement
to acquire the remaining one-third interest and expect that the acquisition will
be completed by year-end 1999.
We believe that we will have sufficient working capital provided by
operations and borrowings under our existing revolving credit facility to fund
our operations and capital expenditures over the next 12 months.
EFFECT OF NEW ACCOUNTING STANDARDS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
was issued in June 1998. SFAS No. 133 establishes standards for the recognition
and measurement of derivatives and hedging activities. This statement, as
amended, is effective for fiscal years beginning after June 15, 2000. We are
currently analyzing the impact SFAS No. 133 will have on our financial
statements.
OUTLOOK
We expect the current demand for telecommunications services in Alaska to
continue to grow, particularly as a result of:
- continuing growth in demand for core telephone services and enhanced
service offerings,
- increased access line demand stemming from growth in population and the
demand for multiple lines,
- increases in demand for wireless services and
55
<PAGE>
- growth in demand for DSL and Internet access services due to higher
business and consumer bandwidth needs for Internet and data services.
We believe that we will be able to capitalize on this demand through our
diverse service offerings and a focused sales and marketing approach.
There are currently a number of regulatory proceedings underway at the state
and federal levels that could have a significant impact on our operations.
At the state level:
- the RCA recently terminated the rural exemptions of our rural local
exchange carriers, triggering interconnection obligations under the
Telecommunications Act from which we had previously been exempt; and
- the RCA has indicated that it does not intend to determine rates and terms
for interconnection through tariff processes and has ordered our rural
local exchange carriers to negotiate with potential competitors for the
purpose of establishing the terms and conditions of interconnection in
their service areas, subject to arbitration at the request of any party at
any time after December 10, 1999 if the parties are unable to reach
agreement.
At the federal level:
- in October 1998 the FCC initiated proceedings, but has not reached a
decision, regarding the appropriate rate of return to be applied for
federal rate-making purposes to companies like us which are not subject to
price cap regulation;
- in September 1999 the FCC revised its list of unbundled network elements
applicable to our ongoing negotiations regarding interconnection,
excluding some elements but increasing the number of sub-elements
associated with the local loop.
This is not an exhaustive list of regulatory matters that could affect our
business, and we cannot predict the impact of these or future regulatory
developments on any of our businesses.
The telecommunications industry is extremely competitive, and we expect
competition to intensify in the future. As the incumbent local exchange carrier,
we face competition mainly from resellers, local providers who lease unbundled
network elements from us and, to a lesser degree, from facilities-based
providers of local telephone services. In addition, as a result of the RCA's
recent affirmation of the APUC's termination of our rural exemptions, we may be
required to provide interconnection elements and/or wholesale discounted
services to competitors in all or some of our rural service areas. Moreover,
while cellular telephone services have historically complemented traditional
local exchange carrier services, we anticipate that existing and emerging
wireless technologies may increasingly compete with local exchange carrier
services. In wireless services, we currently compete with at least one other
cellular provider in each of our wireless service areas. In long distance, we
currently have less than 2.5% of total long distance revenues in Alaska and we
face competition from the two major long distance providers in Alaska. 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.
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.
56
<PAGE>
INDUSTRY OVERVIEW
OVERVIEW
In recent years, the telecommunications industry has undergone rapid change
due to economic growth, technological advancements, infrastructure improvements
and regulatory changes, all of which have increased demand and competition for
telecommunications services. The Alaskan telecommunications industry is
influenced by many of these factors, and Alaska's unique characteristics further
enhance the need for telecommunications services. Alaska is characterized by its
large geographic size, widely dispersed population and large distance between
urban areas. Over 60% of the state's population resides in its three largest
cities: Anchorage, Juneau and Fairbanks. Alaska lacks an effective ground
transportation infrastructure and many of the state's communities are accessible
only by air or water. As a result, Alaskan residents are particularly dependent
on telecommunications to access resources and information.
Alaskan telecommunications operators use a variety of technologies,
including traditional copper wire, fiber optic cable, digital microwave and
satellite-based communications, particularly in remote communities, to provide
telecommunications services, including local telephone, wireless, long distance,
data and Internet services.
LOCAL TELEPHONE OVERVIEW
The U.S. local telephone industry is subject to significant regulation from
both the FCC and state authorities. The U.S. local telephone industry is
composed of a few large, well-known companies, including the regional Bell
operating companies and GTE Corporation, and numerous small, independent
telephone companies. Large incumbent local exchange carriers generate the vast
majority of the estimated $100 billion in annual local exchange revenues and own
a substantial majority of the access lines. A majority of the small, independent
telephone companies operate in sparsely populated rural areas with limited
competition due to the unfavorable economics of constructing and operating a
competing network in those areas.
Local telephone services traditionally offered by local telephone companies
include:
- basic local service to customers within a local exchange carrier's service
area,
- network access services to interexchange carriers for origination and
termination of interstate and intrastate long distance phone calls,
- enhanced services, such as call waiting, call forwarding, caller ID and
voice mail and
- other services, such as billing and collection, directory publishing,
directory assistance and Centrex, a switch-based service offering for
business customers.
Rural local exchange carriers typically receive the majority of their revenues
from access charges, as opposed to the regional Bell operating companies, which
receive a greater share of revenues from basic local services.
The characteristics of a rural local exchange carrier's service areas result
in higher costs for the local exchange carrier because of the additional costs
of providing the infrastructure to rural customers and the lack of economies of
scale available in more densely populated areas. To ensure that affordable
universal telephone service is available in remote areas, rural local exchange
carriers typically benefit from various support mechanisms. The largest explicit
support mechanism for rural local exchange carriers are universal service
payments, as more fully described under "Regulation".
57
<PAGE>
ALASKA OVERVIEW
The population of Alaska was approximately 614,000 at June 30, 1998, having
grown at a compound annual rate of 1.3% over the past ten years, compared to
1.0% for the U.S. as a whole. While the majority of the population is
concentrated in the city of Anchorage and surrounding areas, population growth
in recent years has been broadly distributed throughout the state. The U.S.
Census Bureau projects that through 2005 the population of Alaska will grow at a
compound annual rate of 1.9%, as compared to 0.8% for the U.S. as a whole,
through 2005.
Alaska has the highest median household income in the U.S. According to the
U.S. Census Bureau, Alaska's average median household income during the period
from 1995 to 1997 was $50,829, approximately 40% greater than the overall U.S.
median household income. Alaskans benefit from the absence of state personal
income taxes and receive annual per capita payments from the Alaska Permanent
Fund which in 1999 totaled over $1,700 per person.
Historically, the state's economy has depended significantly on natural
resource industries in general and the petroleum industry in particular. In
1996, the most recent year for which the gross state product was calculated, the
petroleum industry represented approximately 36.3% of the $25.9 billion gross
state product. In 1998, most of the employment growth in Alaska was attributable
to the services sector and, in particular, health care, hotels and social
services.
58
<PAGE>
BUSINESS
We are the leading diversified, facilities-based telecommunications provider
in Alaska, offering local telephone, wireless, long distance, data and Internet
services to business and residential customers throughout the state. We are the
only telecommunications provider in Alaska using its own network facilities to
provide end-to-end communications services to its customers.
LOCAL TELEPHONE. With over 320,000 access lines, representing 75% of the
access lines in Alaska, we are the largest local exchange carrier in Alaska and
the 15th largest in the U.S. We provide service to all of the state's major
population centers, including Anchorage, Juneau and Fairbanks. There are no
regional Bell operating companies in Alaska.
WIRELESS. We are the largest and only statewide provider of wireless
services in Alaska, currently serving over 70,000 subscribers. Our wireless
network covers over 460,000 residents, including all major population centers
and highway corridors. We are in the process of upgrading our network to be
fully digital in all of our service areas by year-end 1999.
LONG DISTANCE. We provide long distance and other interexchange services to
approximately 26,000 customers primarily in Anchorage and intend to market these
services statewide beginning in the first quarter of 2000. We recently migrated
long distance traffic from leased circuits onto our own network infrastructure,
which we believe will result in significant cost savings over time.
DATA AND INTERNET. We are the third largest provider of Internet access
services in Alaska with approximately 16,000 customers. We also own 28.5% of the
second largest Internet services provider in Alaska with approximately 28,000
customers. We currently offer dedicated and dial-up Internet access to our
customers and intend to offer digital subscriber line, or DSL, services by
year-end 1999.
In addition, we recently acquired a majority interest in Alaskan Choice
Television, a provider of cable television services in our Fairbanks and
Anchorage service areas, and expect to expand our offering of wireless cable
services using digital compression technology.
Our telecommunications network includes over 485 miles of fiber optic cable,
176 switching facilities and a statewide cellular network. In addition, we
recently purchased fiber capacity for high speed links within Alaska and for
termination of traffic in the lower 48 states. We plan to continue enhancing our
network to meet customer demand for increased bandwidth and advanced services.
For the year ended December 31, 1998, on a pro forma basis, we would have
had combined revenues of $281.6 million, operating income of $40.6 million,
Adjusted EBITDA, as defined under "Summary Unaudited Pro Forma Combined
Financial and Operating Data", of $106.1 million and a net loss of
$17.3 million.
We were formed in 1998 by Fox Paine & Company, members of the former senior
management team of Pacific Telecom, and other experienced telecommunications
industry executives. In May 1999, we acquired Century's Alaska properties and
ATU. Century's Alaska properties were the incumbent provider of local telephone
services in Juneau, Fairbanks and more than 70 rural communities in Alaska and
provided Internet services to customers statewide. ATU was the largest local
exchange carrier in Alaska and provided local telephone and long distance
services primarily in Anchorage and cellular services statewide. On October 28,
1999, we changed our name from ALEC Holdings, Inc. to Alaska Communications
Systems Group, Inc.
OUR BUSINESS OPPORTUNITY
Alaska is characterized by its large geographic size, widely dispersed
population and large distance between urban areas. Over 60% of the state's
population resides in its three largest cities:
59
<PAGE>
Anchorage, Juneau and Fairbanks. Alaska lacks an effective ground transportation
infrastructure, and many of the state's communities are accessible only by air
or water. As a result, Alaskans are particularly dependent on telecommunications
services to access resources and information unavailable in their communities.
We estimate that Alaskan telecommunications businesses generated aggregate
revenues of $1 billion in 1998.
Alaska's income and demographic characteristics provide opportunities for
continued growth of telecommunications services. Alaska has the highest median
household income in the U.S. In addition, Alaskans pay no state personal income
taxes and receive an annual per capita payment from the Alaska Permanent Fund.
The population in Alaska has been growing at a compound annual rate of 1.3% over
the last ten years, compared to 1.0% for the U.S. as a whole. The U.S. Census
Bureau projects that Alaska's population will grow at a compound annual rate of
1.9%, as compared to 0.8% for the U.S. as a whole, through 2005.
We believe that the outlook for growth in our businesses is favorable due to
the fundamental demand for telecommunications, including:
- continued demand for core telephone services and enhanced service
offerings, such as voice mail and call waiting,
- access line growth due to population growth and the demand for multiple
lines,
- increasing demand for wireless services and
- DSL and Internet access growth due to higher business and consumer
bandwidth needs for data and Internet services.
OUR BUSINESS STRATEGY
As part of our business strategy, we intend to:
LEVERAGE OUR NETWORK AND CUSTOMER BASE. As the leading diversified,
facilities-based telecommunications provider in Alaska offering customers a
broad array of services over our extensive network, we believe we have a
significant competitive advantage. Our competitive position provides us with a
valuable opportunity to capitalize on the growing demand for communications
services and the development of new technologies and services. In particular, we
intend to:
PROVIDE ONE-STOP COMMUNICATIONS SERVICES. Subject to regulatory
restrictions, we intend to offer a complete suite of telecommunications and
data services, providing both residential and business customers with local
telephone, long distance and wireless, as well as high speed data and
Internet services. We also intend to introduce new telecommunications
products and services as they develop. We believe that providing one-stop
communications services will enable us to meet our customers' increasingly
complex communications needs and to strengthen our position by capturing a
larger portion of our customers' communications expenditures.
INCREASE PENETRATION OF ENHANCED SERVICES. We seek to achieve a higher
penetration of enhanced services among our significant base of installed
customers. Customer penetration of enhanced services such as call waiting,
caller ID and voice mail, calculated as the number of enhanced services
divided by the number of access lines, in our service areas is approximately
86%, while other local exchange carriers in the U.S. have achieved average
penetration levels of 121%. We believe we can achieve penetration rates for
these services comparable to these industry averages. Increasing our
penetration rates will improve our revenue per customer which we expect, due
to the fixed cost nature of our local exchange business, to result in
improved operating margins.
60
<PAGE>
OFFER COMPLEMENTARY COMMUNICATIONS AND MEDIA SERVICES. We intend to
expand our service offerings with a particular focus on data, Internet and
wireless cable television services. We anticipate significant demand for
these services as they become necessary for businesses and increasingly
desirable for residential users. We currently offer ISDN and other
high-speed data services and intend to introduce DSL services by year-end
1999. During 2000, we intend to expand our service offerings to include
virtual private networks, statewide Centrex services, such as four digit
dialing, and enhanced digital wireless cable television services.
PROVIDE SUPERIOR CUSTOMER SERVICE. We are committed to building strong
customer relationships by providing high-quality customer care. We believe that
by increasing customer loyalty and retention we will enhance our ability to
market our service offerings. We are building a state-of-the-art customer care
system that will provide one-call customer service access, improved call
response times and, we believe, greater overall customer satisfaction. In
addition, we will provide web-based services that will allow customers to check
billing, order new services or otherwise manage their accounts online.
BUILD THE LEADING COMMUNICATIONS BRAND IN ALASKA. We intend to take
advantage of our statewide presence and centralized marketing efforts by
promoting a unified brand name. We intend to, over time, transition our entire
suite of telecommunications services to be marketed under the "Alaska
Communications Systems" brand, which we seek to make synonymous with high-
quality telecommunications. We believe that a single brand uniting all of our
service offerings will result in superior brand awareness, greater product
penetration and higher demand for packages of premium-priced branded services.
REALIZE OPERATING EFFICIENCIES. We seek to realize significant operating
efficiencies from the consolidation and integration of our recent acquisitions
and the continuous improvement of our operations. We believe we will realize
significant future savings by consolidating Century's Alaska properties and ATU
into a single operating entity, subject to regulatory restrictions. We intend to
continue to make investments in information technology relating to service
provisioning, network management and customer service which we believe will
improve operating margins. In addition, we are creating an integrated low cost
network utilizing state-of-the-art technology which we believe will further
improve operating margins.
PURSUE SELECTED STRATEGIC ACQUISITIONS. We are actively pursuing selected
regional acquisitions in Alaska. There are 19 local exchange carriers remaining
in Alaska with an aggregate of approximately 120,000 access lines, presenting us
with the potential for significant expansion of our network. In addition, we may
pursue other selected strategic acquisitions and investments which will
complement our existing product and service offerings.
PRODUCTS, SERVICES AND REVENUE SOURCES
We offer a broad portfolio of telecommunications services to residential and
business customers in our markets. Our service offerings are locally managed to
better serve the needs of each community. We believe that, as the communications
marketplace continues to converge, our ability to offer an integrated package of
communications products will provide a distinct competitive advantage, as well
as increase customer loyalty, thereby decreasing customer turnover. We intend to
complement our local telephone services by actively marketing our wireless, long
distance, data and Internet service offerings.
61
<PAGE>
The following table sets forth the components of our revenues on a pro forma
basis for the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1998 1999
-------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
REVENUE SOURCE: ------ ------- ------ -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Local network service................................... $ 93.1 33.1% $ 71.2 32.2%
Network access.......................................... 98.6 35.0 77.7 35.1
Directory advertising................................... 26.5 9.4 20.4 9.2
Deregulated revenue..................................... 18.5 6.6 13.7 6.2
Other................................................... 6.3 2.2 4.5 2.0
------ ----- ------ -----
Local telephone....................................... 243.0 86.3 187.5 84.7
Cellular................................................ 31.8 11.3 25.9 11.7
Long distance........................................... 6.8 2.4 7.9 3.6
------ ----- ------ -----
Total................................................. $281.6 100.0% $221.3 100.0%
====== ===== ====== =====
</TABLE>
LOCAL TELEPHONE SERVICES
BASIC LOCAL SERVICE. Basic local service enables customers to originate and
receive telephone calls within a defined "exchange" area. We provide basic local
services to residential and business customers, generally for a fixed monthly
charge. The maximum amount that we can charge a customer for basic local
services is determined by rate proceedings involving the RCA. We charge business
customers higher rates to recover a portion of the costs of providing local
service to residential customers. On average, U.S. business rates for basic
local services have been over two times the rates of residential customers.
Basic local service also includes non-recurring charges to customers for the
installation of new products and services.
At December 31, 1998, approximately 60% of our retail access lines served
residential customers, while 40% served business customers. Currently, our
monthly charges for basic local service for residential customers range from
$9.42 to $16.30 in the service areas of Century's Alaska properties and are
$9.70 in ATU's service area, as compared to the national average of $15.99.
Monthly charges for business customers range from $17.65 to $26.05 in the
service areas of Century's Alaska properties and are $25.75 in ATU's service
areas, as compared to the national average of $34.55.
62
<PAGE>
The table below sets forth the growth in access lines at Century's Alaska
properties and ATU from December 31, 1994 to December 31, 1998 and for the six
month period ended June 30, 1999. The number of access lines shown for Century's
Alaska properties in 1997 includes approximately 37,000 access lines that were
acquired by Century's Alaska properties as part of its acquisition of the City
of Fairbanks Telephone Operation in October 1997. The number of access lines
shown for ATU represents all revenue producing access lines connected to retail
or wholesale customers.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Access lines:
Century's Alaska
properties.............. 73,563 77,660 82,969 124,869 131,858 140,989
ATU....................... 144,869 147,934 154,752 158,486 168,536 183,991
------- ------- ------- ------- ------- -------
Total................. 218,432 225,594 237,721 283,335 300,394 324,980
======= ======= ======= ======= ======= =======
Percentage Growth:
Century's Alaska
properties.............. -- 5.6% 6.8% 50.5% 5.6% --
ATU....................... -- 2.1% 4.6% 2.4% 6.3% --
Combined.................. -- 3.3% 5.4% 19.2% 6.0% --
</TABLE>
On June 1, 1999, as part of the consolidation of our operating and billing
systems, we conformed the methodology by which we calculate our number of access
lines across all of our local exchanges to that used for Century's Alaska
properties. We intend to use the method used to calculate access lines in
service for Century's Alaska properties to calculate our access lines in all
future periods. In the table above, for the period ended September 30, 1999, we
show ATU's number of access lines calculated using this method. If we computed
the number of ATU's access lines in service at December 31, 1998 under this same
method, the number of access lines at ATU would increase by 4,940 and the total
number of access lines would equal 305,334. Due to limited data available to us,
we have not computed any adjustments to the access lines in service for any year
prior to 1998.
Future growth in access lines is expected to be derived from:
- increases in line demand from data-related usage by existing business
customers,
- increased additional line demand from Internet usage by residential
customers and
- population growth in our service areas.
ENHANCED SERVICES. Enhanced services consist of services such as call
waiting, call forwarding, call return, continuous redial, caller ID and voice
mail. These services are generally billed on a monthly basis together with the
customers' bills for basic local services. Customer penetration of enhanced
services, calculated as the number of enhanced services divided by the number of
access lines, in our service areas is approximately 86%, while other rural local
exchange carriers in the U.S. have achieved a penetration level of 121%, on
average.
NETWORK ACCESS
Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than one
company in the provision of such long distance service on an end-to-end basis.
Since toll calls are generally billed to the customer originating the call, a
mechanism is required to compensate each company providing services relating to
the call. This mechanism is the access charge, which we bill to each
interexchange carrier for the use of our facilities to access the customer, as
described below.
63
<PAGE>
INTRASTATE ACCESS CHARGES. We generate intrastate access revenue when an
intrastate long distance call which involves an interexchange carrier is
originated and terminated within the same state. The interexchange carrier pays
us an intrastate access payment for either terminating or originating the call.
We record the details of the call through our carrier access billing system and
receive the access payment from the interexchange carrier. When one of our
customers originates the call, we typically provide billing and collection for
the interexchange carrier through a billing and collection agreement. The access
charge for our intrastate service is regulated by the RCA.
INTERSTATE ACCESS CHARGES. We generate interstate access revenue when an
interstate long distance call is originated from a local calling area in one
state to a local calling area in another state. We bill interstate access
charges in the same manner as we bill intrastate access charges; however, the
interstate access charge is regulated by the FCC rather than by the RCA.
WIRELESS SERVICES
Our cellular businesses currently are managed separately from our local
exchange carrier business and are subject to a different regulatory framework
and cost structure. ATU's wireless services are provided statewide under the
MACtel brand name. Management intends to integrate Century's Alaska properties'
cellular operations with those of MACtel. The primary sources of wireless
revenue include subscriber access charges, airtime usage, toll charges,
connection fees, roaming revenues, as well as enhanced features, such as voice
mail. A subscriber may purchase services separately or may purchase rate plans
that package these services in different ways to fit different calling patterns.
We currently provide digital service in Anchorage and Fairbanks and expect to be
fully digital in our other service areas by the end of 1999. Upon conversion to
digital service, we will be able to offer advanced digital services and
features, such as text messaging.
As illustrated in the table below, Century's Alaska properties and MACtel
have experienced growth in the number of cellular subscribers served and total
covered population over the past five years.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Covered population:
Century's Alaska
properties................ 53,484 54,286 55,101 55,927 56,766 56,766
MACtel...................... 289,813 294,160 298,573 397,434 403,396 403,396
------- ------- ------- ------- ------- -------
Total..................... 342,297 348,446 353,674 453,361 460,162 460,162
======= ======= ======= ======= ======= =======
Ending subscribers:
Century's Alaska
properties................ 1,194 1,300 1,678 2,096 2,945 3,648
MACtel...................... 13,684 24,855 37,651 53,035 63,627 67,208
------- ------- ------- ------- ------- -------
Total..................... 14,878 26,155 39,239 55,131 66,572 70,856
======= ======= ======= ======= ======= =======
Ending penetration:
Century's Alaska
properties................ 2.2% 2.4% 3.1% 3.7% 5.2% 6.4%
MACtel...................... 4.7% 8.4% 12.6% 13.3% 15.8% 16.7%
Combined.................... 4.3% 7.5% 11.1% 12.2% 14.5% 15.4%
</TABLE>
Although we have achieved cellular penetration rates of 18% and 19% in
Anchorage and Kenai, penetration rates in our other service areas are
significantly lower. Management believes there are opportunities to improve the
penetration rates of our cellular operations in Fairbanks and Juneau. Management
also believes that the market for wireless services will continue to grow with
the growth in the wireless industry as a whole.
64
<PAGE>
We also own 10 megahertz E Block PCS licenses covering Anchorage, Juneau and
Fairbanks, which were purchased by Century's Alaska properties in 1997.
Management is analyzing the build out of these licenses and technical
alternatives for using this spectrum to enhance our service offerings in our
overall business.
LONG DISTANCE SERVICES
We began offering long distance services on a resale basis in October 1997,
primarily in Anchorage. We currently have approximately 26,000 long distance
customers and less than 2.5% of total long distance revenues in Alaska. We
intend to expand our long distance operations into the service areas of
Century's Alaska properties during the first quarter of 2000. Before
August 1998, Century's Alaska properties were precluded from entering the long
distance business by a non-competition agreement with AT&T Alascom which was
signed when Pacific Telecom sold Alascom, Inc. to AT&T in 1995. To date, our
long distance operations have generated operating losses.
In April 1999, we entered into a settlement agreement with GCI under which
we agreed to enter into a number of new business arrangements and to settle a
number of outstanding disputes, including GCI's opposition to our acquisitions
of Century's Alaska properties and ATU, the effect of which is not expected to
be material. As part of this agreement and to reduce our dependence on a resale
long distance strategy, we purchased from GCI $19.5 million of fiber capacity
for high speed links within Alaska and for termination of traffic in the lower
48 states. Subsequently, we entered into an amendment of our purchase agreement
with GCI, whereby, among other things, we agreed to purchase additional capacity
in 2001 for $19.5 million. We expect that migrating long distance traffic onto
our network facilities will over time reduce the cost of providing long distance
and other interexchange services and data and Internet access services.
We are subject to numerous conditions imposed by the RCA and, to a lesser
degree, by the FCC on the manner in which we conduct our long distance
operations. The restrictions are intended to prohibit cross-subsidization from
the regulated local exchange carrier to the unregulated long distance affiliate
and discrimination against other long distance providers in favor of a local
exchange carrier's long distance affiliate. Among the conditions applied to our
long distance affiliates are those which:
- require us to hold all books and records, management, employees and
administrative services separate, except that services may be provided
among affiliates through arms-length affiliated interest agreements,
- prohibit Century's Alaska properties from bundling local and long distance
services until competition develops in their local markets and
- prevent us from joint ownership of telephone transmission or switching
facilities with the local exchange carrier and from using the local
exchange carrier's assets as collateral for its own indebtedness.
As a result of the introduction of competition in ATU's local service areas,
the APUC lifted the restriction on bundling on local and long distance services
in ATU's service areas in 1998.
INTERNET ACCESS
We provide Internet access services to approximately 16,000 customers and
generated $5.1 million in Internet access revenues for the year ended
December 31, 1998. In order to offer Internet access, we provide local dial-up
telephone numbers for our customers. These local dial-up numbers allow customers
access, through a modem connection on their computer, to a series of computer
servers we own and maintain. These servers allow customers to access their
e-mail
65
<PAGE>
accounts and to be routed to local access points that connect customers to the
Internet. We charge customers either a flat rate for unlimited Internet usage or
a usage sensitive rate, which, in either case, is billed in conjunction with the
local telephone bill.
We also own a 28.5% minority interest in Internet Alaska, Inc., which
provides Internet access to approximately 28,000 customers primarily in
Anchorage and Fairbanks.
WIRELESS CABLE TELEVISION
We own a two-thirds interest in Alaskan Choice Television, a wireless cable
television provider, having recently acquired the previous managing member's
one-third interest. Alaskan Choice Television provides wireless cable television
services over assigned UHF frequencies to approximately 3,000 customers in our
Anchorage and Fairbanks service areas. We have reached agreement to acquire the
remaining one-third interest and expect that transaction to be completed before
year-end 1999.
UNIVERSAL SERVICE REVENUE
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. The Telecommunications Act prescribed new standards
applicable to universal service, including mechanisms for defining the types of
services to be provided as part of a universal service program, specific goals
or criteria applicable to universal service programs, new qualifications for
receipt of universal service funding and new requirements for contributions to
universal service funding. The FCC, in conjunction with a federal-state joint
board composed of FCC and state commission members, has been working since
passage of the Telecommunications Act to implement these new statutory
provisions. The FCC has chosen to address universal service matters, initially
for non-rural telephone companies, and subsequently for rural telephone
companies. New cost-identification models for non-rural local carriers are
presently expected to be implemented on January 1, 2000 and would be applicable
to our ATU operations. New rules for rural telephone companies, applicable to
Century's Alaska properties, are not expected to be adopted before January 1,
2001 at the earliest.
OTHER
We seek to capitalize on our local presence and network infrastructure by
offering additional services to customers, such as directory services and
billing and collection services for interexchange carriers.
NETWORK FACILITIES
As of September 30, 1999, we owned 74 exchanges serving over 320,000 access
lines. All of our exchanges are served by digital switches provided
predominately by Nortel Networks. Our switches are linked through a combination
of extensive aerial, underground and buried cable, including 485 miles of fiber
optic cable, as well as digital microwave and satellite links. We have 100%
single-party services (one customer per access line), and believe all switches
have the latest generic software upgrades available, allowing for the full range
of enhanced customer features.
We have integrated numerous network elements to offer a variety of services
and applications that meet the increasingly sophisticated needs of customers.
These elements include Signal System 7 signaling networks, voice messaging
platforms, digital switching and, in some communities, integrated service
digital network access. As the telecommunications industry experiences
significant changes in technology, customer demand and competitive pressures, we
intend to introduce additional enhancements.
66
<PAGE>
Network operations and monitoring are provided for Century's Alaska
properties and ATU by ATU's network operating control center located in
Anchorage. The network operating control center has technicians staffed or
on-call seven days a week, 24 hours a day. Automated alarm systems are in place
should problems arise with the network after normal business hours. We also have
customer care facilities in Anchorage and Fairbanks with extensive business
hours to efficiently handle customer inquiries and orders for service.
Our cellular operations consist of eight switching centers and 77 cell sites
covering all major population centers and highway corridors in Alaska. We plan
to complete the conversion of all of our switching and cell site equipment to
digital service by the end of 1999. Our switching and cell site infrastructure
is linked by digital microwave and fiber. MACtel also has a network operating
control center and customer care center, located in Anchorage.
We are enhancing our interexchange network to accommodate developing
products and technology. We are working with Nortel Networks on a multiple phase
conversion of our network from a time division multiple access, or TDMA, circuit
switched platform to an asynchronous transfer mode/Internet protocol, or ATM/IP,
packet switched platform based on Nortel's SUCCESSION NETWORK-TM-. We believe
the implementation of the SUCCESSION NETWORK-TM- will enable us to provide a
complete suite of telecommunications and data services and achieve significant
operating efficiencies. We have completed the first phase of the conversion,
which resulted in the migration of our network traffic to our fiber optic
transport facilities acquired in June 1999. We are currently in the second
phase, which will involve the conversion of our transport connections between
Anchorage and each of Fairbanks, Kenai, Juneau and Seattle from TDMA to ATM,
which we expect to complete by year-end 1999. We expect to complete the
implementation of Nortel's SUCCESSION NETWORK-TM- by year-end 2002. Our planned
network enhancements prior to year-end 2002 will include the installation of
call servers in Anchorage and either Fairbanks or Juneau and the conversion of
network switching nodes to accommodate ATM/IP traffic.
Completion of the SUCCESSION NETWORK-TM- will enable us to provide an array
of IP products throughout our core business. We currently offer frame relay, and
will offer each of the following services as the necessary network elements are
completed:
- virtual private networks,
- virtual private lines,
- transparent local area networks (LAN),
- proprietary LANs and wide area networks (WAN) and
- high speed Internet access.
67
<PAGE>
COMPETITION
LOCAL TELEPHONE SERVICES
Incumbent local exchange carriers may be subject to any of three 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 the incumbent local exchange carrier at wholesale rates
and resell these services to their customers and
- competition from unbundled network element interconnection, that is,
providers who lease unbundled network elements from the incumbent local
exchange carrier.
The geographic characteristics of rural areas make the entrance of most
facilities-based competitors uneconomical because of the significant capital
investment required and the limited market size. Thus, competition is likely to
come from resale interconnection or unbundled network element interconnection.
There are no regional Bell operating companies in Alaska.
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 unbundled network element
interconnection with ATU's facilities, while AT&T Alascom competes exclusively
by reselling ATU's services. Competition is based upon price and pricing plans,
types of services offered, customer service, billing services, quality and
reliability. GCI has focused principally on advertising discount plans for
bundled services. AT&T Alascom's strategy has been to resell ATU's service as
part of a package of local and long distance services. As a result, ATU lost
approximately 19% of its retail access lines in Anchorage to these competitors
during the first ten months of competition ended June 1998, approximately 61% of
which resulted from unbundled network element interconnection by GCI. The
majority of this loss was among price-sensitive residential customers who have
lower average monthly bills than ATU's business customers. Since June 1998, the
rate of this loss has slowed, with ATU's aggregate market share loss rising only
from 19% to just over 23% in the last fifteen months. We expect GCI and AT&T
Alascom to continue to compete for local telephone business.
As "rural telephone companies" under the Telecommunications Act, our rural
local exchange carriers have historically been exempt from the obligation to
lease their facilities or resell their services on a wholesale discount basis to
competitive local exchange carriers seeking interconnection. However, on
June 30, 1999 the APUC ordered these exemptions terminated, and on October 11,
1999, the RCA, which replaced the APUC on July 1, 1999, sustained the APUC's
order. As a result, we may be required to provide interconnection elements
and/or wholesale discount services to competitors in some or all of our rural
service areas. However, we believe that our services offerings, customer
relationships and expertise in the local telephone business may provide us a
competitive advantage over new local exchange carriers.
We expect increasing competition from providers of various services that
provide users the means to 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, in particular, may be
able to modify their networks to partially or completely bypass our local
network.
In addition, while cellular telephone services have historically
complemented traditional local exchange carrier services, we anticipate that
existing and emerging wireless technologies may increasingly compete with local
exchange carrier services. Technological developments in cellular telephone
features, personal communications services, digital microwave and other wireless
technologies are expected to further permit the development of alternatives to
traditional landline services.
68
<PAGE>
WIRELESS SERVICES
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the 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 the demand for wireless telecommunications services is likely to increase
significantly as equipment costs and service rates continue to decline and
equipment becomes more convenient and functional. We currently compete with at
least one other cellular provider in each of our wireless service areas,
including AT&T Wireless Services, Century and Mercury Communications.
Competition is based on price, quality, network coverage and brand reputation.
In addition, there are six PCS licensees in each of our wireless service areas.
We hold PCS licenses covering Anchorage, Fairbanks and Juneau. One of the PCS
licensees began providing digital PCS service in Anchorage in October 1998.
Another PCS licensee has recently indicated it will commence trials of its
technology. We believe that the unique and vast terrain and the high cost of PCS
system buildout makes entrance into markets outside Anchorage unlikely.
LONG DISTANCE SERVICES
The long distance telecommunications market is highly competitive.
Competition in the long distance business is based on price, customer service,
billing services and quality. We currently offer long distance in ATU's service
areas, and intend, subject to regulatory restrictions, to expand ATU's long
distance operations into the service areas of Century's Alaska properties. AT&T
Alascom and GCI are currently the two major long distance providers in Alaska,
including in our service areas. We currently have less than 2.5% of total long
distance revenues in Alaska.
INTERNET SERVICES
The market for Internet access services is highly competitive. There are few
significant barriers to entry, and we expect that competition will intensify in
the future. We currently compete with a number of established online services
companies, interexchange carriers and cable companies. 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 and the pricing policies of our competitors.
CUSTOMERS
We have two basic types of customers for our local services:
- business and residential customers located in their local service areas
that pay for local phone service and
- interexchange carriers that pay us for access to long distance calling
customers located within our local service areas.
In general, the majority of our local customers are residential, rather than
business, customers, as is typical for rural telephone companies. In addition,
no single local customer of ours represented more than 5% of our total 1998 pro
forma revenue, excluding access customers.
SALES AND MARKETING
Century's Alaska properties and ATU have historically conducted their sales
and marketing operations for each of their respective products on a stand-alone
basis, with each product line having its own sales force and marketing
department. Going forward, we intend to consolidate our product and service
offerings under the "Alaska Communications Systems" brand, subject to regulatory
and strategic business considerations.
69
<PAGE>
Key components of our sales and marketing strategy include:
- marketing current and future service offerings aggressively, including
packaged service offerings,
- centralizing marketing functions and
- enhancing direct sales efforts.
We believe that we can leverage our position as an integrated, one-stop
provider of telecommunications services with strong positions in local access,
wireless, long distance and data and Internet markets. By pursuing, within the
bounds of any applicable regulatory constraints, a marketing strategy that takes
advantage of these characteristics and that facilitates 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.
While Century's Alaska properties and ATU have, to a limited extent,
marketed local telephone services in attractively-priced, packaged service
offerings with wireless, long distance and Internet services, neither Century's
Alaska properties nor ATU emphasized these types of offerings. However, we
believe packaged offerings are popular with customers because they allow
customers to enjoy pricing for a number of services at a substantial discount to
A LA CARTE pricing of individual services. Subject to regulatory limitations, we
intend to expand this strategy, which we expect will increase the average
revenue per customer and result in a more loyal and satisfied customer base and
reduced churn.
We have established a sales and marketing organization where marketing
strategies will be centralized and sales functions will be based locally. To
enhance our direct selling efforts, we have established additional customer and
retail service centers in our larger service areas, such as Juneau and
Kenai/Soldotna, and intend to enhance call center operations through a
combination of technology investments and training and incentive compensation
programs for call center employees.
SUPPLIERS
We believe we have strong, long-term relationships with our numerous
communications vendors. Our primary switching vendor is Nortel Networks, a
leading provider of advanced switching systems. We use Ericsson switches and
radios for our cellular operations. For our billing systems we use Saville
Systems, and for our accounting systems we use SAP. Our primary information
technology architecture is provided by IBM. While we recognize that the
separation of Century's Alaska properties from the rest of Century's properties
might result in higher unit costs for Century's Alaska properties, we expect
that the combination of Century's Alaska properties and ATU and the presence of
vendor competition will deter any significant unit increases and may result in
unit cost reductions in the longer term. We enjoy positive relationships with a
variety of vendors for outside plant facilities and other elements of our
network.
EMPLOYEES
We consider employee relations to be good. As of September 30, 1999, we
employed a total of 1,187 regular full-time employees, 791 of whom were
represented by unions.
Century's Alaska properties have a collective bargaining agreement with the
IBEW that expires in 2004. This agreement provides for wage increases up to 4%
based upon the annual increases in the U.S. Department of Labor CPI-U, the
Consumer Price Index for Anchorage. ATU also has a contract with the IBEW. On
November 2, 1999, the IBEW membership ratified the terms under which ATU's
represented employees will be transitioned to Century's Alaska properties'
collective
70
<PAGE>
bargaining agreement. There have been no work stoppages or strikes by either
Century's Alaska properties' or ATU's employees, and management has worked
closely with IBEW leadership for many years.
ENVIRONMENTAL REGULATIONS
Our operations are subject to federal, state and local laws and regulations
governing the use, storage, disposal of, and exposure to, hazardous materials,
the release of pollutants into the environment and the remediation of
contamination. As an owner or operator of property and a generator of hazardous
wastes, we could be subject to environmental laws that impose liability for the
entire cost of cleanup at contaminated sites, regardless of fault or the
lawfulness of the activity that resulted in contamination. We believe, however,
that our operations are in substantial compliance with applicable environmental
laws and regulations.
Many of our properties formerly contained, or currently contain, underground
and aboveground storage tanks used for the storage of fuel or wastes. Some of
these tanks have leaked. We believe that known contamination caused by these
leaks has been, or is being, investigated or remediated. We cannot be sure,
however, that we have discovered all contamination or that the regulatory
authorities will not request additional remediation at sites that have
previously undergone remediation.
Our cellular operations are also subject to regulations and guidelines that
impose a variety of operational requirements relating to radio frequency
emissions. The potential connection between radio frequency emissions and
negative health effects, including some forms of cancer, has been the subject of
substantial study by the scientific community in recent years. To date, the
results of these studies have been inconclusive. Although we have not been named
in any lawsuits alleging damages from radio frequency emissions, it is possible
we could be sued in the future, particularly if scientific studies conclusively
determine that radio frequency emissions are harmful.
PROPERTIES
LOCAL TELEPHONE. Our primary properties consist of 168 switching facilities
serving 74 exchanges. We own most of our administrative and maintenance
facilities, central office and remote switching platforms and transport and
distribution network facilities. We lease our corporate headquarters located in
Anchorage.
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 or other agreements.
WIRELESS. We have 77 cell sites that cover all major population centers and
highway corridors throughout Alaska. In most cases, we lease the land on which
these sites are located.
LEGAL PROCEEDINGS
We currently, and from time to time, are involved in litigation and
regulatory proceedings incidental to the conduct of our business. Some of these
regulatory proceedings are described under "Risk Factors" and "Regulation". We
are not a party to any lawsuit or proceeding that, in the opinion of management,
is likely to have a material adverse effect on us.
71
<PAGE>
REGULATION
OVERVIEW
Our operations are subject to the separate but concurrent jurisdictional
control of both the federal government and the State of Alaska. Our local
telephone operating subsidiaries, Telephone Utilities of the Northland,
Telephone Utilities of Alaska, PTI Communications, which was formerly the City
of Fairbanks Telephone Operation, and ATU are each "telecommunications carriers"
and "local exchange carriers" under the Communications Act of 1934, which was
amended by the Telecommunications Act, and are subject to FCC jurisdiction as
are our wireless communications activities. Our local telephone operating
companies are also "public utilities" within the meaning of the Alaska statutes
and are, therefore, governed by the applicable rules and regulations of the RCA.
The RCA succeeded to the regulatory responsibilities of the APUC when it ceased
to exist on June 30, 1999. Only one of the new RCA commissioners has prior APUC
experience.
FEDERAL REGULATION
Under the federal regulatory scheme, incumbent local exchange carriers are
required to comply with the Communications Act and the applicable rules and
regulations of the FCC. In substantially overhauling the Communications Act, the
Telecommunications Act was intended to, among other things, eliminate
unproductive regulatory burdens and promote competition. Despite this,
telecommunications carriers are still subject to extensive ongoing regulatory
requirements. For instance, FCC-regulated entities, like our subsidiaries, are
required to maintain accounting records in accordance with the Uniform System of
Accounts, to structure access charges according to FCC rules, and to charge for
interstate services at a rate of return not to exceed a rate prescribed by the
FCC. The FCC also regulates transfers of control and assignments of radio
station licenses. The FCC requires carriers providing access services to file
tariffs with the FCC reflecting the rates, terms and conditions of those
services. These tariffs are subject to review and potential objection by the FCC
or third parties. Additionally, all of our local exchange carriers are
"incumbent local exchange carriers" within the meaning of the Telecommunications
Act. As such, they are subject to various requirements under that Act, including
specific interconnection duties such as the provisioning of unbundled network
elements and of wholesale discounted resale of end user services.
STATE REGULATION
Telecommunications companies subject to the RCA's jurisdiction are required
to obtain certificates of public convenience and necessity prior to operating as
a public utility in Alaska. The RCA is responsible for approving new issuances
and any transfers of these operating certificates. In addition, the RCA is
responsible for implementing a portion of the competitive requirements of the
Telecommunications Act, as well as for regulating intrastate access and local
service rates and services of local telephone companies. After passage of the
Telecommunications Act, the APUC adopted a plan to address competition issues
across Alaska. The APUC established multiple dockets to investigate different
competition-related issues, including revising local and long distance market
structures, reforming its intrastate access charge system and establishing a
state universal service fund. While some of these dockets have been completed,
many others remain open for further processing by the RCA. In connection with
regulatory approval of our acquisitions of Century's Alaska properties and ATU,
the APUC imposed several conditions on our operating companies. Among those
conditions was a requirement that ATU, PTI Communications of Alaska, Inc.,
Telephone Utilities of Alaska, Inc. and Telephone Utilities of the Northland,
Inc. each file revenue requirement, cost of service and rate design studies no
later than July 2001. Additionally, restrictions were placed on the ability of
our rural local exchange carriers to bundle service offerings with ATU Long
Distance, Inc.
72
<PAGE>
COST RECOVERY AND REVENUE RECOGNITION
As a regulated common carrier, we are afforded the opportunity to set
maximum rates at a level that allows us the opportunity to recover the
reasonable costs we incur in the provision of regulated telecommunications
services and to earn a reasonable rate of return on the investment required to
provide these services.
These costs are recovered through:
- monthly charges to end users for basic local telephone services and
enhanced service offerings,
- access charges to interexchange carriers for originating and terminating
interstate and intrastate interexchange calls,
- interconnection charges, wholesale service charges and other rates to
competing carriers interconnecting with our networks or reselling our
services and
- high-cost support mechanisms, such as the federal Universal Service Fund
and the Alaska Universal Service Fund.
Maximum rates for regulated services, and the amount of high-cost support, are
set by the FCC with respect to interstate services and by the RCA with respect
to intrastate services.
In conjunction with the recovery of costs and establishment of rates, a
local exchange carrier must first determine its aggregate costs and then
allocate those costs between regulated and nonregulated services.
After identifying the regulated costs of providing local telephone service,
a local exchange carrier must allocate those costs among its various local
exchange and interstate and intrastate interexchange services and between state
and federal jurisdictions. This process is complicated by the difficulty of
allocating specific pieces of plant and equipment to a particular service
because a local exchange carrier's plant and equipment are utilized for
different services, such as local telephone and interstate and intrastate
access. This process is referred to as "separations" and is governed primarily
by the FCC's rules and regulations. The underlying legal purpose of separations
rules is to define how a carrier's expenses are allocated and recovered from
federal and state jurisdictions. The FCC is considering whether to modify or
eliminate the current separations process. This decision could indirectly
increase or reduce earnings of carriers subject to separations rules.
INTERSTATE END-USER RATES
The deployment of the local telephone network from the switching facility to
the customer is known as the "local loop" and is one of the most significant
costs incurred by a local exchange carrier in providing telephone service. The
FCC has established a rate structure that provides for the recovery of a portion
of the cost of the local loop allocated to that interstate jurisdiction directly
from the end user customer through the assessment of a subscriber line charge.
The remaining portion of the local loop costs are recovered from interstate
access charges to an interexchange carrier or, in some circumstances, from the
federal Universal Service Fund.
As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher than in
urban areas. In the absence of an accommodation in the FCC rules to address this
fact, a substantial portion of the costs of smaller local exchange carriers
would remain unrecovered, leaving them little alternative other than to
73
<PAGE>
charge high rates for intrastate services. Accordingly, the FCC provides for
additional interstate recovery by eligible telecommunications carriers through
the federal Universal Service Fund. The federal Universal Service Fund is
available to carriers whose local loop costs are significantly above the
national average as calculated pursuant to FCC rules. Recent FCC rulings have
made this high-cost support available to a competitive carrier, on an averaged
per line basis, for those lines serving customers switching to the competitive
carrier.
INTERSTATE ACCESS RATES
Interstate access rates are developed on the basis of a local exchange
carrier's measurement of its interstate costs for the provision of access
service to interexchange carriers divided by its projected demand for service.
The resulting rates are published in a company's interstate access tariff and
filed with the FCC, at which time they are subject to challenge by third parties
and to review by the FCC.
The FCC recognized that this rate making and tariff filing process may be
administratively burdensome for small local exchange carriers. Accordingly, the
FCC established the National Exchange Carriers Association, which is commonly
referred to as NECA, in 1983 to, among other things, develop common interstate
access service rates, terms and conditions. NECA develops interstate access
rates on the basis of data that are provided individually by participating local
exchange carriers and blended to yield average rates. These rates are intended
to generate revenue equal to the aggregate costs plus a return on the investment
of all of the participants. Currently, the authorized maximum rate of return
used in setting interstate access rates is 11.25%.
Individual participating local exchange carriers are likely to have costs of
providing service that are either higher or lower than the revenues generated by
applying the overall NECA tariff rate. To rectify this result, the revenues
generated by applying the NECA rates are pooled from all of the participating
companies and redistributed on the basis of each individual company's costs. The
result of this process not only eliminates the burden of individual tariff
filing, but also produces a system in which small companies can share and spread
risk. For example, if a smaller local exchange carrier filed its own tariff and
subsequently suffered the loss of major customers that utilize interstate access
service, the local exchange carrier could suffer significant under-recovery of
its costs. In the NECA pool environment, the impact of this loss is reduced
because it is spread over all of the pool participants.
NECA operates separate pools for traffic sensitive costs, which are
primarily switching costs, and non-traffic sensitive costs, which are primarily
loop costs. Companies are also free to develop and administer their own
interstate access charges. Our rural local exchange carriers participate in both
the traffic sensitive and non-traffic sensitive NECA pools. ATU files its own
traffic sensitive access tariffs with the FCC but participates in the NECA
non-traffic sensitive pool.
The FCC has initiated a proceeding to review its policies governing
interstate exchange access rates and the rate of return applicable to incumbent
local exchange carriers who are subject to rate-of-return, rather than price
cap, regulation. Both ATU and our rural local exchange carriers are
rate-of-return regulated, and thus the outcome of this proceeding could directly
affect their earning prospects. The outcome of this proceeding, however, and its
ultimate impact on us, cannot be predicted at this time.
INTRASTATE END USER RATES
The levels of rates charged to end users for the provision of basic local
service are generally subject to rate-of-return regulation administered by the
RCA. Local rates are typically set at a level that will allow recovery of
embedded costs for local service divided by the number of services and
74
<PAGE>
customers. Recognized costs include an allowance for a rate of return on
investment in plant used to provide local service. Rate cases are typically
infrequent, carrier-initiated and require the carrier to meet substantial
burdens of proof. The last APUC-authorized rates of return were 12.55% and
11.70% for Telephone Utilities of Alaska and Telephone Utilities of the
Northland, respectively. These rates were ordered in 1989. PTI Communications
was previously not regulated by the APUC and instead was regulated by the City
of Fairbanks Public Utilities Board. As a condition of the acquisition of the
City of Fairbanks Telephone Operation by our properties, the APUC required that
a general rate proceeding be initiated for PTI Communications by June 1999. This
proceeding has been delayed and combined with a company-wide earnings review to
be filed with the APUC by June 30, 2001. ATU's last authorized rate of return
was 9.79% for retail local exchange and 10.85% for intrastate access, ordered in
1991.
The APUC adopted regulations to govern competition in the local exchange
marketplace. The transitional regulations provide for, among other things:
- initial classification of all incumbent local exchange carriers, including
our properties and ATU, as dominant carriers,
- symmetrical requirements that all carriers, both dominant and nondominant,
offer all retail services for resale at wholesale rates and
- substantial 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 to the APUC. Only rate increases affecting existing services are
subject to full cost support showings for local exchange carriers in areas
with local competition.
INTRASTATE ACCESS RATES
In the past, the APUC has required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each local exchange carrier charges interexchange carriers fees for
originating or terminating long distance calls on its network based on the
statewide average cost of access rather than on its costs of access. Access
revenues are collected in a pool administered by the Alaska Exchange Carriers
Association and then redistributed to the local exchange carriers based on their
actual costs. With the passage of the Telecommunications Act and increased
competition in the local exchange market, the APUC began a process of reforming
intrastate access charges.
Under recent revisions to the Alaska access system, local exchange carriers
not yet subject to local competition continue to participate in the Alaska
Exchange Carriers Association pool. Participants in this pool recover their
costs based on the embedded cost of services most recently authorized by the
APUC. In the event of competitive entry into a dominant carrier's service area,
these revisions also require the dominant local exchange carrier to exit the
pool and initiate separate access charges. Dominant local exchange carriers
subjected to competitive entry have the right to propose that their access
charges be based on market rates.
An additional consequence of this access reform is the continued removal of
subsidies implicit in access pricing. For instance, the APUC recently abolished
the "weighting system" for the non-traffic-sensitive rate element that had
loaded extra costs on access charges for lower cost urban exchanges to support
rural exchanges. At the same time, the APUC proposed to support a portion of
high switching costs separately through a state universal service fund. The RCA
has subsequently proposed that such state universal service support be available
only to local companies with access lines of 20,000 or less. If adopted as
proposed, this limitation would reduce
75
<PAGE>
the amount of state universal service support which our rural local exchange
carriers would receive in the future.
The Alaska Universal Service Fund serves as a complement to the federal
Universal Service Fund, but must meet federal statutory criteria concerning
consistency with federal rules and regulations. Currently, the Alaska Universal
Service Fund only subsidizes a portion of higher cost carriers' switching costs,
and the costs of lifeline service--supporting rates of low income customers. The
APUC indicated that it might have considered expanding the Alaska Universal
Service Fund's coverage in the future, such as to support the costs of public
interest pay telephones. The RCA has proposed to subject existing support paid
to carriers for switching costs to an access line threshold which could reduce
or eliminate such support for some of our subsidiaries, and recently ordered the
suspension of certain payments from the Alaska Universal Service Fund,
associated with such switching costs, to one of our rural local exchange
carriers. Further, litigation has been initiated in state court to determine the
lawfulness of the Alaska Universal Service Fund as currently established.
THE TELECOMMUNICATIONS ACT
Among other things, the Telecommunications Act was enacted to enhance
competition without jeopardizing the availability of nationwide universal
service at affordable rates. These two objectives have resulted in a complex set
of rules intended to promote competitive entry in the provision of local
telephone services, except where entry would adversely effect the provision of
universal service or the public interest.
PROMOTION OF LOCAL SERVICE COMPETITION AND THE RURAL EXEMPTIONS
The Telecommunications Act made competitive entry into the local telephone
business more attractive to other carriers by removing barriers to competition.
In order to promote competition, the Telecommunications Act established new
interconnection rules generally requiring local exchange carriers to allow
competing carriers to interconnect with their local networks. Congress
recognized, however, that when the desire to promote competition conflicted with
the ability of existing carriers to provide universal service to higher cost
customers, local exchange carriers classified as "Rural Telephone Companies"
should be exempted from interconnection requirements until the continuation of
the exemption was no longer required by the public interest, as defined in the
Telecommunications Act.
Under the Telecommunications Act, all local exchange carriers, including
both incumbent local exchange carriers and new competitive carriers, are
required to:
- offer reasonable and nondiscriminatory resale of their telecommunications
services,
- ensure that customers can keep their telephone numbers when changing
carriers,
- ensure that competitors' customers can use the same number of digits when
dialing and receive nondiscriminatory access to telephone numbers,
operator service, directory assistance and directory listing,
- ensure access to telephone poles, ducts, conduits and rights of way and
- compensate competitors for the costs of terminating traffic.
76
<PAGE>
The Telecommunications Act also requires incumbent local exchange carriers
to:
- negotiate in good faith the terms and conditions of interconnection with
any competitive carrier making a request for same,
- interconnect their facilities and equipment with any requesting
telecommunications carrier at any technically feasible point,
- unbundle and provide nondiscriminatory access to unbundled network
elements, such as local loops, switches and transport facilities, at
nondiscriminatory rates and on nondiscriminatory terms and conditions,
- offer resale interconnection at wholesale rates,
- provide reasonable notice of changes in the information necessary for
transmission and routing of services over the incumbent local exchange
carrier's facilities or in the information necessary for interoperability
and
- provide for the physical collocation of equipment necessary for
interconnection or access to unbundled network elements at the premises of
the incumbent local exchange carrier, at rates, terms and conditions that
are just, reasonable and nondiscriminatory.
In order to implement interconnection requirements, local exchange carriers
generally enter into negotiated interconnection arrangements with competing
carriers. Local exchange carriers may also offer interconnection tariffs,
available to all competitors.
Competitors are required to compensate a local exchange carrier for the cost
of providing interconnection services. In the case of resale interconnection,
the rules provide that the rates charged should be on a wholesale basis and
reflect the current retail rates of the incumbent local exchange carrier,
excluding the portion of costs avoided by the incumbent local exchange carrier.
In the case of unbundled network element interconnection, rates are based on
costing methodologies that employ a forward-looking economic cost pricing
methodology known as total element long run incremental cost. While the Supreme
Court recently affirmed the FCC's authority to develop pricing guidelines, the
Supreme Court did not evaluate this pricing methodology. Some incumbent local
exchange carriers have argued that total element long run incremental cost
pricing methodology does not allow adequate compensation for the provision of
unbundled network elements. The Eighth Circuit Court of Appeals heard oral
arguments on this pricing issue on September 16, 1999, but has not yet issued a
ruling.
The Telecommunications Act specifies that resale and unbundled network
element rates are to be negotiated among the parties, or, if the parties fail to
reach an agreement, arbitrated by the relevant state regulatory authority. Once
the parties have come to agreement, the proposed rates are subject to final
approval by the state regulatory commission.
The Supreme Court has also recently upheld the FCC's authority to prevent
the incumbent local exchange carrier from disaggregating existing combinations
of network elements and to establish "pick and choose" rules regarding
interconnection agreements. "Pick and choose" rules would permit a carrier
seeking interconnection to pick and choose among the terms of service from other
interconnection agreements between the incumbent and local exchange carriers and
other competitors.
The Supreme Court also remanded the list of unbundled network elements that
the FCC adopted for further consideration of the necessity of each one under the
statutory standard. On September 15, 1999, the FCC adopted an order eliminating
some previously included unbundled
77
<PAGE>
network elements, but adding other elements to the list. These new FCC rules are
likely to be the subject of further appeals.
In January 1997, ATU entered into an interconnection agreement with GCI,
which provides for resale and unbundled network element interconnection, and
with AT&T Alascom, which provides for resale interconnection.
Our local operating utilities, Telephone Utilities of Alaska, Telephone
Utilities of the Northland, and PTI Communications, are defined as "rural
telephone companies" under the Telecommunications Act. As rural telephone
companies, they were granted rural exemptions from the requirements relating to
both resale interconnection and unbundled network element interconnection. The
rural exemptions were continued until the APUC determined that interconnection
was technically feasible, not unduly economically burdensome and consistent with
the Telecommunications Act's universal service provisions.
On June 30, 1999, the APUC ordered the rural exemptions of Telephone
Utilities of the Northland, Telephone Utilities of Alaska, and PTI
Communications terminated. On October 11, 1999, the RCA affirmed the APUC's
order. As a result, these rural local exchange carriers are no longer exempt
from the Telecommunications Act's interconnection requirements applicable to
incumbent local exchange carriers, and are now engaged in the negotiation of
interconnection agreements with potential competitors. We cannot be certain that
we will be able to charge rates which fairly compensate us for providing
unbundled network elements and/or schedule discounted resale services.
Separately, on September 1, 1999, we filed petitions with the RCA seeking
suspension or modification of interconnection duties and addressing market
structure reforms for the Fairbanks and Juneau-Douglas markets. In those
petitions, our rural local exchange carriers proposed tariffed terms and
conditions, including pricing, for resale of their services at wholesale
discounts, for certain unbundled network elements, and for the interconnection
of their facilities and those of competitive local exchange carriers in the
Fairbanks and Juneau-Douglas markets, effective January 1, 2000. Further, as
part of that proposal, we also requested that the RCA permit our local exchange
carriers to operate subject to competitive regulation and that the RCA remove or
reduce other regulatory limitations in those markets, effective January 1, 2001.
Subsequently, on October 26, 1999, the RCA dismissed our petitions seeking to
establish open competitive markets in Fairbanks and Juneau through tariffed
interconnection terms and conditions. On November 10, 1999, we filed a formal
appeal of the RCA's order terminating the rural exemptions in the Alaskan
Superior Court. On November 12, 1999, we filed a parallel appeal of the RCA's
order dismissing our petitions for tariffed interconnection in the Alaskan
Superior Court. Although we believe that the appeals are well-founded, we cannot
predict the timing and outcome of this litigation.
In April 1999, a bill was proposed in the Alaska state senate to open to
competition many local telephone markets in which we operate. Specifically, the
bill proposed to allow competitors to provide local telephone service in local
telephone markets throughout Alaska that have at least 5,000 access lines,
effectively depriving incumbent local exchange carriers in those markets of
their rural exemptions. Competition resulting from this bill, if it had been
enacted into law, could have materially adversely affected our profitability.
Although this bill was not enacted into law, we cannot predict at this time
whether or to what extent proposals included in the bill will be offered again
and enacted into law.
For the first nine months of 1999, our local exchange carriers benefiting
from rural exemptions accounted for 41.7% of our revenues and 53.8% of our
operating income. Loss of the rural exemptions, absent compensating measures,
such as rate increases, or market structure reforms,
78
<PAGE>
such as the replacement of implicit subsidies by explicit support mechanisms, or
rate deaveraging, could adversely affect our operating results.
PROMOTION OF UNIVERSAL SERVICE
While the Telecommunications Act promoted Congress' policy of ensuring that
affordable service is provided to consumers universally in rural, high-cost
areas of the country, the Telecommunications Act altered the framework for
providing universal service by:
- providing for the identification of those services eligible for universal
service support,
- requiring the FCC to make implicit subsidies explicit,
- expanding the types of communications carriers required to pay universal
service contributions and
- allowing competitive local exchange carriers to be eligible for funding.
These and other provisions were intended to make provision of universal service
support compatible with a competitive market.
Pursuant to the Telecommunications Act, federal Universal Service Fund
payments are only available to carriers that are designated as eligible
telecommunications carriers by a state public utilities commission. In areas
served by rural local exchange carriers, the Telecommunications Act provides
that a state public utilities commission may designate more than one eligible
telecommunications carrier, in addition to the incumbent local exchange carrier,
only after determining that the designation of an additional eligible
telecommunications carrier is consistent with the public interest. As a result,
an incumbent rural local exchange carrier has an opportunity to maintain its
status as the sole recipient of federal Universal Service Fund payments in its
service area, even if it is subsequently subjected to competition. Telephone
Utilities of Alaska, Telephone Utilities of the Northland and PTI Communications
are currently the sole designated eligible telecommunications carriers in their
respective service areas. The addition of a second eligible telecommunications
carrier in the service areas of our properties could have the effect of reducing
the amount of funds available from the federal Universal Service Fund and could
materially adversely affect our ability to achieve a reasonable rate of return
on the capital invested in our network.
In May 1997, the FCC initiated new proceedings addressing federal universal
service support. The new proceedings undertook to separately analyze and address
federal Universal Service Fund requirements and considerations for rural and for
non-rural telephone companies. The FCC indicated its intention that new rules
for universal service support of non-rural companies would be based on
forward-looking economic cost principles as applied through cost proxy models.
On October 21, 1999, the FCC issued orders addressing specific implementation
matters for providing universal service support to non-rural carriers. The FCC
established cost input parameters for use in the cost proxy models, upon which
universal service support payments to non-rural carriers would be based in the
future. The FCC also established procedures for allocating universal service
support for non-rural carriers among and between the states. This new system of
universal service support applies only to non-rural carriers and will become
effective January 1, 2000.
With respect to universal service support for rural telephone companies, the
FCC established a Rural Task Force in 1997 to investigate rural carrier
universal service needs, including issues concerning whether and how cost proxy
models adopted for non-rural carriers could be applied to rural telephone
companies. The FCC has indicated several times that it will not implement a new
universal service support system for rural telephone companies sooner than
January 1, 2001 and
79
<PAGE>
may delay any implementation beyond that date. The October 21, 1999 order
described above applies only to non-rural carriers.
Because we provide interstate and international services, we are required to
contribute to the federal Universal Service Fund a percentage of our revenue
earned from our interstate and international services. Although our rural local
exchange carriers receive subsidies from the federal Universal Service Fund, we
cannot be certain of how, in the future, our contributions to the fund will
compare to the subsidies we receive from the fund.
Separately, the FCC has requested comments concerning ways to promote basic
and advanced services to unserved and underserved areas. As a part of these
proceedings, the FCC is reviewing its authority to designate certain types of
telecommunications carriers, such as wireless carriers, as eligible to receive
payments from the universal service fund. Any determinations concerning such
eligibility could affect either our rural local exchange carriers, our wireless
carrier, or both, but we cannot predict the outcome of these proceedings at
present.
On July 30, 1999, the U.S. Court of Appeals for the Fifth Circuit overturned
certain of the FCC's rules governing the basis on which the FCC collects subsidy
payments from telecommunications carriers and recovery of those payments by
incumbent local exchange carriers. One or more parties to that litigation may
seek review by the Supreme Court. On October 8, 1999, the FCC revised its
universal service rules in response to the decision by the Fifth Circuit. Among
other things, these revised rules provide that intrastate revenue earned by a
contributing carrier will not be considered in determining the amount of the
contribution to the federal universal service fund.
FCC REGULATION OF 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.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of commercial mobile radio service which
includes personal communications services and cellular services and the FCC does
not regulate such rates. The FCC imposes, however, a variety of additional
regulatory requirements on commercial mobile radio service operators. These
include:
- Commercial mobile radio service operators must be able to transmit 911
calls from any qualified handset without credit check or validation, are
required to provide the location of the 911 caller, within an increasingly
narrow geographic tolerance over time, and in the future, will be required
to provide 911 service for individuals with speech and hearing
disabilities.
- The FCC is considering mechanisms to permit commercial mobile radio
service operators to charge the party initiating the call for the call
(even if it is not a personal communications service or cellular
subscriber)
FCC REGULATION OF INTERSTATE LONG DISTANCE SERVICES
Our long distance services are currently not subject to rate regulation by
the FCC, and we are not required to obtain FCC authorization for the
installation, acquisition or replacement of our
80
<PAGE>
domestic interexchange network facilities. However, we must comply with the
requirements of common carriage under the Communications Act. We are subject to
the general requirement that our charges and terms for our telecommunications
services be "just and reasonable" and that we not make any "unjust or
unreasonable discrimination" in our charges on terms, as well as to a number of
other requirements of the Communications Act and the FCC's rules. The FCC has
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations, and it has recently levied substantial
fines on carriers that have engaged in "slamming," which is the industry term
for unauthorized switching of a customer's telecommunications service provider.
In 1996, the FCC issued an order that required nondominant interexchange
carriers, like us, to cease filing tariffs for our domestic interexchange
services. The order required mandatory detariffing and gave carriers nine months
to withdraw federal tariffs and move into contractual relationships with their
customers. This order subsequently was stayed by a federal appeals court. If the
FCC's order becomes effective, nondominant interstate services providers will no
longer be able to file tariffs with the FCC and we may need to implement
customer contracts which could result in substantial administrative expense.
FCC POLICY ON INTERNET SERVICES
The Telecommunications Act establishes a distinction between
telecommunications services, which are regulated by the FCC, and information
services, which remain unregulated. Our Internet services are considered
information services and are not regulated by the FCC. Because the regulatory
boundaries in this area are somewhat unclear and subject to dispute, however,
the FCC could seek to characterize some of our information services as
"telecommunications services." If that happens, those services would become
subject to FCC regulations. The impact of a reclassification of our Internet
services is difficult to predict.
OTHER PROCEEDINGS
A number of other FCC, state and judicial proceedings are currently pending
or may be initiated in the future which could materially affect our business.
Some of these proceedings include:
- The FCC has adopted certain restrictions on the ability of
telecommunications carriers to use and disclose certain types of customer
information in marketing different types of services. The U.S. Court of
Appeals for the Tenth Circuit has held that these rules are an
unconstitutional abridgment of the carrier's freedom of speech. The FCC
has asked the Tenth Circuit to reconsider its decision. If the FCC's rules
are upheld, it may impose significant restrictions on our ability to
market packaged service offerings to our customers.
- The FCC has adopted new rules designed to make it easier for customers to
understand the bills of telecommunications carriers. These new rules,
among other things, establish certain requirements regarding the
formatting of bills and the information that must be included on bills.
Judicial review of these rules is pending.
- The FCC has recently adopted an order that requires telecommunications
service providers to make their services accessible to individuals with
disabilities, if readily achievable. It is unclear the effect that this
order will have on our businesses.
- The FCC has ordered telecommunications service providers to provide law
enforcement personnel with a sufficient number of ports and technical
assistance in connection with wiretaps. We cannot predict the cost to us
of complying with this order.
The foregoing is not an exhaustive list of proceedings that could materially
affect our business. We cannot predict the outcome of these or any other
proceeding before the FCC, the RCA or the courts.
81
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive
officers. We anticipate appointing additional directors over time who will not
be employees of Alaska Communications Systems Group or affiliated with
management.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Charles E. Robinson....................... 65 Chairman and Chief Executive Officer
Wesley E. Carson.......................... 49 President and Chief Operating Officer
Donn T. Wonnell........................... 52 Executive Vice President, General Counsel and
Secretary
Michael E. Holmstrom...................... 57 Senior Vice President and Chief Financial Officer
John Ayers................................ 56 Senior Vice President of Marketing and Sales
Dean A. Ryland............................ 48 Vice President, Finance and Accounting, Controller
and Assistant Treasurer
Kevin P. Hemenway......................... 39 Vice President and Treasurer
W. Dexter Paine, III...................... 38 Director
Saul A. Fox............................... 46 Director
Jason B. Hurwitz.......................... 27 Director
Carl H. Marrs............................. 50 Director
</TABLE>
CHARLES E. ROBINSON. Mr. Robinson, our Chairman and Chief Executive Officer
since May 1999, has over four decades of experience in the telecommunications
industry. Mr. Robinson was instrumental in creating Alaska's long distance
communications systems, including the White Alice Communications System,
beginning in the late 1950's. Between 1979 and 1982, Mr. Robinson served as
President of Alascom, the state's primary long distance carrier at the time.
Under his guidance, Alascom developed the first statewide long distance service
network in Alaska, connecting with more than 27 independent local companies.
Mr. Robinson served as President and Chief Operating Officer of Pacific Telecom
from 1981 until its sale to Century in 1997 and was appointed Chairman and Chief
Executive Officer in 1989. Mr. Robinson has been a member of the National
Security Telecommunications Advisory Committee for the last 18 years, having
been appointed by President Reagan. Mr. Robinson also served on the Board of
Directors of the United States Telephone Association from 1993 to 1995.
WESLEY E. CARSON. Mr. Carson, our President and Chief Operating Officer,
has been with the Company since its inception. On October 7, 1999, Mr. Carson
(previously an Executive Vice President) was appointed President and Chief
Operating Officer. Mr. Robinson had previously held the title of President.
Mr. Carson has over 19 years of telecommunications experience. He began his
career in telecommunications in 1980 with TRT Telecommunications Corporation, an
international data and voice carrier located in Washington, D.C. that was
acquired by Pacific Telecom in 1988. From 1989 to 1997, Mr. Carson served as the
Vice President of Human Resources for Pacific Telecom responsible for
administrative services, the planning, development, implementation and
administration of human resources policies and procedures and employee
relations. Mr. Carson has been involved with labor issues for nearly 20 years
and an active participant in Alaska labor relations since 1989. Mr. Carson holds
a B.A. in International Relations from Brigham Young University, a Master of
Public Administration degree from the University of Illinois-Springfield and a
J.D. from Georgetown University.
DONN T. WONNELL. Mr. Wonnell is Executive Vice President, General Counsel
and Secretary, a position he has held since June 1999. Mr. Wonnell has worked in
the telecommunications industry for more than 20 years. Mr. Wonnell served as
Vice President for legal, regulatory and legislative
82
<PAGE>
affairs of Pacific Telecom until the merger of Pacific Telecom into Century at
the end of 1997. Prior to joining Pacific Telecom, Mr. Wonnell served as
President of the Telecommunications and Energy Division of California Pacific
Utilities in San Francisco, and, earlier, as Vice President and General Counsel
of RCA Alaska Communications in Anchorage. Mr. Wonnell holds a B.A. from the
College of William & Mary and a J.D. from the University of Pennsylvania School
of Law. Mr. Wonnell has been admitted to practice before the bars of Alaska,
California, Pennsylvania and the District of Columbia.
MICHAEL E. HOLMSTROM. Mr. Holmstrom, our Senior Vice President and Chief
Financial Officer since January 1999, is responsible for our financial,
accounting, tax and business development functions. Mr. Holmstrom's career in
telecommunications spans 35 years. Since 1990, he has consulted, served as Chief
Operating Officer for Spectrum Network Systems, Ltd. in Sydney, Australia, and
as Chief Financial Officer for Atlantic Tele-Network in the U.S. Virgin Islands.
From 1983 through 1989 he was Vice President of Unregulated Operations, Chief
Financial Officer and then President of CP National Corporation, a
telecommunications provider that merged with Alltel Corporation in
December 1988. Mr. Holmstrom was Vice President of Finance at Alascom from 1976
through 1980, and Vice President of Financial and Business Planning at Pacific
Telecom, Alascom's parent corporation, from 1980 to 1981. Mr. Holmstrom has a
B.S. in Business Administration from Gannon University. He was
Executive-in-Residence professor of business strategy at Texas A&M University
for the academic year 1981 to 1982.
JOHN AYERS. Mr. Ayers is Senior Vice President of Marketing and Sales, a
position he has held since May 1999. Mr. Ayers has more than 20 years of
experience in the telecommunications industry. As President and co-founder of
e.Net, Ltd. in 1996, Mr. Ayers served as a consultant to a variety of
established and start-up businesses. From February 1987 through August 1995,
Mr. Ayers held various leadership positions with Pacific Telecom and its
subsidiaries, including Executive Vice President of Pacific Telecom Services
Company, with responsibility for strategic planning, marketing and business
development, and Executive Vice President and General Manager of Alascom, Inc.,
Alaska's largest interexchange carrier. Mr. Ayers holds a bachelor's degree in
management from Golden Gate University.
DEAN A. RYLAND. Mr. Ryland, our Vice President, Finance and Accounting,
Controller and Assistant Treasurer since September 1998, served as a senior
accounting manager with Century from 1997 to 1998. Prior to this time he worked
at Pacific Telecom for over 20 years, holding various positions including Vice
President, Finance and Administration Multivisions Ltd., and Pacific Telecom
Accounting Manager. Mr. Ryland earned a B.A. from the University of Santa Clara.
Mr. Ryland began his professional accounting career as an auditor for
PriceWaterhouse based in Anchorage and left when offered an opportunity to join
Alascom in 1976.
KEVIN P. HEMENWAY. Mr. Hemenway joined us as Vice President and Treasurer
in July 1999 with 10 years of prior experience in the telecommunications
industry. Before joining us Mr. Hemenway served as the Chief Financial Officer
and Treasurer of Atlantic Tele-Network, Inc. based in the U.S. Virgin Islands.
From January 1990 to October 1998, as an independent consultant, Mr. Hemenway
performed extensive financial, accounting, management and rate making consulting
services for the telecommunications industry, principally for Atlantic
Tele-Network, Inc. and its subsidiaries. From 1986 through 1989, Mr. Hemenway
was employed by Deloitte & Touche LLP as a C.P.A. and manager, performing both
audit and consulting services and from 1983 to 1986, was employed by Grant
Thornton as a C.P.A. and senior staff accountant. Mr. Hemenway graduated from
Creighton University in 1982 with a B.S.B.A., majoring in accounting, and is a
non-practicing CPA certificate holder registered in the State of Nebraska.
W. DEXTER PAINE, III. Mr. Paine, a director since July 1998, has been
President and Co-founder of Fox Paine & Company since its inception in 1997.
From 1994 until founding Fox
83
<PAGE>
Paine, Mr. Paine served as a senior partner of Kohlberg & Company. Prior to
joining Kohlberg & Company, Mr. Paine served as a general partner at Robertson
Stephens & Company. Mr. Paine has a B.A. in economics from Williams College.
SAUL A. FOX. Mr. Fox, a director since May 1999, has been Chief Executive
Officer and Co-founder of Fox Paine & Company since its inception in 1997. From
1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis &
Roberts & Co. Prior to joining KKR, Mr. Fox was an attorney at Latham & Watkins,
a law firm headquartered in Los Angeles, California. Mr. Fox has a B.S. in
communications and computer science from Temple University and a J.D. from the
University of Pennsylvania Law School.
JASON B. HURWITZ. Mr. Hurwitz, a director since October 1999, has been
employed at Fox Paine & Company, LLC since June 1997 and has served as an
associate and vice president, and is currently a director, of Fox Paine &
Company, LLC. Mr. Hurwitz was an associate at McCown De Leeuw & Co. from August
1996 to June 1997 and was an analyst at James D. Wolfensohn Incorporated from
July 1994 to July 1996.
CARL H. MARRS. Mr. Marrs, a director since July 1999, is President and
Chief Executive Officer of Cook Inlet. Mr. Marrs has been with Cook Inlet for
approximately 25 years. During that period Mr. Marrs has been employed in a
series of management positions, culminating in his appointment as President in
1986. Mr. Marrs attended the Stanford University School of Business for
Executives in 1983 and the Amos Tuck School of Business at Dartmouth College in
1986.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the offering, our board of directors will establish an
Audit Committee, a Compensation Committee and an Executive Committee. The
functions of the Audit Committee will be to:
- recommend annually to our board of directors the appointment of our
independent auditors,
- discuss and review in advance the scope and the fees of our annual audit
and review the results thereof with our independent auditors,
- review and approve non-audit services of our independent auditors,
- review compliance with our existing major accounting and financial
reporting policies,
- review the adequacy of major accounting and financial reporting policies
and
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices.
We anticipate that the Audit Committee will consist solely of directors who are
not otherwise our employees.
The functions of the Compensation Committee will be to review and approve
annual salaries, bonuses, and grants of stock options under our stock incentive
plans for all executive officers and other key members of management, and to
review and approve the terms and conditions of all employee benefit plans or
changes to these plans. We anticipate the Compensation Committee will consist of
directors who are not otherwise our employees.
The Executive Committee will have the authority to exercise the powers of
our board of directors, other than those reserved to the Audit Committee and the
Compensation Committee or to our full board of directors, between meetings of
our full board of directors.
84
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, our board of directors does not currently have a
Compensation Committee, but we anticipate establishing one in connection with
the offering. Prior to this offering, our controlling stockholder and senior
management were directly involved in setting compensation for our executives.
COMPENSATION OF DIRECTORS
As noted above, our board of directors does not currently have a
Compensation Committee, but we anticipate establishing one in connection with
the offering. Upon its formation, the Compensation Committee will formulate
policies for compensating non-employee directors, including meeting fees and
annual retainers. We currently do not, and we will continue not to, compensate
our employee directors for serving as directors. We will reimburse all directors
for reasonable and necessary expenses they incur in performing their duties as
directors.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. 1999 NON-EMPLOYEE DIRECTOR STOCK
COMPENSATION PLAN
In connection with the offering, we intend to adopt the Alaska
Communications Systems Group, Inc. 1999 Non-Employee Director Stock Compensation
Plan. The purpose of this plan will be to promote a greater identity of
interests between our non-employee directors and our stockholders and to attract
and retain individuals to serve as directors.
The plan will be administered by our board of directors or a committee of
our board of directors designated for this purpose.
Our non-employee directors will be eligible to participate in the plan as of
the date of the pricing of this offering. A total of 150,000 shares of common
stock will be reserved for issuance and available for grants under the plan.
Our board of directors or its designated committee may adjust the awards
under the plan if there is any change in corporate capitalization, such as a
stock split, or a corporate transaction, such as a merger, consolidation,
separation, including a spin-off, or other distribution of our stock or
property, any reorganization or any partial or complete liquidation.
Each non-employee director, other than directors affiliated with Fox Paine,
will receive a portion of his or her annual retainer and meeting fees in shares
of common stock. In addition, non-employee directors may make an annual
irrevocable election to receive shares of common stock in lieu of all, or a
portion, of such director's remaining fees. The number of shares of common stock
granted to a director will be equal to the appropriate percentage of fees
payable to the director in each calendar quarter, divided by the fair market
value of a share of common stock on the last business day of the calendar
quarter. We will round the number of shares granted to the director down to the
nearest whole share of common stock and pay cash for the value of any fractional
share. Each director may defer the receipt of his or her cash payments into an
interest-bearing cash account and/or his or her elected or mandatory shares of
common stock into a share account which will be credited with additional shares
having a value equal to the dividends that would be paid on the shares credited
to the share account, if they were outstanding. When the director leaves our
board of directors or, if earlier, upon a change of control, the amount of cash
in his or her cash account, plus a number of shares of common stock equal to the
number of shares in his or her share account will be delivered to the director,
with cash being paid in lieu of any fractional shares.
85
<PAGE>
Grants and awards under the plan are nontransferable other than by will or
the laws of descent and distribution, or at the discretion of our board of
directors or the designated committee, by a written beneficiary designation.
Our board of directors may at any time terminate or amend the plan, except
that no termination or amendment may impair the rights of directors relating to
outstanding awards. No amendment will be made without the approval of our
stockholders to the extent such approval is required by law or stock exchange or
automated quotation system rule.
EXECUTIVE COMPENSATION
Prior to the acquisitions of Century's Alaska properties and ATU on May 14,
1999, none of our executive officers was compensated by us or any of our
subsidiaries to any meaningful extent. As a result, individual information for
our directors and executive officers is not provided for periods prior to
May 14, 1999. The following table shows current cash compensation, assuming a
full year and the payment of maximum targeted bonuses, for our Chief Executive
Officer and each of our four other most highly compensated executive officers
under their employment agreements.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------
--------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS STOCK OPTIONS(1) LTIP COMPENSATION(2)
- --------------------------- --------- --------- --------------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Charles E. Robinson............. $500,000 $500,000 1,117,500 $0 $1,071,712
Chairman and
Chief Executive Officer
Wesley E. Carson................ 200,000 200,000 450,000 0 534,690
President and Chief Operating
Officer
Donn T. Wonnell................. 200,000 100,000 300,000 0 316,408
Executive Vice President,
General Counsel and Secretary
Michael E. Holmstrom............ 200,000 100,000 350,000 0 8,700
Senior Vice President and
Chief Financial Officer
John Ayers...................... 200,000 100,000 300,000 0 8,700
Senior Vice President
</TABLE>
- ------------------------
(1) Options to purchase shares of common stock. See "--Option Grants".
(2) In May and July 1999, Messrs. Robinson, Carson and Wonnell received common
stock grants in the amounts of 172,729 shares for Mr. Robinson, 85,469
shares for Mr. Carson and 50,000 shares for Mr. Wonnell. The fair market
value of these grants was established using a per share price of
approximately $6.15. In addition, each executive officer receives an annual
car allowance in the amount of $8,700.
86
<PAGE>
OPTION GRANTS
The following table provides information on grants of stock options in 1999
to the executive officers listed below.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL
SECURITIES STOCK OPTIONS
UNDERLYING GRANTED TO MARKET
STOCK OPTIONS EMPLOYEES EXERCISE PRICE ON
GRANTED IN FISCAL PRICE DATE OF EXPIRATION
NAME (SHARES) 1999 PER SHARE GRANT DATE
- ---- -------------- -------------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Charles E. Robinson.......... 1,017,500(1) 32.7% $6.1542 6.1542 May 14, 2008
100,000(2) 3.2% 6.1542 10.1200 September 28, 2008
Wesley E. Carson............. 400,000(1) 12.9% 6.1542 6.1542 May 14, 2008
50,000(2) 1.6% 6.1542 10.1200 September 28, 2008
Donn T. Wonnell.............. 250,000(1) 8.0% 6.1542 6.1542 May 25, 2008
50,000(2) 1.6% 6.1542 10.1200 September 28, 2008
Michael E. Holmstrom......... 300,000(1) 9.7% 6.1542 6.1542 May 14, 2008
50,000(2) 1.6% 6.1542 10.1200 September 28, 2008
John Ayers................... 250,000(1) 8.0% 6.1542 6.1542 May 24, 2008
50,000(2) 1.6% 6.1542 10.1200 September 28, 2008
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM (3)
---------------------------------
0% 5% 10%
NAME ($) ($) ($)
- ---- --------- --------- ---------
<S> <C> <C> <C>
Charles E. Robinson.......... -- 3,452,361 8,503,331
396,580 954,524 1,770,823
Wesley E. Carson............. -- 1,357,194 3,342,833
198,290 477,262 885,412
Donn T. Wonnell.............. -- 848,246 2,089,270
198,290 477,262 885,412
Michael E. Holmstrom......... -- 1,017,895 2,507,125
198,290 477,262 885,412
John Ayers................... -- 848,246 2,089,270
198,290 477,262 885,412
</TABLE>
- ----------------------------------
(1) Of these stock options, 10% (16 2/3% in the case of Mr. Robinson) vest on
each anniversary of their grant for a period of five years (three years in
case of Mr. Robinson). The first anniversary of Messrs. Robinson's, Carson's
and Holmstrom's grants will be May 14, 2000; the first anniversary of
Mr. Wonnell's grant will be May 25, 2000; and the first anniversary of
Mr. Ayers' grant will be May 24, 2000. An additional 50% of these stock
options granted to each such officer will vest on the ninth year after the
date of grant and vesting may be accelerated to each January 1 of the five
years (three years in the case of Mr. Robinson) following the date of grant,
in equal installments, if corporate financial goals established under our
stock incentive plan are attained, and the vesting of Mr. Robinson's shares
will be accelerated upon completion of the offering.
(2) These stock options will vest upon completion of the offering. Each
executive officer has agreed not to dispose of more than 20% of the shares
he may receive upon exercise of these options before each anniversary
following the date of grant of the options.
(3) Represents the potential realizable value of each grant of options
calculated through its expiration date assuming that the underlying stock
appreciates from its market price on the date of grant through the option
expiration date at the annual rate of 0%, 5% and 10%.
OPTION EXERCISES AND YEAR-END VALUES
The following table provides information for the listed executive officers,
regarding the number and value of all their unexercised stock options at
September 30, 1999. To date, none of these options has vested.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED STOCK OPTIONS VALUE OF UNEXERCISED
AT SEPTEMBER 30, 1999 IN-THE-MONEY STOCK OPTIONS
(SHARES) AT SEPTEMBER 30, 1999(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------------- --------------------------
<S> <C> <C>
Charles E. Robinson..................... 0/1,117,500 $ 0/4,431,782
Wesley E. Carson........................ 0/450,000 0/1,784,610
Donn T. Wonnell......................... 0/300,000 0/1,189,740
Michael E. Holmstrom.................... 0/350,000 0/1,388,030
John Ayers.............................. 0/300,000 0/1,189,740
</TABLE>
- ------------------------
(1) The fair market value of stock options as of September 30, 1999 was assumed
to be $10.12 per share, based upon an independent business valuation, due to
the lack of a public trading market for the securities underlying the stock
options.
87
<PAGE>
EMPLOYMENT ARRANGEMENTS
Before completion of the acquisitions of Century's Alaska properties and
ATU, we entered into new employment arrangements with some of our employees
relating to their employment with us and Alaska Communications Systems Holdings,
their ownership of our common stock and the granting of options to purchase
shares of our common stock following the completion of these acquisitions.
EMPLOYMENT AGREEMENT WITH CHARLES E. ROBINSON. Under the employment
agreement among Alaska Communications Systems Group, Alaska Communications
Systems Holdings and Charles E. Robinson, dated as of March 12, 1999,
Mr. Robinson served as the Chairman of the Board, Chief Executive Officer and
President of Alaska Communications Systems Group and Alaska Communications
Systems Holdings for a three-year period, which will be extended automatically
for successive additional one-year periods unless either our board of directors,
or Mr. Robinson gives no less than 90 days written notice of an intention not to
extend the term. On October 7, 1999, Mr. Carson became President and Chief
Operating Officer of Alaska Communications Systems Group, while Mr. Robinson
retained his title of Chairman of the Board and Chief Executive Officer.
Mr. Robinson will receive an initial annual base salary of $500,000, which may
be increased at the beginning of each year following the first year of
employment. Mr. Robinson will be eligible for an annual bonus equal to 100% of
his annual base salary for each calendar year based on our attainment of
mutually determined business targets, with appropriate adjustments to the extent
we exceed or fail to reach these targets. In no event will Mr. Robinson's annual
bonus be less than $200,000. Mr. Robinson's employment agreement also provides
for other customary benefits including fringe benefit plans, paid vacation, life
and disability insurance plans and expense reimbursement.
Under the Robinson employment agreement, if Mr. Robinson's employment were
to be terminated by Mr. Robinson for good reason or following a change in
control or by Alaska Communications Systems Group without cause, we would be
obligated to pay Mr. Robinson a lump sum cash payment in an amount equal to the
sum of:
- Mr. Robinson's annual base salary, as then in effect plus
- Mr. Robinson's most recent annual bonus, as well as reimbursement for the
cost of continuing health insurance coverage under COBRA for twelve
months.
In addition, upon the termination of Mr. Robinson's employment, the number of
then-unvested options will vest as are necessary to vest at least one-third of
all options received by Mr. Robinson. In addition, in the event we decide at any
time not to extend the term of his employment agreement, we will pay
Mr. Robinson the sum of:
- Mr. Robinson's annual base salary, as then in effect, plus
- Mr. Robinson's most recent annual bonus plus
- reimbursement for the cost of continuing health insurance coverage under
COBRA for twelve months.
The employment agreement with Mr. Robinson also provides that during his
employment and during the 12-month period following any termination of his
employment, Mr. Robinson will not directly or indirectly own, make equity or
debt investments in, manage, control, participate in, consult with, advise,
render services to, or in any manner engage in, or be connected as an employee,
officer, partner, director, consultant or otherwise with:
- any enterprise engaged in the provision of local exchange or wireless
telecommunications services in any state in which:
- we, our affiliates or subsidiaries or
- any entity that is a party to an acquisition agreement with us, our
affiliates or subsidiaries
is engaged in the provision of local exchange or wireless telecommunications
services, or
88
<PAGE>
- any enterprise that is the subject of a potential transaction made known
to us, our affiliates or subsidiaries, or Mr. Robinson during or at any
time prior to the termination of his employment agreement, that is engaged
in the provision of local exchange or wireless telecommunications
services.
However, Mr. Robinson may be a passive owner of not more than one percent of any
publicly traded class of capital stock of any entity engaged in the provision of
local exchange or wireless telecommunications services. The Robinson employment
agreement also provides for other non-inducement and non-solicitation
restrictions during Mr. Robinson's employment and during the 12-month period
following any termination of his employment.
EMPLOYMENT AGREEMENT WITH WESLEY E. CARSON. Under the employment agreement,
dated March 12, 1999, by and among Alaska Communications Systems Group, Alaska
Communications Systems Holdings and Wesley E. Carson, Mr. Carson served as
Executive Vice President of us and Alaska Communications Systems Holdings for a
two-year initial term at an annual base salary of $200,000. On October 7, 1999,
Mr. Carson assumed the title of President and Chief Operating Officer of Alaska
Communications Systems Group. Previously, Mr. Robinson held the title of
President. Mr. Carson's employment agreement generally contains provisions
similar to those in Mr. Robinson's employment agreement, except that:
- Mr. Carson does not have a guaranteed minimum annual bonus and Mr. Carson
will receive no annual bonus if termination occurs prior to December 31,
1999 and
- Mr. Carson's employment agreement does not provide any additional rights
with respect to vesting of then-unvested options upon termination.
OTHER EMPLOYMENT ARRANGEMENTS. We have made additional employment
commitments to other of our officers on terms and conditions substantially
similar to those in the employment agreement with Mr. Carson.
ALEC HOLDINGS, INC. 1999 STOCK INCENTIVE PLAN
In connection with the completion of the acquisitions of Century's Alaska
properties and ATU, we adopted the ALEC Holdings, Inc. 1999 Stock Incentive Plan
under which we may grant incentive awards in the form of options to purchase
shares of our common stock, restricted shares of our common stock and stock
appreciation rights to participants, which include non-employee directors,
officers, employees and consultants of us and our affiliates. The total number
of shares of our common stock initially reserved and available for grant under
the stock incentive plan is 3,410,486 shares. A committee of our board of
directors, or our board of directors itself in the absence of a committee, is
authorized to make grants and various other decisions under the stock incentive
plan. Unless otherwise determined by the committee, any participant granted an
award under the stock incentive plan must become a party to, and agree to be
bound by, the stockholders' agreement.
Stock options may include incentive stock options, nonqualified stock
options or both, in each case, with or without stock appreciation rights. Stock
options are generally nontransferable and, unless otherwise determined by the
committee, have a term of ten years. Upon a participant's death or when the
participant's employment with us or the applicable affiliate of us is terminated
for any reason, the participant's then-unvested stock options are forfeited and
the participant or his or her legal representative may, within three months if
termination of employment is for any reason other than death, or one year in the
case of the participant's death, exercise any previously vested stock options.
Stock appreciation rights may be granted in conjunction with all or part of any
stock option award and are generally exercisable only in connection with the
exercise of the related stock option. Upon termination or exercise of the
related stock option, stock appreciation rights terminate and are no longer
exercisable. Stock appreciation rights are transferable only with the related
stock options. Unless otherwise provided in the related award agreement or, if
applicable, the stockholders' agreement, immediately prior to the change of
control transactions described in the stock incentive plan, all outstanding
stock options and stock appreciation rights will become fully exercisable and
vested, and any restrictions and deferral limitations applicable to any
restricted
89
<PAGE>
stock awards will lapse. The committee may also grant to any participant, on
terms and conditions determined by the committee, the right to receive cash
payments to be paid at that time as an award results in compensation income to
the participant in order to assist the participant in paying the resulting
taxes.
The stock incentive plan will terminate on May 14, 2009. However, awards
outstanding at that time will not be affected or impaired by the stock incentive
plan's termination. Our board of directors and the committee have authority to
amend the stock incentive plan and awards granted thereunder.
On May 14, 1999 we issued options to purchase 2,244,500 shares of common
stock to some of our employees and a consulting firm (204,000 of which were
subsequently forfeited); on May 24, 1999 we issued options to purchase 250,000
shares of common stock to some of our employees; on May 25, 1999 we issued
options to purchase 250,000 shares of common stock to some of our employees; on
June 1, 1999 we issued options to purchase 25,000 shares of common stock to some
of our employees; on June 9, 1999 we issued options to purchase 15,000 shares of
common stock to some of our employees; and on June 25, 1999 we issued options to
purchase 73,500 shares of common stock to some of our employees. For all of
these options, 10% vest on each anniversary of their grant for a period of five
years (16 2/3% for a period of three years in the case of Mr. Robinson) and an
additional 50% of the options vest on the ninth year of the date of grant, and
vesting will be accelerated to each January 1 of the five years (three years in
the case of Mr. Robinson) following the date of grant, in equal installments, if
corporate financial goals established under our stock incentive plans are
obtained. The vesting of 508,750 performance-based options of Mr. Robinson,
however, will be accelerated upon completion of the offering. In addition,
vesting of 20,000 performance-based options held by another employee will be
accelerated upon completion of the offering. These employees have agreed not to
dispose of more than 20% of the shares they may receive upon exercise of these
options before each anniversary following the date of grant of the options (plus
any shares permitted to be disposed of, but not disposed of, in any previous
year). On September 28, we issued options to purchase 470,000 shares of common
stock to some of our employees; on October 25, 1999, we issued options to
purchase 4,000 shares of our common stock to some of our employees; on
November 1, 1999 we issued options to purchase 8,000 shares of our common stock
to some of our employees; and on November 15, 1999 we issued options to purchase
21,500 shares of common stock to some of our employees, all of which will vest
upon completion of the offering. The employees to whom these options have been
granted have agreed not to dispose of more than 20% of the shares they may
receive upon exercise of these options before each anniversary following
September 28, October 25, November 11, or November 15, 1999, the dates of grant
of the options (plus any shares permitted to be disposed of, but not disposed
of, in any previous year). We had an independent appraisal of the fair market
value of these recently granted options. Based upon this appraisal, we recorded
$1,997,000 as of November 15 of deferred compensation which will be charged to
expense upon completion of the offering.
Additionally, as discussed above, 528,750 of the options granted in May 1999
under the ALEC Holdings, Inc. 1999 Stock Incentive Plan are performance-vesting
options that vest upon completion of the offering. Based upon the midpoint of
the initial public offering price range set forth on the cover of this
prospectus we would record compensation expense of $4,148,000 following the
offering.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. 1999 STOCK INCENTIVE PLAN
In connection with the offering, we intend to adopt and approve the Alaska
Communications Systems Group, Inc. 1999 Stock Incentive Plan. This plan is
designed to promote our success and enhance our value by linking the interests
of our officers, employees and consultants to those of our stockholders and by
providing participants with an incentive for outstanding performance. This plan
is further intended to provide flexibility in its ability to motivate, attract
and retain employees upon whose judgment, interest and special efforts our
business is largely dependent. Our officers,
90
<PAGE>
employees and consultants, including employees who are members of our board of
directors, and officers, employees and consultants of our subsidiaries and
affiliates are eligible to participate in this plan. Non-employee directors are
not eligible to participate in this plan. This plan is intended to remain in
effect until 2009. The description below summarizes the material terms of this
plan.
GENERAL
The plan will be administered by the Compensation Committee of our board of
directors, or another committee designated by our board of directors, and
provides for the grant of stock options, both non-qualified and incentive stock
options and other types of equity-based awards.
The plan provides that the maximum number of shares of common stock
available for grant under the 1999 plan is 1,500,000.
The term of options granted under the plan may not exceed 10 years. Unless
otherwise determined by our 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.
A participant exercising an option may pay the exercise price in cash or, if
approved by our Compensation Committee, with previously acquired shares of
common stock or in a combination of cash and stock. Our Compensation Committee,
in its discretion, may allow the cashless exercise of options.
Options are nontransferable other than by will or the laws of descent and
distribution or, at the discretion of our Compensation Committee, by a written
beneficiary designation and, in the case of a non-qualified option, by a gift to
members of the holder's immediate family. The gift may be made directly or
indirectly or by means of a trust or partnership or limited liability company
and, during the participant's lifetime, may be exercised only by the
participant, any such permitted transferee or a guardian, legal representative
or beneficiary.
OTHER AWARDS
A stock appreciation right, or SAR, permits a participant to receive cash or
shares of common stock, or a combination thereof, as determined by our board of
directors or our Compensation Committee. The amount of cash or the value of the
shares is equal to the excess of the fair market value of a share of common
stock on the date of exercise over the SAR exercise price, multiplied by the
number or shares with respect to which the SAR is exercised. Restricted stock
may be granted subject to performance or service-based goals upon which
restrictions will lapse. Performance units or restricted units may be granted
subject to performance goals and/or service-based restrictions, and will be
payable in cash or shares of common stock or a combination as determined by our
board of directors or our Compensation Committee. Dividend and interest
equivalents with respect to awards, and other awards based on the value of
common stock, may also be granted.
CHANGE IN CONTROL
In the event of a change in control, any option or SAR that is not then
exercisable and vested will become fully exercisable and vested, restrictions on
restricted stock will lapse and performance units will be deemed earned. Change
in control generally means:
- the acquisition of an amount of common stock greater than the amount held,
directly or indirectly, by Fox Paine, our controlling stockholder, and
representing at least 30% of the outstanding common stock or voting
securities,
- a change in the majority of the members of the board of directors, unless
approved by the incumbent directors or Fox Paine,
- the completion of a merger or other business combination involving Alaska
Communications Systems Group in which, among other things, our
stockholders fail to retain more than 50% of the common stock and voting
power or
91
<PAGE>
- approval by our stockholders of a complete liquidation or dissolution or
sale of substantially all of our assets.
AMENDMENTS
Our board of directors may at any time amend or terminate the plan and may
amend the terms of any outstanding option or other award, except that no
termination or amendment may impair the rights of the participants as they
relate to outstanding options or awards. However, no such amendment to the plan
will be made without the approval of our stockholders to the extent such
approval is required by law or stock exchange or automated quotation system
rule.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN
In connection with the offering, we intend to adopt the Alaska
Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan. The
purpose of the purchase plan will be to further our long-term stability and
financial success by providing a method for employees to increase their
ownership of common stock. Under the purchase plan, 1,000,000 shares of common
stock will be available for issuance and sale. Unless sooner terminated at the
discretion of our board of directors, the purchase plan will terminate on
December 31, 2009.
ELIGIBILITY
All of our 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.
GENERAL DESCRIPTION
A participant in the purchase plan may authorize regular salary deductions
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 $25,000. The amounts so deducted and contributed will be applied
to the purchase of full shares of common stock under options to purchase shares
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
will be January 1 and July 1 of each purchase plan year, and each offering
period will consist of one six-month purchase period. Any offering period,
however, beginning in 1999 would be commenced after July 1, and would be for
less than a six-month period. Shares will be purchased for participating
employees on the last business days of June and December for each purchase plan
year and each such participant will have the rights of a stockholder with
respect to such shares.
Participants may decrease their payroll deductions at any time but not more
than once during any offering period. Participants may increase or decrease
their payroll deductions for any subsequent offering period by notifying the
purchase plan administrator no later than 15 days prior to such offering period.
Participants may also withdraw from participation in the purchase plan at any
time on or prior to the 15th day of the last month of the offering period. If a
participant withdraws from the purchase plan, any contributions that have not
been used to purchase shares will be refunded. A participant who has withdrawn
may not participate in the purchase plan again until the next offering period.
In the event of retirement or other termination of employment before the
15th day of the last month in the offering period, any contributions that have
not yet been used to purchase shares will be refunded and a certificate issued
for the full shares in the participant's account. In the event of a
participant's death, any contributions that have not yet been used to purchase
shares and all shares in such participant's account will be delivered to the
participant's beneficiary designated in writing and filed with us, or, if no
beneficiary has been designated or survives the participant, to the
participant's estate. Any payroll deductions that have not been used to purchase
shares will be returned to the participant after the end of the applicable
offering period.
92
<PAGE>
AMENDMENTS OR TERMINATION OF THE PURCHASE PLAN
Our board of directors may amend the purchase plan in any respect, although
our stockholders must approve any amendment that would increase the number of
securities that may be issued under the purchase plan or would cause the plan to
fail to qualify for beneficial tax treatment under Section 423 of the Internal
Revenue Code. Our board of directors may suspend or terminate the purchase plan
at any time. However, in the event of a termination while an offering period is
in progress, our Compensation Committee may return accumulated payroll
deductions or shorten the offering period by setting a new date of purchase.
FEDERAL INCOME TAX CONSIDERATION OF OPTIONS
The following brief summary of the U.S. federal income tax rules currently
applicable to nonqualified stock options and incentive stock options is not
intended to be specific tax advice under the ALEC Holdings and the Alaska
Communications Systems Group 1999 incentive plans.
Two types of stock options may be granted under the 1999 incentive plans:
nonqualified stock options ("NQOs") and incentive stock options ("ISOs"). The
grant of an option generally has no immediate tax consequences to the
participant or Alaska Communications Systems Group. Generally, participants will
recognize ordinary income upon the exercise of NQOs. In the case of NQOs, the
amount of income recognized is measured by the difference between the exercise
price and the fair market value of common stock on the date of exercise. The
exercise of an ISO for cash generally has no immediate tax consequences to a
participant or to Alaska Communications Systems Group. Participants may, in
certain circumstances, recognize ordinary income upon the disposition of shares
acquired by exercise of an ISO, depending upon how long such shares were held
prior to disposition. Special rules apply to shares acquired by exercise of ISOs
for previously held shares. In addition, special tax rules may result in the
imposition of a 20% excise tax on any "excess parachute payments" (as defined in
the Code) that result from the acceleration of the vesting or exercisability of
awards upon a change in control.
Alaska Communications Systems Group is generally required to withhold
applicable income and payroll taxes ("employment taxes") from ordinary income
which a participant recognizes on the exercise or receipt of an award. Alaska
Communications Systems Group thus may either require participants to pay to it
an amount equal to the employment taxes are required to withheld or retain or
sell without notice a sufficient number of the shares to cover the amount
required to be withheld.
STOCKHOLDERS' AGREEMENT
On May 14, 1999, we 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 our employees listed on
the signatures pages to the stockholders' agreement. Since May 14, 1999,
additional parties, including Cook Inlet, have been added to the stockholders'
agreement. The following is a summary of the material terms of the stockholders'
agreement and is qualified in its entirety by reference to the stockholders'
agreement, which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
TRANSFER RESTRICTIONS. The stockholders' agreement contains general
restrictions on the ability of our stockholders to transfer their shares of
common stock. In addition, if Fox Paine Capital Fund and its affiliates desire
to sell or dispose of all their shares of common stock, they have the right to
require the non-fund investors to sell all of their shares of common stock on a
pro rata basis and on the same terms and conditions in that transaction. The
non-fund investors have tag-along rights which enable them to participate on a
pro rata basis and on the same terms and conditions in sales of shares of common
stock by Fox Paine Capital Fund and its affiliates other than sales made
pursuant to Rule 144 under the Securities Act.
REGISTRATION RIGHTS. Under the stockholders' agreement, following
completion of the offering and subject to limited exceptions,
93
<PAGE>
- Fox Paine Capital Fund and its affiliates, as a group, may make up to six
demands for registration under the Securities Act of their shares of
common stock,
- Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, or
holders of at least 25% of the shares of common stock presently owned by
DLJ, may make one demand for registration under the Securities Act of
their shares of common stock and
- Cook Inlet, or holders of at least 25% of the shares of common stock
presently owned by Cook Inlet, may make one demand for registration under
the Securities Act of its shares of common stock.
Upon any demand for registration by any of Fox Paine Capital Fund and its
affiliates, DLJ or Cook Inlet, each of our other stockholders will be given the
opportunity to participate on a pro rata basis in the registration demanded. The
stockholders' agreement also provides the stockholders with piggyback
registration rights which allow each of them to include all or a portion of
their shares of common stock under a registration statement filed by us, subject
to limited exceptions. The stockholders have amended the stockholders' agreement
so that piggyback registration rights will not be exercisable with respect to
the offering.
OTHER AGREEMENTS. Pursuant to the stockholders' agreement, each of our
stockholders has agreed at all times during the term of the stockholders'
agreement, not to act as a member of a group or in concert with others in
connection with the acquisition, disposition or voting of shares of common stock
in any manner inconsistent with the stockholders' agreement.
Provisions in the stockholders' agreement that
- preclude stockholders from granting any proxy or entering into any voting
trust with respect to our common stock or entering into any stockholder
agreement or arrangement inconsistent with the provisions of the
stockholders' agreement or
- grant members of management various rights to put or call their shares of
common stock
expire upon completion of the offering.
TERMINATION. The rights and obligations described under "--Transfer
Restrictions" will terminate when
- Fox Paine Capital Fund and its affiliates own less than 20% of the fully
diluted shares of common stock then outstanding or
- in the case of the shares of common stock issued upon exercise of the
warrants issued in connection with the senior discount debentures,
following completing of the offering.
In addition, the stockholders' agreement will terminate upon any
recapitalization, consolidation, reorganization or other restructuring of Alaska
Communications Systems Group as a result of which parties to the stockholders'
agreement and their permitted transferees own less than a majority of the
outstanding voting power of the entity surviving that recapitalization,
consolidation, reorganization or other restructuring. After such a transaction,
only rights and obligations described under "--Registration Rights" will survive
until the earlier of
- May 14, 2019 or
- the date when there are no longer any shares outstanding or issuable upon
exercise or conversion of any options, warrants, rights or other
convertible securities that remain to be registered.
Rights and obligations under the stockholders' agreement relating to
indemnification will survive indefinitely.
94
<PAGE>
INSIDER RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with the execution of the purchase agreement relating to
Century's Alaska properties, Century entered into a consulting agreement, dated
August 14, 1998, with LEC Consulting Corporation, a corporation owned and
operated by current and former members of our management team. Pursuant to the
consulting agreement, LEC Consulting provided management and advisory services
to Century's Alaska properties with respect to its day-to-day business
operations. Under the terms of the consulting agreement, Century paid LEC
Consulting $175,000 per month for these services. In addition to the services
required under the consulting agreement, LEC Consulting employees were
responsible for managing the transition process for us and for creating the
infrastructure necessary to begin operations as of May 14, 1999. In addition,
Fox Paine & Company loaned to LEC Consulting approximately $3.4 million
beginning in August 1998 for funding of start-up expenses, which amount was
repaid out of funds provided by us on May 14, 1999 as part of the fees and
expenses related to the acquisitions of Century's Alaska properties and ATU. LEC
Consulting was merged into Alaska Communications Systems Holdings on May 10,
1999.
Pursuant to a consulting agreement between Century and Mr. Robinson,
Mr. Robinson will continue to provide consulting services to Century with
respect to its operations in Alaska and the lower 48 states. We do not believe
that these services will interfere with Mr. Robinson's fulfillment of his duties
and responsibilities to us. We have agreed that Mr. Robinson will not
participate in making any decisions relating to acquisitions by us in the lower
48 states during the term of his consulting agreement and for two years
thereafter. This consulting agreement will expire on or before November 2000.
In connection with the completion of the acquisitions of Century's Alaska
properties and ATU, members of management were given grants of our common stock.
In connection with the stock grants, we loaned Messrs. Robinson and Carson
approximately 40% of the fair market value of the grants on May 14, 1999 on a
nonrecourse basis. Subsequently, we loaned Mr. Wonnell approximately 40% of the
fair market value of the grants on July 31, 1999 on a nonrecourse basis. The
proceeds of these loans, which are secured by the shares of our common stock
owned by the individual borrowers, were to be used by those three individuals to
pay taxes on the income deemed received in connection with the grants.
Fox Paine & Company received aggregate advisory fees in the amount of
$14.2 million upon consummation of the acquisitions of Century's Alaska
properties and ATU. In addition, Fox Paine & Company will receive an annual
management fee in the amount of 1% of Alaska Communications Systems Group'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.
95
<PAGE>
SECURITY OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of common stock, including the percent of the total voting
power, as of the date of this prospectus, and as adjusted to reflect completion
of the offerings, by
- each of our five most highly compensated officers,
- each director,
- each holder of more than 5% of our common stock and
- all current directors and executive officers as a group.
Except as otherwise indicated in the footnotes below, each beneficial owner
has the sole power to vote and to dispose of all shares held by that holder. You
should keep the following points in mind as you read the information in the
table.
- The amounts and percentage of our common stock beneficially owned by a
holder are reported on the basis of the regulations of the SEC that govern
the determination of beneficial ownership of securities. Under these
regulations, a person is deemed to be a "beneficial owner" of a security
if that person has or shares "voting power", which includes the power to
vote or to direct the voting of the security, or "investment power", which
includes the power to dispose of or to direct the disposition of the
security. A person is also deemed to be a beneficial owner of any
securities with respect to which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one
person may be deemed a beneficial owner of the same security and a person
may be deemed to be a beneficial owner of securities as to which that
person has no economic interest.
- The percentage of our common stock outstanding is based on the 21,829,273
shares of our common stock outstanding as of the date of this prospectus,
without taking into account any options or convertible interests.
- We have computed percentages of shares outstanding with respect to the
currently outstanding shares of our common stock held by the holder,
without taking into account any options in calculating beneficial
ownership of common stock before the offering, and taking into account
options which vest upon completion of the offering in calculating
beneficial ownership of common stock after the offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK BEFORE COMMON STOCK AFTER
OFFERING OFFERING
------------------------- -------------------------
<S> <C> <C> <C> <C>
NAME SHARES % SHARES %
- ---------------------------------------------- ---------- ---- ---------- ----
Fox Paine Capital, LLC(1)..................... 19,555,751 89.6% 19,555,751 61.4%
Fox Paine Capital Fund(1)..................... 16,251,658 74.4% 16,251,658 51.1%
FPC Investors, L.P.(1)........................ 241,144 1.1% 241,144 *
W. Dexter Paine, III(1)....................... 19,555,751 89.6% 19,555,751 61.4%
Saul A. Fox(1)................................ 19,555,751 89.6% 19,555,751 61.4%
Jason B. Hurwitz(1)........................... -- -- -- --
Cook Inlet Region, Inc.(2).................... 1,624,907 7.4% 1,624,907 5.1%
Carl H. Marrs(2).............................. 1,624,907 7.4% 1,624,907 5.1%
Charles E. Robinson(3)........................ 241,788 1.1% 850,538 2.6%
Wesley E. Carson(4)........................... 129,341 * 179,341 *
Donn T. Wonnell(5)............................ 66,249 * 116,249 *
Michael E. Holmstrom(6)....................... 16,249 * 66,249 *
John Ayers(7)................................. 16,249 * 66,249 *
All directors and executive officers as a
group (10 persons)(1)(2).................... 21,650,534 99.2% 22,459,284 68.8%
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
96
<PAGE>
- ------------------------
* The percentage of shares beneficially owned does not exceed 1% of the class.
(1) Fox Paine Capital, LLC is General Partner or Manager of Fox Paine Capital
Fund, FPC Investors, L.P., ALEC Coinvestment Fund I, LLC, ALEC Coinvestment
Fund II, LLC, ALEC Coinvestment Fund III, LLC, ALEC Coinvestment Fund IV,
LLC, ALEC Coinvestment Fund V, LLC and ALEC Coinvestment Fund VI, LLC and
possesses voting and investment power over all shares held by each of these
entities. Fox Paine Capital is not the record owner of any shares of our
common stock. Messrs. Fox and Paine are members of Fox Paine Capital and
share voting power of Fox Paine Capital. None of the shares shown as
beneficially owned by Messrs. Fox and Paine are owned of record by these
individuals. Each of Messrs. Fox and Paine disclaims beneficial ownership of
the shares owned by the entities of which Fox Paine Capital is General
Partner or Manager, except to the extent of his respective pecuniary
interest therein. Mr. Hurwitz is a director of Fox Paine & Company, LLC. The
address of Fox Paine Capital, Fox Paine Capital Fund, FPC Investors, and
Messrs. Fox, Paine and Hurwitz is c/o Fox Paine & Company, LLC, 950 Tower
Lane, Suite 1950, Foster City, CA 94404.
(2) Cook Inlet Region, Inc. is record owner of 1,624,907 shares of our common
stock. The address of Cook Inlet is 2525 C Street, P.O. Box 93330,
Anchorage, Alaska 99509-3330. Mr. Marrs is President and Chief Executive
Officer of Cook Inlet. Mr. Marrs disclaims beneficial ownership of the
shares owned by Cook Inlet, except to the extent of his pecuniary interest
therein.
(3) Mr. Robinson is record owner of 241,788 shares of our common stock. The
address of Mr. Robinson is c/o Alaska Communications Systems Group, Inc.,
510 L. Street, Suite 500, Anchorage, Alaska 99501. Of these shares, 172,729
represent stock grants. See "Insider Relationships and Related Party
Transactions".
(4) Mr. Carson is record owner of 129,341 shares of our common stock. The
address of Mr. Carson is c/o Alaska Communications Systems Group, Inc., 510
L. Street, Suite 500, Anchorage, Alaska 99501. Of these shares, 85,469
represent stock grants. See "Insider Relationships and Related Party
Transactions".
(5) Mr. Wonnell is record owner of 66,249 shares of our common stock. The
address of Mr. Wonnell is c/o Alaska Communications Systems Group, Inc., 510
L. Street, Anchorage, Alaska 99501. Of these shares, 50,000 represent stock
grants. See "Insider Relationships and Related Party Transactions".
(6) Mr. Holmstrom is record owner of 16,249 shares of our common stock. The
address of Mr. Holmstrom is c/o Alaska Communications Systems Group, Inc.,
510 L. Street, Suite 500, Anchorage, Alaska 99501.
(7) Mr. Ayers is record owner of 16,249 shares of our common stock. The address
of Mr. Ayers is c/o Alaska Communications Systems Group, Inc., 510 L.
Street, Suite 500, Anchorage, Alaska 99501.
97
<PAGE>
DESCRIPTION OF INDEBTEDNESS
THE SENIOR CREDIT FACILITY
Alaska Communications Systems Holdings, together with us, entered into a
credit agreement with The Chase Manhattan Bank, as administrative agent and
collateral agent, Credit Suisse First Boston Corporation, as documentation
agent, and Canadian Imperial Bank of Commerce, as syndication agent, and the
lenders named therein that provides the Alaska Communications Systems Holdings'
senior credit facility consisting of term loans of up to $460.0 million and a
revolving credit facility of $75.0 million. Chase Securities Inc. acted as
advisor and arranger in connection with the senior credit facility. The
following is a summary description of the material terms of the senior credit
facility, as amended as of October 19, 1999, and is subject to and qualified in
its entirety by reference to the credit agreement, which has been filed as an
exhibit to the registration statement of which this prospectus is a part.
STRUCTURE. Loans under the credit agreement consist of:
- a term loan A facility in the amount of $150.0 million;
- a term loan B facility in the amount of $150.0 million;
- a term loan C facility in the amount of $160.0 million; and
- a revolving credit facility in the amount of $75.0 million which is
available, in part, for up to $25.0 million in letters of credit and up to
$10.0 million in the form of swingline loans.
The term loan facilities and the revolving credit facility constitute the senior
credit facility. Alaska Communications Systems Holdings used the term loan
facilities and a portion of the revolving credit facility to provide a portion
of the funds necessary to complete the acquisitions of Century's Alaska
properties and ATU and to repay existing indebtedness of Century's Alaska
properties. Alaska Communications Systems Holdings will use the remainder of the
revolving credit facility for general corporate purposes.
SECURITY; GUARANTEES. Alaska Communications Systems Holdings' obligations
under the senior credit facility are unconditionally and irrevocably guaranteed,
jointly and severally, by us and by each of Alaska Communications Systems
Holdings' existing and subsequently acquired or organized domestic or, in
limited circumstances, foreign subsidiaries. In addition, the senior credit
facility and the related guarantees are secured by collateral that includes
substantially all of Alaska Communications Systems Holdings' assets and all of
the assets of Alaska Communications Systems Holdings' subsidiaries, including:
- a first priority pledge:
- by us of all of Alaska Communications Systems Holdings' capital stock
and
- to the extent not prohibited by law or any existing contract, by
Alaska Communications Systems Holdings of the capital stock of
companies in which Alaska Communications Systems Holdings holds a
minority stake, plus of all the capital stock of Alaska
Communications Systems Holdings, or any of its domestic subsidiaries
or, under limited circumstances, any of Alaska Communications Systems
Holdings' foreign subsidiaries, held in any existing and subsequently
acquired or organized subsidiary, which pledge, in the case of any
foreign subsidiary will, except under limited circumstances, be
limited to 65% of the capital stock of the foreign subsidiary, and
98
<PAGE>
- a perfected first priority security interest in, and mortgage on,
substantially all of Alaska Communications Systems Holdings' tangible and
intangible assets and substantially all of the tangible and intangible
assets of the guarantors, including accounts receivable, documents,
inventory, equipment, intellectual property, investment property, general
intangibles, real property, cash and cash accounts and proceeds of the
foregoing, in each case subject to limited exceptions.
The credit agreement provides for the release of guarantees under limited
circumstances.
AVAILABILITY. The availability of the senior credit facility is subject to
various conditions precedent typical of bank loans including, among other
things, the absence of any material adverse change in Alaska Communications
Systems Holdings' business. The full amount of the term loan facilities was
drawn as required in a single drawing on May 14, 1999. As a result of issuance
of $150.0 million in Alaska Communications Systems Holdings senior subordinated
notes, the term loan C facility was reduced to $135.0 million on May 14, 1999.
Amounts repaid or prepaid under the term loan facilities may not be reborrowed.
Amounts repaid under the revolving credit facility are available for reborrowing
on a revolving basis, subject to the terms of the revolving credit facility.
AMORTIZATION AND INTEREST
- The term loan A facility is repayable in annual principal payments of
1.00% of outstanding principal over five years, commencing on May 14,
2002, with the balance of the term loan A facility payable at maturity.
The final maturity of the term loan A facility is November 14, 2006. The
term loan A facility bears interest at an annual rate equal (at Alaska
Communications Systems Holdings' option) to: (1) an adjusted London
interbank offered rate, or LIBOR, plus 2.75% or (2) a rate equal to 1.75%
plus the greater of the administrative agent's prime rate, a certificate
of deposit rate plus 1.00% and the federal funds effective rate plus
0.50%, in each case subject to reduction based on Alaska Communications
Systems Holdings' financial performance.
- The term loan B facility is repayable in annual principal payments of
1.00% of outstanding principal over six years, commencing on May 14, 2002,
with the balance of term loan B facility payable at maturity. The final
maturity of the term loan B facility is November 14, 2007. The term loan B
facility bears interest at an annual rate equal (at Alaska Communications
Systems Holdings' option) to: (1) an adjusted LIBOR plus 3.00% or (2) a
rate equal to 2.00% plus the greater of the administrative agent's prime
rate, a certificate of deposit rate plus 1.00% and the federal funds
effective rate plus 0.50%.
- The term loan C facility is repayable in annual principal payments of
1.00% of outstanding principal over six years, commencing on May 14, 2002,
with the balance of term loan C facility payable at maturity. The final
maturity of the term loan C facility is May 14, 2008. The term loan C
facility bears interest at an annual rate equal (at Alaska Communications
Systems Holdings' option) to: (1) an adjusted LIBOR plus 3.25% or (2) a
rate equal to 2.25% plus the greater of the administrative agent's prime
rate, a certificate of deposit rate plus 1.00% and the federal funds
effective rate plus 0.50%.
- The revolving credit facility is a seven-year facility and outstanding
balances thereunder will bear interest at an annual rate equal (at Alaska
Communications Systems Holdings' option) to: (1) an adjusted LIBOR plus
2.75% or (2) a rate equal to 1.75% plus the greater of the administrative
agent's prime rate, a certificate of deposit rate plus 1.00% and the
federal funds effective rate plus 0.50%, in each case subject to reduction
based on Alaska Communications Systems Holdings' financial performance.
99
<PAGE>
Amounts under the senior credit facility not paid when due bear interest at a
default rate equal to 2.00% above the otherwise applicable rate.
On July 24, 1999 we entered into a hedging 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.
PREPAYMENTS. The senior credit facility permits Alaska Communications
Systems Holdings to prepay loans and to permanently reduce revolving credit
commitments, in whole or in part, at any time. In addition, Alaska
Communications Systems Holdings is required to make mandatory prepayments of the
term loan facilities, subject to limited exceptions, in amounts equal to the
excess, if any, of:
- 50% of excess cash flow for each fiscal year, as specified in the credit
agreement, over
- the aggregate principal amount of the term loan facilities prepaid during
the fiscal year.
Alaska Communications Systems Holdings is also required to make mandatory
prepayments of term loan facilities, subject to limited exceptions, with the net
cash proceeds of dispositions of assets or issuances of debt of us or any of our
subsidiaries. Mandatory and optional prepayments will be allocated ratably among
the term loan A facility, the term loan B facility and the term loan C facility,
as applicable, and within each term loan facility, applied ratably to the
remaining amortization payments under that facility, except that the lenders
participating in the term loan B facility and the term loan C facility, as
applicable, have the right to refuse mandatory prepayments, in which case those
prepayments will be applied to the term loan A facility, or, if no portion of
the term loan A facility remains outstanding, Alaska Communications Systems
Holdings may retain the prepayments. Any prepayment of adjusted LIBOR loans
other than at the end of an interest period will be subject to reimbursement of
breakage costs as described in the credit agreement.
FEES. Alaska Communications Systems Holdings is required to pay the
lenders, on a quarterly basis, a commitment fee equal to 0.50% annually on the
undrawn portion of the unused commitments, subject to reductions based upon
Alaska Communications Systems Holdings' financial performance. Alaska
Communications Systems Holdings is also required to pay:
- on a quarterly basis, a commission on the face amount of all outstanding
letters of credit equal to the applicable margin then in effect for
adjusted LIBOR loans under the revolving credit facility,
- on a quarterly basis, a fronting fee in the amount of 0.25% annually on
each letter of credit to the issuing bank,
- standard fees of the issuing bank with respect to issuance, amendment,
renewal or extension of any letters of credit and
- fees payable to the administrative agent.
COVENANTS, EVENTS OF DEFAULT. The credit agreement contains customary
covenants that, among other things, restrict our ability, the ability of Alaska
Communications Systems Holdings and the ability of Alaska Communications Systems
Holdings' subsidiaries to dispose of assets, incur additional indebtedness,
incur guarantee obligations, prepay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, change Alaska Communications Systems
Holdings' business, make capital expenditures or engage in transactions with
affiliates. In addition, under the senior credit facility, Alaska Communications
100
<PAGE>
Systems Holdings is required to comply with specified financial ratios,
including minimum interest coverage ratios and maximum leverage ratios. As
discussed below, certain of these restrictions have been modified pursuant to an
amendment dated as of October 19, 1999, which is conditioned upon receipt of
gross proceeds from the offering of not less than $140,000,000.
The credit agreement also contains provisions that prohibit any modification
of the indenture relating to the senior subordinated notes of Alaska
Communications Systems Holdings as well as customary representations and
warranties, affirmative covenants and events of default, including cross
default, material judgments and change in control.
As of October 19, 1999 and subject to receiving gross proceeds from the
offering of not less than $140 million and contributing the net proceeds (other
than such amounts permitted to be used for the repayment of our senior discount
debentures) from the offering to Alaska Communications Systems Holdings as
common equity, and the satisfaction of other customary conditions to
effectiveness, we have amended the credit agreement related to the senior credit
facility. The amendment:
- modifies the provisions related to the prepayment of indebtedness to
permit the payment of up to $40.0 million for the repurchase of our senior
discount debentures and/or the Alaska Communications Systems Holdings
senior subordinated notes under certain circumstances;
- modifies the provisions related to capital expenditures to increase the
amount of capital expenditures we are permitted to make in each year;
- increases our flexibility with respect to acquisitions and other
investments, allowing for "permitted acquisitions" of up to
$200.0 million, which amount excludes acquisitions made using our capital
stock or equity contributions from Fox Paine, and "permitted investments"
of up to $15.0 million; and
- increases our flexibility with respect to the incurrence of certain
indebtedness.
If we receive less than $140 million in gross proceeds from the offering,
the amendment will not become effective. In that event, we intend to seek a new
amendment providing for all or a portion of the flexibility currently
contemplated.
If the lenders under the credit agreement do not consent to that new
amendment, we will not be permitted under the credit agreement to redeem any of
our senior discount debentures. Additionally, while we will continue to use
available proceeds to reduce the outstanding balance under our revolving credit
facility and for general corporate purposes, including acquisitions, our
flexibility to pursue strategic investments or acquisitions will be limited to
the extent currently provided in the credit agreement. In such event, we will
also be required to adjust our planned capital expenditures to satisfy covenants
contained in the credit agreement.
THE ALASKA COMMUNICATIONS SYSTEMS HOLDINGS SENIOR SUBORDINATED NOTES
On May 14, 1999, Alaska Communications Systems Holdings issued
$150.0 million in aggregate principal amount of senior subordinated notes due
2009 in a private transaction not subject to the registration requirements of
the Securities Act. Cash interest is payable on the outstanding principal amount
of the senior subordinated notes at the annual rate of 9 3/8% payable
semiannually on May 15th and November 15th of each year, commencing
November 15, 1999, subject to restrictions on dividends to Alaska Communications
Systems Holdings contained in the senior credit facility. On October 8, 1999, a
registration statement on Form S-4 relating to a registered exchange offer for
the senior subordinated notes was declared effective by the SEC.
101
<PAGE>
Holders of the senior subordinated notes will be able to exchange their notes
for registered senior subordinated notes in the exchange offer.
The senior subordinated notes rank junior in right of payment to all current
and future senior indebtedness of Alaska Communications Systems Holdings, rank
equally in right of payment to all current and future senior subordinated
indebtedness of Alaska Communications Systems Holdings and rank senior in right
of payment to all current and future subordinated indebtedness of Alaska
Communications Systems Holdings. As obligations of a holding company, the senior
subordinated notes are effectively subordinated to all obligations of the
subsidiaries of Alaska Communications Systems Holdings.
The senior subordinated notes are not redeemable until May 15, 2004.
Thereafter, the senior subordinated notes will be redeemable at the option of
Alaska Communications Systems Holdings with a premium that declines each year
until 2007, when the senior subordinated notes will be redeemable in whole or in
part at 100% of their principal amount plus accrued and unpaid interest. Upon a
change of control as described in the indenture governing the senior
subordinated notes, each holder will be able to require Alaska Communications
Systems Holdings to offer to redeem the holder's senior subordinated notes at a
price equal to 101% of principal amount, subject to restrictions contained in
the senior credit facility. If Alaska Communications Systems Holdings
consummates one or more offerings of Alaska Communications Systems Holdings
capital stock on or before May 15, 2002, Alaska Communications Systems Holdings,
at its option, will be able to use all or a portion of the sale proceeds to
redeem up to 35% of the aggregate principal amount of the senior subordinated
notes originally issued, at a price equal to their principal amount plus a
premium equal to one year's interest at the stated interest rate.
The indenture relating to the senior subordinated notes contains various
restrictive covenants that, among other things, limit:
- the incurrence of indebtedness by Alaska Communications Systems Holdings
and its subsidiaries,
- the payment of restricted payments, as described in the indenture relating
to the senior subordinated notes,
- the payment of dividends on stock and purchases of stock,
- the sale of assets or stock of Alaska Communications Systems Holdings'
subsidiaries,
- transactions with affiliates,
- mergers, consolidations and sales of assets and
- the business activities in which Alaska Communications Systems Holdings
and its subsidiaries may engage.
The indenture also limits the extent to which Alaska Communications Systems
Holdings may permit restrictions on the ability of its subsidiaries to pay
dividends and make other distributions. Each of these limitations, however, is
subject to qualifications set forth fully in the indenture governing the senior
subordinated notes, which has been filed as an exhibit to the registration
statement of which this prospectus is a part.
The indenture relating to the senior subordinated notes also contains events
of default customary for obligations of this type, including:
- a default in the payment of interest on the senior subordinated notes when
due and payable,
102
<PAGE>
- the acceleration of debt of Alaska Communications Systems Holdings or any
of its subsidiaries in an amount in excess of $5.0 million and
- the rendering of any judgment for the payment of money in excess of
$5.0 million against Alaska Communications Systems Holdings
subject, in each case, to applicable grace periods.
Payment of all amounts outstanding under the senior subordinated notes could
be accelerated in the event of a default under the indenture governing the
senior subordinated notes.
THE ALASKA COMMUNICATIONS SYSTEMS GROUP DISCOUNT DEBENTURES
On May 14, 1999, we issued $46.9 million in aggregate principal amount of
senior discount debentures due 2011 and 828,261 warrants, for gross proceeds of
$25.0 million, in a private transaction not subject to the registration
requirements of the Securities Act. No cash interest is payable on the discount
debentures for five years following issuance, but deferred interest accrues at
the annual rate of 13%. On and after May 15, 2004, cash interest will be payable
on the outstanding principal amount of the discount debentures, including
accrued deferred interest, at the annual rate of 13% payable semiannually on
May 15th and November 15th of each year, subject to restrictions on dividends to
us contained in the senior credit facility and the indenture relating to the
senior subordinated notes. On October 8, 1999 a registration statement on Form
S-4 relating to a registered exchange offer for the senior discount debentures
was declared effective by the SEC. Holders of the discount debentures will be
able to exchange their debentures for registered discount debentures in the
exchange offer. On October 29, 1999 we amended the indenture resulting to the
discount debentures to provide for optional cash interest payments by Alaska
Communications Systems Group prior to May 15, 2004. The amendment is subject to
the offering being completed prior to March 31, 2000, and the amendment to the
credit agreement described under "--The Senior Credit Facility" becoming
effective.
The discount debentures rank equally in right of payment to all of our
current and future senior indebtedness and rank senior in right of payment to
all of our current and future subordinated indebtedness. As obligations of a
holding company, the discount debentures are effectively subordinated to all
obligations of our subsidiaries, including Alaska Communications Systems
Holdings' obligations under the senior subordinated notes and borrowings under
the senior credit facility.
The discount debentures are not redeemable until May 15, 2004. Thereafter,
the discount debentures will be redeemable at our option with a premium that
declines each year until 2009, when the discount debentures will be redeemable
in whole or in part at 100% of their principal amount plus accrued and unpaid
interest. Upon a change of control as described in the indenture governing the
discount debentures, each holder will be able to require us to offer to redeem
the holder's discount debentures at a price equal to 101% of accreted value or,
if after May 15, 2004, of the principal amount thereof plus accrued and unpaid
interest thereon, subject to restrictions contained in the senior credit
facility and the indenture relating to the senior subordinated notes. If we
consummate one or more offerings of our common stock on or before May 15, 2002,
we, at our option, will be able to use all or a portion of the sale proceeds to
redeem up to 35% of the aggregate principal amount of the discount debentures
originally issued, at a price equal to their accreted value plus a premium equal
to one year's interest at the stated interest rate. As more fully described
under "Use of Proceeds", we intend to use $10.5 of the net proceeds from the
offerings to repay $9.3 million in aggregate accreted value of the senior
discount debentures, plus a redemption premium of $1.2 million.
103
<PAGE>
The indenture relating to the discount debentures contains various
restrictive covenants that, among other things, limit:
- the incurrence of indebtedness by us and our subsidiaries,
- the payment of restricted payments, as described in the indenture relating
to the discount debentures,
- the payment of dividends on stock and purchases of stock,
- the sale of assets or stock of our subsidiaries,
- transactions with affiliates,
- mergers, consolidations and sales of assets and
- the business activities in which we and our subsidiaries may engage.
Each of these limitations, however, is subject to qualifications set forth fully
in the indenture governing the senior discount debentures, which has been filed
as an exhibit to the registration statement of which this prospectus is a part.
The indenture relating to the discount debentures also contains events of
default customary for obligations of this type, including:
- a default in the payment of interest on the discount debentures when due
and payable,
- the acceleration of our or the debt of any of our subsidiaries in an
amount in excess of $5.0 million and
- the rendering of any judgment for the payment of money in excess of
$5.0 million against us,
subject, in each case, to applicable grace periods.
Payment of all amounts outstanding under the discount debentures could be
accelerated in the event of a default under the indenture governing the discount
debentures.
104
<PAGE>
DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY DESCRIBES THE MATERIAL TERMS OF OUR CAPITAL STOCK.
HOWEVER, YOU SHOULD REFER TO THE ACTUAL TERMS OF THE CAPITAL STOCK CONTAINED IN
OUR CERTIFICATE OF INCORPORATION AND IN OTHER AGREEMENTS REFERENCED BELOW.
Our authorized capital stock consists of 150,000,000 million shares, par
value $0.01 per share, consisting of 145,000,000 shares of common stock and
5,000,000 shares of preferred stock. We currently have 21,829,273 shares of
common stock outstanding. After this offering, there will be 31,829,273 shares
of common stock outstanding, without giving effect to the exercise of the
underwriters' over-allotment option.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of common stock on the applicable record date is
entitled to receive dividends as may be declared by our board of directors out
of funds legally available to pay dividends, and, in the event of liquidation,
to share ratably in any distribution of our assets after payment or providing
for the payment of liabilities and the liquidation preference of any outstanding
preferred stock. Common stock will vote together as a single class on all
matters presented to a vote of stockholders, including the election of
directors. Each holder of common stock is entitled to one vote for each share
held of record on the applicable record date for all of these matters. Holders
of common stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities, and there are no
conversion rights or redemption or sinking fund provisions with respect to
common stock. All outstanding shares of common stock are, and the shares of
common stock sold in the offering will be, when issued, fully paid and
nonassessable.
PREFERRED STOCK
Our board of directors has the authority to issue shares of preferred stock
in one or more series and to fix, by resolution, the voting powers, and
designations, preferences and relative, participating, optional or other rights,
if any, and the qualifications, limitations or restrictions thereof, if any,
including the number of shares in each series (which our board of directors may
increase or decrease as permitted by Delaware law), liquidation preferences,
dividend rates, conversion rights and redemption provisions of the shares
constituting any series, without any further vote or action by the stockholders.
Any shares of preferred stock so issued would have priority over the common
stock with respect to dividend or liquidation rights or both. Although our board
of directors has no present plans to do so, it could issue one or more series of
preferred stock, without stockholder approval, that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt.
DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law generally prevents
Delaware corporations from engaging under certain circumstances in a business
combination with any interested stockholder for three years following the date
that the stockholder became an interested stockholder. We have opted out of the
provisions of Section 203.
ACTION BY WRITTEN CONSENT
Under the Delaware General Corporation Law, unless the certificate of
incorporation expressly prohibits action by the written consent for
stockholders, any action required or permitted to be taken by our stockholders
at a duly called annual or special meeting of stockholders may be taken by a
consent in writing executed by stockholders possessing the requisite votes for
the action to be
105
<PAGE>
taken. Our certificate of incorporation does not expressly prohibit action by
the written consent of stockholders. As a result, Fox Paine & Company, as holder
of 61.4% of our total voting power after this offering, will be able to take any
action to be taken by stockholders without the necessity of holding a
stockholder meeting. We intend, however, to hold annual meetings of
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be ChaseMellon
Shareholder Services, L.L.C.
LISTING
Application has been made for quotation of our common stock on the Nasdaq
National Market under the symbol "ALSK".
106
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock.
Future sales of substantial amounts of common stock in the public market, or the
perception that substantial sales may occur, could adversely affect the
prevailing market price of the common stock. After completion of the offering,
there will be 31,829,273 shares of common stock outstanding. Of these shares,
the 10,000,000 shares of common stock sold in the offering, or 11,500,000 shares
if the underwriter's options to purchase additional shares are exercised in
full, will be freely transferable without restriction under the Securities Act,
except by persons who may be deemed to be our affiliates. All the remaining
shares of common stock may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, including
an exemption contained in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who beneficially owns
"restricted securities" may not sell those securities until they have been
beneficially owned for at least one year. Thereafter, the person would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
(1) 1% of the then outstanding shares of common stock, or approximately
shares after the offering; and
(2) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the SEC.
Sales under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about us and may
be effected only through unsolicited brokers' transactions.
A person who is not deemed an "affiliate" of us at any time during the
90 days preceding a sale would (but for the Stockholders' Agreement described
above and the "lock-up" arrangements described below) be entitled to sell his,
her or its restricted shares under Rule 144 without regard to the volume or
other limitations described above, once two years have elapsed since the
restricted shares were acquired from us or one of our affiliates.
We, our directors, executive officers and our principal stockholders have
agreed with the underwriters that, during the period beginning from the date of
this prospectus and continuing to and including the date 180 days after the date
of this prospectus, we will not offer, sell, contract to sell or otherwise
dispose of any shares of common stock or any securities of Alaska Communications
Systems Group which are substantially similar to the shares of the common stock
or which are convertible into or exchangeable for securities which are
substantially similar to the shares of common stock (other than, in our case,
pursuant to our existing employee compensation plans) without the prior written
consent of Goldman, Sachs & Co., except for the shares of common stock offered
in connection with the offerings. The lock-up agreements by these persons (other
than Alaska Communications Systems Group) cover an aggregate of approximately
21,651,000 shares.
No prediction can be made as to the effect, if any, that market sales of
restricted shares or the availability of restricted shares for sale will have on
the market price of our common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for our common
stock and could impair our future ability to raise capital through an offering
of our equity securities, as described under "Risk Factors--Our share price may
decline due to the large number of shares eligible for future sale".
107
<PAGE>
In connection with the offering, we intend to file a registration statement
on Form S-8 to register 6,060,486 shares of common stock that are or will be
reserved for issuance or sale under our stock incentive, non-employee director
compensation and stock purchase plans. As of November 15, 1999, there were
outstanding options to purchase a total of 3,157,500 shares of common stock of
which 70,000 options were vested. In addition, options to purchase an additional
1,032,250 shares of common stock that have been granted to our employees will
vest upon completion of the offering. These employees have agreed not to dispose
of more than 20% of the shares they may receive upon exercise of these options
before each anniversary following the date of grant of the options (plus any
shares permitted to be disposed of, but not disposed of, in any previous year).
All of such shares of common stock issuable upon exercise of options under our
stock incentive, non-employee director compensation and stock purchase plans
would otherwise be freely tradable upon effectiveness of the registration
statement without restrictions under the Securities Act of 1933, unless such
shares are held by an "affiliate" of us.
108
<PAGE>
U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a non-U.S. holder. As used in this prospectus, the term "non-U.S. holder" is
a person other than:
- a citizen or individual resident of the U.S. for U.S. federal income tax
purposes,
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the U.S.,
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source or
- a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences,
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by certain determinations made at the
partner level,
- the tax consequences for the shareholders or beneficiaries of a non-U.S.
holder,
- special tax rules that may apply to certain non-U.S. holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities who elect to apply a mark-to-market method of
accounting or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge" or "conversion transaction".
The following is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, applicable Treasury regulations, and administrative and
judicial interpretations, all as of the date of this prospectus, and all of
which may change, retroactively or prospectively. The following summary is for
general information. ACCORDINGLY, EACH NON-U.S. HOLDER SHOULD CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER
TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON
STOCK.
DIVIDENDS
In the event that dividends are paid on shares of common stock, dividends
paid to a non-U.S. holder of common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate, or such lower rate as may
be provided by an applicable income tax treaty. Non-U.S. holders should consult
their tax advisors regarding their entitlement to benefits under a relevant
income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the U.S. or, if an income tax treaty applies,
attributable to a permanent establishment, or in the case of an individual, a
"fixed base", in the U.S., as provided in that treaty ("U.S. trade or business
income"), are generally subject to U.S. federal income tax on a net income basis
at regular graduated rates, but are not generally subject to the 30% withholding
tax if the non-U.S. holder files the appropriate U.S. Internal Revenue Service
form with the payor. Any U.S. trade or business income received by a non-U.S.
holder that is a corporation may also, under certain
109
<PAGE>
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as specified by an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000:
- a non-U.S. holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide certain
information, including a U.S. taxpayer identification number and
- look-through rules will apply for tiered partnerships.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for a refund with the
IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder,
- the non-U.S. holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the U.S. for more than 182 days in the taxable year of
the disposition and meets certain other requirements,
- the non-U.S. holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to certain U.S. expatriates or
- we are or have been a "U.S. real property holding corporation" for federal
income tax purposes at any time during the shorter of the five-year period
ending on the date of disposition or the period that the non-U.S. holder
held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that Alaska Communications Systems Group has not been and is not currently, and
we do not anticipate it becoming, a "U.S. real property holding corporation" for
U.S. federal income tax purposes. The tax relating to stock in a "U.S. real
property holding corporation" will not apply to a non-U.S. holder whose
holdings, direct and indirect, at all times during the applicable period,
constituted 5% or less of the common stock, provided that the common stock was
regularly traded on an established securities market.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
110
<PAGE>
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, non-U.S. holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to 2001 to an address outside the
U.S. For dividends paid after 2000, however, a non-U.S. holder of common stock
that fails to certify its non-U.S. holder status in accordance with applicable
U.S. Treasury Regulations may be subject to backup withholding at a rate of 31%
on payments of dividends.
The payment of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker or through a non-U.S. branch of a U.S.
broker generally will be subject to information reporting and backup withholding
at a rate of 31% unless the holder either certifies its status as a non-U.S.
holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a non-U.S. holder of common stock
to or through a non-U.S. office of a non-U.S. broker will not be subject to
backup withholding or information reporting unless the non-U.S. broker is a
"U.S. related person". In the case of the payment of proceeds from the
disposition of common stock by or through a non-U.S. office of a broker that is
a U.S. person or a "U.S. related person", information reporting, but currently
not backup withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes,
- a foreign person 50% or more of whose gross income for certain periods is
derived from the conduct of a U.S. trade or business or
- effective after 2000, a foreign partnership if, at any time during its
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (B) the partnership is engaged in
a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge or reason to know that the holder is a U.S. person. Non-U.S. holders
should consult their own tax advisors regarding the application of the
information reporting and backup withholding rules to them, including changes to
these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
VALIDITY OF SHARES
The validity of the shares of common stock will be passed upon for us by
Wachtell, Lipton, Rosen & Katz, New York, New York and for the underwriters by
Cravath, Swaine & Moore, New York, New York.
EXPERTS
Our balance sheet as of March 31, 1999 included in this prospectus has been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report herein and are included in
111
<PAGE>
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Alaska Communications Systems
Holdings, Inc. as of December 31, 1998 and for the period from July 16, 1998,
its date of inception through December 31, 1998 included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report herein and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The combined financial statements of CenturyTel Alaska Properties, also
known as Century's Alaska properties, as of December 31, 1998 and for the year
then ended have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The combined financial statements of CenturyTel Alaska Properties, also
known as Century's Alaska properties, as of December 31, 1997 and for the year
ended December 31, 1996, eleven months ended November 30, 1997, and one month
ended December 31, 1997 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report herein
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The combined financial statements of Telephone Fund of Fairbanks Municipal
Utilities Services as of October 6, 1997 and for the year ended December 31,
1996 and the period ended October 6, 1997 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report herein and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The financial statements of the Municipality of Anchorage Telephone Utility
Fund as of December 31, 1998, and for each of the years in the three-year period
ended December 31, 1998, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
112
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered in this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to that registration statement. For
further information with respect to us and the common stock, we refer you to
this registration statement and its exhibits and schedules. Statements contained
in this prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
that contract or document filed as an exhibit to the registration statement,
each of these statements being qualified in all respects by that reference. The
registration statement, including exhibits thereto, may be inspected and copied
at the public reference facilities maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional
Offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, 13(th) Floor, New York, New York 10048. Copies of
these materials may be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC also
maintains a world wide web site (HTTP://WWW.SEC.GOV) that contains reports,
proxy and information statements and other information regarding registrants
such as us which file electronically with the SEC. The registration statement,
including all exhibits thereto and amendments thereof, is available on that
website.
We recently filed a registration statement on Form S-4 with the SEC in
connection with the registration under the Securities Act of 1933 of our senior
discount debentures. Upon effectiveness of that registration statement we became
subject to the informational requirements of the Exchange Act and will file
annual, quarterly and current reports, proxy and information statements and
other information with the SEC. You may inspect and copy these reports, proxy
and information statements and other information at the addresses set forth
above.
We intend to furnish to our stockholders our annual reports containing
consolidated financial statements audited by our independent auditors and
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year.
113
<PAGE>
UNDERWRITING
Alaska Communications Systems Group and the underwriters named below (the
"Underwriters") have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each Underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities
Corporation, CIBC World Markets Corp., Deutsche Bank Securities Inc. and
Hambrecht & Quist LLC are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
CIBC World Markets Corp.....................................
Deutsche Bank Securities Inc................................
Hambrecht & Quist LLC.......................................
----------
Total................................................... 10,000,000
==========
</TABLE>
------------------
If the Underwriters sell more shares than the total number set forth in the
table above, the Underwriters have an option to buy up to an additional
1,500,000 shares from Alaska Communications Systems Group to cover such sales.
They may exercise that option for 30 days. If any shares are purchased pursuant
to this option, the Underwriters will severally purchase shares in approximately
the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriters by Alaska Communications Systems
Group. Such amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by
Alaska Communications
Systems Group
-------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................... $ $
Total............................................... $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Alaska Communications Systems Group has agreed with the Underwriters not to
dispose of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. This
agreement does not apply to any existing employee benefit plans or to any
shareholder rights plans. See "Shares Eligible for Future Sale" for a discussion
of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among Alaska Communications
Systems Group and the representatives. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be Alaska Communications Systems Group's
historical performance, estimates of business potential and earnings prospects
of Alaska Communications Systems Group, an assessment of Alaska Communications
Systems Group's management and the
114
<PAGE>
consideration of the above factors in relation to market valuation of companies
in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "ALSK".
In connection with the offering, the Underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the Underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Alaska Communications Systems Group estimates that its share of the total
expenses of the offering, excluding underwriting discounts and commissions, will
be approximately $1.9 million.
The Underwriters and their affiliates have in the past provided, and may in
the future from time to time provide, investment banking and general financing
and banking services to Fox Paine & Company and its affiliates for which they
have in the past received, and may in the future receive, customary fees.
Affiliates of CIBC World Markets Corp. and affiliates of Deutsche Bank
Securities Inc. are limited partners in certain partnerships organized by Fox
Paine & Company, including certain of the partnerships organized in connection
with the formation of ALEC Holdings.
Affiliates of Donaldson, Lufkin & Jenrette Securities Corporation were the
initial purchasers of Alaska Communications Systems Group senior discount
debentures. These affiliates of Donaldson, Lufkin & Jenrette Securities
Corporation received warrants to purchase 828,261 shares of common stock at an
exercise price of $0.01 per share in connection with the issuance of the senior
discount debentures. Approximately 828,000 shares underlying these warrants are
expected to be issued in connection with the offering.
An affiliate of CIBC World Markets Corp., Canadian Imperial Bank of
Commerce, is the syndication agent and a lender under the senior credit facility
and in those capacities receives customary fees, commissions and reimbursement
of expenses. A portion of the net proceeds from the offering will be used to
repay borrowings under the revolving credit facility. CIBC World Markets Corp.
was an initial purchaser of the senior subordinated notes and in that capacity
received customary fees and commissions.
On September 27, 1999, Hambrecht & Quist Group, the parent corporation of
Hambrecht & Quist, LLP, entered into an agreement and plan of merger with The
Chase Manhattan Corporation pursuant to which Hambrecht & Quist Group and its
subsidiaries will be acquired by The Chase Manhattan Corporation. An affiliate
of The Chase Manhattan Corporation, The Chase Manhattan Bank, is the
administrative agent and collateral agent and a lender under the senior credit
facility and in those capacities receives customary fees, commissions and
reimbursement of expenses. Another affiliate of The Chase Manhattan Corporation,
Chase Securities Inc., was an initial purchaser of the senior subordinated notes
and in that capacity received customary fees and commissions.
Alaska Communications Systems Group has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Alaska Communications Systems Group, Inc.
Independent Auditors' Report.............................. F-2
Balance Sheet--March 31, 1999............................. F-3
Notes to Balance Sheet--March 31, 1999.................... F-4
Consolidated Balance Sheet--September 30, 1999
(Unaudited)............................................. F-5
Consolidated Statement of Operations--Nine Months Ended
September 30, 1999 (Unaudited).......................... F-6
Consolidated Statement of Stockholders' Equity--Nine
Months Ended September 30, 1999 (Unaudited)............. F-7
Consolidated Statement of Cash Flows--Nine Months Ended
September 30, 1999 (Unaudited).......................... F-8
Notes to Consolidated Financial Statements--Nine Months
Ended September 30, 1999 (Unaudited).................... F-9
Alaska Communications Systems Holdings, Inc.
Independent Auditors' Report.............................. F-16
Consolidated Balance Sheets--December 31, 1998 and March
31, 1999 (Unaudited).................................... F-17
Consolidated Statements of Cash Flows--Period from July
16, 1998 (Date of Inception) through December 31, 1998
and Three Months Ended March 31, 1999 (Unaudited)....... F-18
Notes to Consolidated Financial Statements--Period from
July 16, 1998 (Date of Inception) through December 31,
1998 (Notes for the Three Months Ended March 31, 1999
Are Unaudited).......................................... F-19
CenturyTel Alaska Properties
Independent Auditors' Reports............................. F-22
Combined Balance Sheets--December 31, 1997, December 31,
1998 and March 31, 1999................................. F-24
Combined Statements of Income and Retained Earnings--Year
Ended December 31, 1996, Eleven Months Ended November
30, 1997, One Month Ended December 31, 1997, Year Ended
December 31, 1998 and Three Months Ended March 31, 1998
and 1999 (Unaudited).................................... F-25
Combined Statements of Cash Flows--Year Ended December 31,
1996, Eleven Months Ended November 30, 1997, One Month
Ended December 31, 1997, Year Ended December 31, 1998
and Three Months Ended March 31, 1998 and 1999
(Unaudited)............................................. F-26
Notes to Combined Financial Statements--Year Ended
December 31, 1996, Eleven Months Ended November 30,
1997, One Month Ended December 31, 1997, Year Ended
December 31, 1998 and Three Months Ended March 31, 1998
and 1999 (Unaudited).................................... F-27
Telephone Fund of Fairbanks Municipal Utilities Services
Independent Auditors' Report.............................. F-40
Combined Balance Sheet--October 6, 1997................... F-41
Combined Statements of Income and Fund Equity--Year Ended
December 31, 1996 and Period Ended October 6, 1997...... F-42
Combined Statements of Cash Flows--Year Ended December 31,
1996 and Period Ended October 6, 1997................... F-43
Notes to Combined Financial Statements--Year Ended
December 31, 1996 and Period Ended October 6, 1997...... F-44
Municipality of Anchorage Telephone Utility Fund
Independent Auditors' Report.............................. F-47
Balance Sheets--December 31, 1997, December 31, 1998 and
March 31, 1999.......................................... F-48
Statements of Revenues, Expenses, and Changes in Retained
Earnings--Years Ended December 31, 1996, 1997 and 1998
and Three Months Ended March 31, 1998 and March 31, 1999
(Unaudited)............................................. F-49
Statements of Cash Flows--Years Ended December 31, 1996,
1997 and 1998 and Three Months Ended March 31, 1998 and
March 31, 1999 (Unaudited).............................. F-50
Notes to Financial Statements--Years Ended December 31,
1996, 1997 and 1998 and Three Months Ended March 31,
1998 and 1999 (Unaudited)............................... F-51
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alaska Communications Systems Group, Inc.
Anchorage, Alaska
We have audited the balance sheet of Alaska Communications Systems
Group, Inc. (the "Company") (formerly ALEC Holdings, Inc.) as of March 31, 1999.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Alaska Communications
Systems Group, Inc. as of March 31, 1999, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
June 28, 1999
F-2
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1
======
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares;
outstanding, 100 shares................................. $ 1
======
</TABLE>
See notes to Balance Sheet.
F-3
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO BALANCE SHEET
MARCH 31, 1999
1. THE COMPANY
Alaska Communications Systems Group, Inc. (the "Company")(formerly ALEC
Holdings, Inc.) was incorporated in the State of Delaware in October 1998 to
operate as a holding company to purchase telecommunications properties.
2. SUBSEQUENT ACQUISITIONS
At March 31, 1999, Alaska Communications Systems Holdings, Inc. ("ACS"),
which became a wholly owned subsidiary of the Company in May 1999, had announced
two purchase agreements that would allow ACS to enter the telecommunications
industry. The first agreement involved the acquisition of Century Tel's Alaska
holdings including Telephone Utilities of Alaska, Inc., Telephone Utilities of
the Northland, Inc., PTI Communications of Alaska, Inc., Pacific Telecom of
Alaska PCS, Inc. and Pacific Telecom Cellular of Alaska, Inc. The second
agreement was with the Municipality of Anchorage to acquire all of its
telecommunication investments.
On May 14, 1999, ACS purchased all the outstanding shares of PTI Alaska from
CenturyTel of the Northwest, Inc. and CenturyTel Wireless, Inc., which are
wholly owned subsidiaries of Century. PTI Alaska is the incumbent provider of
local telephone services to over 131,000 access lines in Juneau, Fairbanks and
more than 70 rural communities in Alaska. PTI Alaska also provides cellular
services to approximately 3,000 subscribers and Internet services to
approximately 16,000 customers. The aggregate cash purchase price paid was
approximately $411.8 million.
On May 14, 1999, ACS also purchased certain of the assets and certain of the
liabilities of the Anchorage Telephone Utility ("ATU") from the Municipality of
Anchorage. ATU is the largest local exchange carrier in Alaska providing local
services to over 168,000 access lines, primarily in Anchorage. ATU also provides
cellular service to over 63,000 subscribers under the MACtel brand name and long
distance service on a resale basis to approximately 26,000 customers. The
aggregate cash purchase price paid was approximately $265.1 million.
ACS recorded transaction fees and expenses of approximately $48 million from
these purchases. In addition, ACS will amortize approximately $245 million of
acquisition goodwill over 40 years.
F-4
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 1,554
Accounts receivable-trade................................. 49,031
Materials and supplies.................................... 7,588
Prepayments and other current assets...................... 5,269
---------
Total current assets.................................... 63,442
Investments................................................. 1,790
Property, plant and equipment:
Telecommunications........................................ 839,627
Less: Accumulated depreciation............................ 445,512
---------
394,115
Construction work in progress............................... 34,481
---------
Property, plant and equipment, net........................ 428,596
Intangible assets........................................... 28,020
Goodwill.................................................... 244,209
Debt issuance cost.......................................... 36,149
Deferred charges and other assets........................... 2,266
---------
Total assets................................................ $ 804,472
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Current liabilities:
Current portion of long-term debt......................... $ 4,990
Notes payable............................................. 10,000
Accounts payable--trade................................... 14,056
Accounts payable--affiliates.............................. 366
Income taxes payable...................................... 707
Advance billings and customer deposits.................... 6,551
Accrued and other current liabilities..................... 20,241
---------
Total current liabilities............................... 56,911
Long-term debt, net of current portion...................... 610,443
Deferred income taxes....................................... (986)
Unamortized investment tax credits.......................... 522
Other deferred credits and long-term liabilities............ 8,491
Minority interest........................................... 1,422
Commitments and contingencies............................... --
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 shares
authorized, 21,790,276 shares issued and outstanding.... 218
Paid in capital in excess of par value.................... 140,837
Notes receivable from officers............................ (862)
Unearned compensation..................................... (1,864)
Retained earnings (deficit)............................... (10,660)
---------
Total stockholders' equity 127,669
---------
Total liabilities and stockholders' equity.................. $ 804,472
=========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
Operating revenues:
Local telephone........................................... $ 95,640
Cellular.................................................. 14,735
Long distance............................................. 4,065
--------
Total operating revenues.............................. 114,440
Cost of sales and operating expenses:
Local telephone........................................... 63,612
Cellular.................................................. 9,053
Long distance............................................. 5,091
Depreciation and amortization............................. 23,708
--------
Total cost of sales and operating expenses............ 101,464
--------
Operating income............................................ 12,976
Other income and expense:
Interest expense.......................................... (23,532)
Interest income........................................... 515
Other..................................................... (793)
--------
Other income and expense, net......................... (23,810)
--------
Income (loss) before income taxes........................... (10,834)
Income tax provision (benefit).............................. (174)
--------
Net income (loss)........................................... $(10,660)
========
Net loss per share--basic and diluted....................... $ (0.51)
========
Shares used in computing net loss per share................. 21,085
========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PAID IN NOTES
CAPITAL IN RECEIVABLE TOTAL
COMMON IN EXCESS OF FROM UNEARNED ACCUMULATED STOCKHOLDERS'
STOCK PAR VALUE OFFICERS COMPENSATION DEFICIT EQUITY
-------- ------------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.. $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 21,789,176
shares of common stock,
$.01 par.................. 218 133,884 -- -- -- 134,102
Discount on warrants issued
in conjunction with long-
term debt................. -- 5,089 -- -- -- 5,089
Officers loans in
conjunction with the
issuance of stock......... -- -- (862) -- -- (862)
Unearned compensation....... -- 1,864 -- (1,864) -- --
Net loss for the period
January 1, 1999 to
September 30, 1999........ -- -- -- -- (10,660) (10,660)
---- -------- ----- ------- -------- --------
Balance, September 30,
1999...................... $218 $140,837 $(862) $(1,864) $(10,660) $127,669
==== ======== ===== ======= ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (10,660)
Adjustments to reconcile net loss to net cash provided by
operating activities:.....................................
Depreciation.............................................. 20,997
Amortization of debt issuance costs....................... 1,751
Amortization of intangibles............................... 2,712
Deferred income taxes..................................... (947)
Deferred credits.......................................... (436)
Accounts receivable and other current assets.............. 3,711
Accounts payable and other current liabilities............ 545
Other..................................................... 1,528
---------
Net cash provided by operating activities................... 19,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction (excluding interest capitalized on equity
funds).................................................... (46,218)
Cost of acquisition, net of cash received................... (691,855)
Organizational costs........................................ (2,385)
---------
Net cash used by investing activities....................... 740,458
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term notes payable...................... 10,000
Proceeds from the issuance of long-term debt, net of
discounts................................................. 613,632
Payments on long-term debt.................................. (1,275)
Debt issuance costs......................................... (37,900)
Issuance of common stock/warrants........................... 138,354
---------
Net cash provided by financing activities................... 722,811
Increase in cash............................................ 1,554
Cash and equivalents at beginning of the period............. --
---------
Cash and equivalents at end of the period................... $ 1,554
=========
SUPPLEMENTAL CASH FLOW DATA:
Interest Paid............................................... $ 11,148
Income Taxes Paid........................................... --
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for Alaska Communications Systems
Group, Inc. and Subsidiaries (the Company) represent the operating results of
the following four legal entities (see Note 2, Acquisitions):
Alaska Communications Systems Group, Inc. (formerly ALEC Holdings, Inc.)
Alaska Communications Systems Holdings, Inc. (formerly ALEC Acquisition
Corporation)
ALEC Acquisition Sub Corp., Inc. which acquired the stock of the PTI Alaska
companies at the closing of the acquisitions.
Alaska Communications Systems, Inc. which acquired the stock of ATU Long
Distance, ATU Communications, Inc. and MACtel Inc. on May 14, 1999 and purchased
a majority interest in Alaska Choice Television on September 30, 1999.
A summary of significant accounting policies followed by the Company is set
forth below:
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are as of and
for nine months ended September 30, 1999 and include the operations of Alaska
Communications Systems Holdings for the full nine month period and the PTI
Alaska companies, ATU Long Distance, ATU Communications and MACtel since their
acquisition on May 14, 1999. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
full fiscal year or for any future period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results may differ from those estimates.
REGULATION
The local telephone exchange activities of the Company are subject to rate
regulation by the Federal Communications Commission (FCC) for interstate
telecommunication service, and the Regulatory Commission of Alaska (RCA) for
intrastate and local exchange telecommunication service. The Company, as
required by the FCC, accounts for such activity separately. Long distance
services are subject to rate regulation as a non-dominant interexchange carrier
by the FCC for
F-9
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
interstate telecommunication services and the RCA for intrastate
telecommunication services. Cellular operations are not subject to rate
regulation.
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 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. The Company provides for depreciation of telephone plant on the
straight-line method, using rates approved by the regulatory authorities.
NON-TELEPHONE plant is stated at purchase 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 live ranging from three to
15 years.
CELLULAR LICENSES
Cellular licenses are stated at net book value. Amortization is computed on
the straight-line method over an estimated useful life of 40 years. These
licenses are renewable at our option in perpetuity.
GOODWILL
Goodwill associated with the purchase of rural telephone properties is
amortized on the straight-line method over 40 years and 15 years for all other
goodwill.
REVENUE RECOGNITION
Recurring revenues are billed one month in advance and are deferred until
the month earned. Nonrecurring revenues area billed in arrears and are
recognized when earned.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted FASB Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Under the provisions of this statement, the Company has evaluated its long-lived
assets for impairment and will continue to evaluate them if events or changes in
circumstance indicate the carrying amount of such assets may not be fully
recoverable on an undiscounted cash flow basis.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock outstanding from May 14, 1999 through September 30, 1999 (basic
earnings per share) and dilutive common equivalent shares from stock options and
warrants, using the treasury stock method (dilutive earnings per share). The
weighted average number of shares outstanding is calculated
F-10
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from May 14, 1999 because the Company had no significant operations or
outstanding shares prior to that date. Common stock equivalent shares were
antidilutive for the period ended September 30, 1999.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted FASB Statement No. 130, COMPREHENSIVE INCOME. The
Company's comprehensive loss is equal to its net loss.
2. ACQUISITIONS
On May 14, 1999, Alaska Communications Systems Holdings Inc. ("ACS"),
acquired Century's Alaska holdings (PTI properties), including Telephone
Utilities of Alaska, Inc., Telephone Utilities of the Northland, Inc., PTI
Communications of Alaska, Inc., Pacific Telecom of Alaska PCS, Inc., and Pacific
Telecom Cellular of Alaska, Inc., excluding the assets, liabilities and equity
of Alaska RSA#1. On the same date, ACS also acquired from the Municipality of
Anchorage ATU Communications, Inc. and its subsidiaries, MACtel and ATU Long
Distance (collectively, "ATU"). These holdings include local area exchanges,
long distance service, Internet service and cellular operations throughout rural
Alaska and Anchorage. Both acquisitions were accounted for under the purchase
method of accounting. The financial statements reflect the allocation of the
purchase price and assumption of certain liabilities and include the operating
results of both ATU and PTI properties from the date of acquisition. In total,
the Company paid Century Telephone Enterprise $411,784 for the PTI properties
and the Municipality of Anchorage $265,115 for the assets acquired. Acquisition
expenses totaling $14,079 were also allocated to the purchase price. The
purchase price information presented is subject to final settlement adjustments,
which management does not expect to be material.
The following reflects the preliminary allocation of the purchase price and
the sources of funds to finance the purchase (in thousands).
<TABLE>
<CAPTION>
PTI
PROPERTIES ATU TOTAL
---------- --------- ---------
<S> <C> <C> <C>
Current assets.............................................. $ 20,905 $ 45,142 $ 66,047
Property, plant and equipment............................... 153,181 247,694 400,875
Other assets................................................ 9,765 20,750 30,515
Less liabilities assumed.................................... (12,701) (38,518) (51,219)
-------- -------- --------
Net assets acquired......................................... 171,150 275,068 446,218
Goodwill.................................................... 244,593 167 244,760
-------- -------- --------
Total cost of acquisition................................... 415,743 275,235 690,978
Acquisition expenses........................................ (3,959) (10,120) (14,079)
-------- -------- --------
Total purchase price paid................................... $411,784 $265,115 $676,899
======== ======== ========
</TABLE>
F-11
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
2. ACQUISITIONS (CONTINUED)
Net assets acquired were purchased for cash provided from the following
sources:
<TABLE>
<S> <C>
Revolving credit facility (of ACS).......................... $ 6,700
Term loan facilities (of ACS)............................... 435,000
9 3/8% Senior subordinated notes due 2009 (of ACS).......... 150,000
13% Senior discount debentures due 2011..................... 19,911
Issuance of common stock/warrants........................... 126,289
--------
Total sources............................................... $737,900
========
</TABLE>
These sources also provided $12,601 of working capital and entailed $48,400
of transaction fees and expenses.
The goodwill acquired will be amortized on a straight line basis over 40
years.
The following are the pro forma results for the nine month periods ended
September 30, 1998 and 1999, giving effect to the acquisitions as if they had
occurred at the beginning of the periods (in thousands, except net income (loss)
per share amounts):
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Revenues.................................................... $208,037 $221,346
Net income (loss)........................................... 1,457 (16,727)
Net income (loss) per share................................. $ 0.07 $ (0.77)
Weighted average shares outstanding......................... 21,790 21,790
</TABLE>
On September 30, 1999, the Company acquired a majority interest in Alaskan
Choice Television, LLC ("ACTV"'). The cash purchase price was approximately
$1,900. Goodwill from the acquisition will be amortized over 15 years.
F-12
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
Term Loan A Facility (of ACS)............................... $150,000
Term Loan B Facility (of ACS)............................... 150,000
Term Loan C Facility (of ACS)............................... 135,000
9 3/8% Senior subordinated notes due 2009 (of ACS).......... 150,000
13% Senior discount debentures due 2011..................... 21,186
Capital Lease Obligations (of ACS).......................... 7,267
Note to Municipality of Fairbanks (of ACS).................. 1,602
Other....................................................... 378
--------
615,433
Less current portion........................................ 4,990
--------
Total long-term obligations................................. $610,443
========
</TABLE>
The Company's senior discount debentures balance of $21,186 consists of the
$25,000 issue price plus accrued interest of $1,221 minus unamortized original
issue discount of $5,035. The original issue discount resulted from the issuance
of detachable warrants in connection with the 13% senior discount debentures.
These detachable warrants are exercisable into 828,261 shares of common stock at
any time from May 14, 1999 through May 15, 2011 at $0.01 per share. The original
issue discount represents the difference between the exercise price and the fair
value of the underlying shares at the date of issue.
4. STOCK OPTIONS
At September 30, 1999, the Company has reserved a total 3,410,486 shares of
authorized common stock for issuance under the 1999 Stock Incentive Plan ("the
Plan"). At September 30, 1999, 3,328,000 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. During May, June and July of 1999, 2,858,000 of these
options were granted at an exercise price equivalent to the then fair value of
the underlying stock as evidenced by sales to third parties. On September 28,
1999, 470,000 options were granted below the independently appraised fair value
of the underlying stock at the time of issuance, which was $10.12. Additionally,
the terms of the 470,000 options granted with exercise prices below fair value
on September 28, 1999 call for immediate vesting upon the successful completion
of an initial public offering ("IPO").
Of the options granted in May, 653,750 are performance vesting options
granted to certain officers and management of the Company (of which 125,000
subsequently were forfeited). The terms of these performance vesting options
call for vesting based upon the achievement of certain annual performance goals,
upon successful completion of an IPO or on the ninth anniversary of their grant
date.
F-13
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
4. STOCK OPTIONS (CONTINUED)
Included on the balance sheet at September 30, 1999 is unearned compensation
of $1,864 related to the 470,000 options granted on September 28, 1999. This
unearned compensation expense will be amortized as a non-cash expense over the
vesting term of the options or immediately upon the successful completion of an
IPO, whichever occurs first. The 528,750 options granted on May 14, 1999 will be
recorded as compensation expense when vesting occurs. Compensation expense will
be recorded upon the earlier of achieving the annual corporate level performance
goals, the successful completion of an IPO or on the ninth anniversary of their
grant date. Compensation expense recorded will be the difference between the
market price of the shares on the day vesting is determined and the exercise
price of $6.1542.
5. BUSINESS SEGMENTS
The Company has adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Company has three reportable
segments: local telephone (consisting of local telephone service, directory
advertising, deregulated revenue and other revenues), cellular and long
distance. Each reportable segment is a strategic business under separate
management and offering different services than those offered by the other
segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
The Company also incurs interest expense, interest income, equity in
earnings 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 "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.
F-14
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
5. BUSINESS SEGMENTS (CONTINUED)
The following table illustrates selected financial data for each segment for
the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
LOCAL LONG
TELEPHONE CELLULAR DISTANCE OTHER TOTAL
--------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues....................... $ 95,640 $14,735 $ 4,065 $ -- $114,440
Operating income (loss).................. 10,005 4,445 (1,474) -- 12,976
Depreciation and amortization............ 19,743 1,237 367 2,361 23,708
Interest expense......................... (114) (1) -- (23,417) (23,532)
Interest income.......................... 318 54 -- 143 515
Equity in earnings of minority
investments............................ -- -- -- (81) (81)
Other non-operating, net................. (689) 28 -- (51) (712)
Income tax provision (benefit)........... 6,497 1,869 -- (8,540) (174)
Net income (loss)........................ 9,715 2,657 (1,474) (21,558) (10,660)
Capital expenditures..................... 21,154 5,549 19,515 -- 46,218
Investments under the equity method...... -- -- -- 1,790 1,790
Total assets............................. 706,156 73,491 21,831 2,994 804,472
</TABLE>
6. INCOME TAXES
The tax benefit reported for the consolidated period ended September 30,
1999 is due to investment tax credits that the Company is eligible to take
regardless of its net loss position for the period. In general, the provision
for income taxes may differ from the federal statutory rate due to the effect of
federal and state alternative minimum taxes and net operating losses incurred
for the period that are not benefited. In the current period, operating losses
were not benefited because it is not certain that the Company will be able to
use the losses going forward.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Alaska Communications Systems Holdings, Inc.
Anchorage, Alaska
We have audited the consolidated balance sheet of Alaska Communications
Systems Holdings, Inc. and Subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statement of cash flows for the period from
July 16, 1998 (date of inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Alaska
Communications Systems Holdings, Inc. and Subsidiaries as of December 31, 1998,
and their cash flows for the period from July 16, 1998 (date of inception)
through December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 24, 1999
F-16
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $281,236 $ 180,422
Receivable from employees and related party (Note 2)...... 41,771 44,770
-------- ----------
Total current assets.................................... 323,007 225,192
PROPERTY, PLANT, AND EQUIPMENT, Net (Notes 1 and 3)......... 36,536 565,482
DEFERRED ACQUISITION AND FINANCING COSTS (Note 1)........... 248,637 1,709,089
DEPOSITS.................................................... 11,820 15,720
-------- ----------
$620,000 $2,515,483
-------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accrued Liabilities....................................... $ -- $ 495,483
Advances payable to stockholder (Note 2).................. 620,000 2,020,000
-------- ----------
Total current liabilities............................... 620,000 2,515,483
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)............... -- --
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value; authorized, 1,000 shares;
outstanding, 1 share.................................... -- --
-------- ----------
$620,000 $2,515,483
======== ==========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 16, 1998
(DATE OF INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1998 MARCH 31, 1999
------------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property, plant, and equipment............... $ (36,536) $ 528,946
Deferred acquisition costs................................ (248,637) 1,460,452
Deposits.................................................. (11,820) 3,900
Accounts receivable from employees and related party...... (41,771) 2,999
Accrued liabilities....................................... -- 495,483
--------- ---------
Net cash used in investing activities................... (338,764) 1,500,814
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from stockholder................... 620,000 1,400,000
--------- ---------
NET (DECREASE) INCREASE IN CASH............................. 281,236 (100,814)
CASH, BEGINNING OF PERIOD................................... -- 281,236
--------- ---------
CASH, END OF PERIOD......................................... $ 281,236 $ 180,422
========= =========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements for Alaska Communications Systems
Holdings, Inc. and Subsidiaries (the "Company") represent the operating results
of the following three legal entities:
Alaska Communications Systems Holdings, Inc. (formerly ALEC Acquisition
Corporation)
ALEC Acquisition Sub Corp., Inc.
Alaska Communications Systems, Inc.
The Company was organized in 1998 as the principal entity to acquire and
manage telecommunication operations in Alaska. The principal activities in 1998
and through March 31, 1999 were the preparation of systems and obtaining
financing for pending acquisitions (see Note 5). In May 1999, the Company was
acquired and became a wholly owned subsidiary of ALEC Holdings, Inc.
A summary of significant accounting policies followed by the Company is set
forth below:
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results may differ from those estimates.
PROPERTY, PLANT, AND EQUIPMENT is stated at cost. At December 31, 1998, the
Company was in the early stages of opening its Corporate Headquarters in
Anchorage. No depreciation was claimed in 1998 since the assets in service were
acquired at year end.
DEFERRED ACQUISITION AND FINANCING COSTS are stated at cost and are direct
costs incurred in connection with the Company's acquisitions and related
financings.
REVENUES--No revenues or expenses have been generated since the Company was
not in operation as of December 31, 1998.
2. TRANSACTIONS WITH RELATED PARTIES
Fox Paine Capital Fund, the majority stockholder of the Company's parent,
ALEC Holdings, Inc., has advanced cash to allow the Company to operate until
permanent funding is put in place at the closing of the acquisitions (see
Note 5). Outstanding advances were $620,000 as of December 31, 1998. Fox Paine
Capital Fund will continue to fund the Company until permanent funding is
obtained at the closing of the acquisitions.
The Company advanced cash to a related party to perform certain consulting
services in connection with the Company's pending acquisitions. Cash used is
capitalized as deferred acquisition costs. Any unused cash that was advanced to
this related party is to be repaid to the Company. As of December 31, 1998, the
total amount of unused cash was $41,771.
F-19
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
3. PROPERTY, PLANT, AND EQUIPMENT
The balances by category of property, plant, and equipment, at December 31,
1998 are:
<TABLE>
<S> <C>
Office furniture, equipment, and other...................... $ 3,049
Construction work in progress............................... 33,487
-------
Total property, plant, and equipment........................ 36,536
Less: Accumulated depreciation.............................. --
-------
Property, plant, and equipment, net......................... $36,536
=======
</TABLE>
4. LEASES
The Company has entered into an operating lease for office space in
Anchorage, Alaska for its corporate headquarters. The lease is for 60 months
and, under this lease agreement, future minimum annual rental payments are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999........................................................ $278,772
2000........................................................ 139,060
2001........................................................ 141,841
2002........................................................ 144,678
2003........................................................ 147,571
--------
Total................................................... $851,922
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company has announced two purchase agreements that will allow the
Company to enter the telecommunications industry. The first agreement involves
the acquisition of CenturyTel's Alaska holdings including Telephone Utilities of
Alaska, Inc., Telephone Utilities of the Northland, Inc., PTI Communications of
Alaska, Inc., Pacific Telecom of Alaska PCS, Inc., and Pacific Telecom Cellular
of Alaska, Inc. and the second is with the Municipality of Anchorage to acquire
all of its telecommunication investments. Upon completion of these two
contracts, the Company will have in excess of 300,000 local telephone, 70,000
cellular, 20,000 long distance, and 16,000 Internet access lines. The combined
purchase price is approximately $700 million. The Company is being funded by a
$145 million equity contribution from its parent, ALEC Holdings, Inc., and the
remainder with bank financed debt.
It is currently anticipated that by mid-1999 all regulatory approvals will
have been granted and the acquisitions will be completed. At that time, the
Company's primary business will be to provide traditional local telephone, long
distance, cellular, and Internet service throughout the state of Alaska. Until
the completion of the acquisitions, the Company is incurring costs to facilitate
certain transition and financing activities.
F-20
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JULY 16, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
6. BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for
the three months ended March 31, 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year or for any future period.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Century Telephone Enterprises, Inc.:
We have audited the accompanying combined balance sheet of CenturyTel's
Alaska Properties as of December 31, 1998, and the related combined statement of
income and retained earnings, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of CenturyTel's Alaska
Properties as of December 31, 1998, and the results of their operations and
their cash flows for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Shreveport, Louisiana
February 26, 1999
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Century Telephone Enterprises, Inc.
Monroe, Louisiana
We have audited the combined balance sheet of CenturyTel Alaska Properties
as of December 31, 1997, and the related combined statements of income and
retained earnings and of cash flows for the year ended December 31, 1996, eleven
months ended November 30, 1997, and one month ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of CenturyTel Alaska
Properties as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1996, eleven months ended
November 30, 1997, and one month ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 25, 1999
F-23
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 871 $ 5,728 $ 10,739
Accounts receivable:
Customers, less allowance for doubtful accounts of $376,
$164 and $162 at December 31, 1997 and 1998, and March
31, 1999, respectively................................ 5,071 $ 8,446 $ 8,362
Affiliates (Note 8)..................................... 20,404 31,922 38,361
Connecting companies.................................... 4,146 10,984 6,596
Receivable from sale of cellular license................ 5,022 -- --
Miscellaneous accounts receivable and other............. 2,760 1,213 1,326
Material and supplies (at cost)........................... 2,653 2,072 2,058
Prepayments............................................... 1,513 610 602
-------- -------- --------
Total current assets.................................. 42,440 60,975 68,044
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, Net (Note 4)................. 158,590 161,710 157,866
-------- -------- --------
OTHER ASSETS:
Excess cost of net assets acquired, less accumulated
amortization of $5,056, $6,853 and 8,455 at December 31,
1997 and 1998, and March 31, 1999, respectively
(Note 1)................................................ 248,948 242,632 241,030
Investments, at cost...................................... 997 976 976
Other, net................................................ 8,200 6,367 5,753
-------- -------- --------
Total other assets...................................... 258,145 249,975 247,759
-------- -------- --------
TOTAL ASSETS................................................ $459,175 $472,660 $473,669
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5)............. $ 1,316 $ 1,427 $ 1,451
Accounts payable.......................................... 3,275 5,322 2,589
Accrued expenses and other accrued liabilities:
Salaries and benefits................................... 2,434 1,949 2,321
Taxes................................................... 1,123 1,008 1,937
Other................................................... 684 1,849 1,841
Advance billings and customer deposits (Note 1)........... 1,643 2,019 2,026
-------- -------- --------
Total current liabilities............................... 10,475 13,574 12,165
-------- -------- --------
LONG-TERM DEBT (Note 5)..................................... 41,634 41,981 41,643
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes (Note 6)............................ 11,297 13,523 13,914
Deferred investment tax credits........................... 1,421 909 780
Other..................................................... 3,034 1,711 1,282
-------- -------- --------
Total deferred credits and other liabilities............ 15,752 16,143 15,976
-------- -------- --------
SHAREHOLDER'S EQUITY:
Common stock (103, 104 and 104 shares authorized and 23,
24, and 24 issued and outstanding, respectively)........ 23 24 24
Paid-in capital........................................... 393,026 393,026 393,026
Retained earnings......................................... (1,735) 7,912 10,835
-------- -------- --------
Total shareholder's equity.............................. 391,314 400,962 403,885
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................. $459,175 $472,660 $473,669
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
MONTHS ONE MONTH THREE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED MARCH 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
-------------- -------------- -------------- -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Telephone................... $75,950 $79,330 $10,255 $121,933 $27,967 $30,815
Cellular.................... 4,823 5,120 181 2,576 408 546
------- ------- ------- -------- ------- -------
Total operating
revenues................ 80,773 84,450 10,436 124,509 28,375 31,361
OPERATING EXPENSES:
Cost of sales and operating
expenses--telephone....... 41,789 42,404 6,434 72,008 16,451 17,270
Cost of sales and operating
expenses--cellular........ 3,381 3,082 147 2,128 330 396
Depreciation and
amortization.............. 15,348 15,823 2,466 30,459 7,209 7,785
------- ------- ------- -------- ------- -------
Total operating
expenses................ 60,518 61,309 9,047 104,595 23,990 25,451
------- ------- ------- -------- ------- -------
OPERATING INCOME.............. 20,255 23,141 1,389 19,914 4,385 5,910
OTHER INCOME (EXPENSE):
Interest expense............ (3,176) (3,027) (253) (3,588) (797) (965)
Interest income (Note 8).... 1,180 858 82 2,183 495 607
Other income (expense),
net....................... (33) (298) 53 356 357 80
------- ------- ------- -------- ------- -------
Total other income
(expense)............... (2,029) (2,467) (118) (1,049) 55 (278)
------- ------- ------- -------- ------- -------
INCOME BEFORE INCOME TAX
EXPENSE..................... 18,226 20,674 1,271 18,865 4,440 5,632
INCOME TAX EXPENSE (Note 6)... 6,737 7,746 736 9,218 2,214 2,709
------- ------- ------- -------- ------- -------
NET INCOME.................... 11,489 12,928 535 9,647 2,226 2,923
======= ======= ======= ======== ======= =======
RETAINED EARNINGS AT BEGINNING
OF PERIOD................... 63,216 61,079 -- (1,735) (1,735) 7,912
Less dividends to
shareholder................. 13,626 7,080 2,270 -- -- --
------- ------- ------- -------- ------- -------
RETAINED EARNINGS AT END OF
PERIOD...................... $61,079 $66,927 $(1,735) $ 7,912 $ 491 $10,835
======= ======= ======= ======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
CENTURYTEL ALASKA PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN
MONTHS ONE MONTH THREE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED MARCH 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
-------------- -------------- -------------- -------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................. $11,489 $12,928 $ 535 $ 9,647 $ 2,226 $ 2,923
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and
amortization............ 15,348 15,823 2,466 30,459 7,209 7,785
Deferred income taxes and
unamortized investment
tax credits, net........ 1,538 1,160 65 24 148 66
Change in current assets
and liabilities:
Accounts receivable..... 14,476 (1,383) 3,873 (3,644) (2,105) 4,359
Accounts payable........ (6,828) (2,986) (1,527) 1,479 (282) (2,733)
Other current assets and
liabilities, net...... (1,434) (4,329) 176 2,427 1,588 1,322
Other, net.............. -- -- -- (2,101) 2,241 381
------- ------- -------- ------- ------- -------
Net cash provided by
operating
activities.......... 34,589 21,213 5,588 38,291 11,025 14,103
------- ------- -------- ------- ------- -------
INVESTING ACTIVITIES:
Payments for property,
plant, and equipment...... (20,465) (14,575) (1,825) (26,799) (2,321) (2,200)
Other, net.................. (146) 1,021 (1,454) 135 4,268 (139)
------- ------- -------- ------- ------- -------
Net cash provided (used)
by investing
activities............ (20,611) (13,554) (3,279) (26,664) 1,947 (2,339)
FINANCING ACTIVITIES:
Proceeds from issuance of
long-term debt............ 1,739 -- -- -- -- --
Dividends paid.............. (13,626) (7,080) (2,270) -- -- --
Payments of long-term
debt...................... (1,060) (1,129) (293) (1,322) (2,047) (314)
Change in affiliate
balance................... -- -- -- (5,448) (9,540) (6,439)
------- ------- -------- ------- ------- -------
Net cash used by
financing
activities............ (12,947) (8,209) (2,563) (6,770) (11,587) (6,753)
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........ 1,031 (550) (254) 4,857 1,385 5,011
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR........... 644 1,675 1,125 871 871 5,728
------- ------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS, END
OF YEAR..................... $ 1,675 $ 1,125 $ 871 $ 5,728 $ 2,256 $10,739
======= ======= ======== ======= ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Net assets of acquisitions
contributed as paid-in
capital, including push-
down of goodwill of
$32,159................... $ -- $89,132 $ -- $ -- $ -- $ --
Push-down of excess costs of
Alaskan entities from
CenturyTel acquisition.... -- -- 208,389 -- -- --
Paydown of minority interest
liability through transfer
of property, plant, and
equipment................. -- -- 1,525 -- -- --
Income tax paid............. 5,344 4,653 3,207 600 1,428 2,076
Interest paid............... 3,510 2,706 261 3,434 577 954
</TABLE>
See accompanying notes to combined financial statements.
F-26
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL--The combined financial statements for CenturyTel Alaska Properties
(the "Company") represent the operating results of the following legal entities
("Alaskan Entities"):
Telephone Utilities of Alaska, Inc. ("TUA")
Telephone Utilities of the Northland, Inc. ("TUN")
PTI Communications of Alaska, Inc. ("PTICA")
Pacific Telecom of Alaska PCS, Inc. ("PTAPCS")
Pacific Telecom Cellular of Alaska, Inc. ("PTCA"), excluding the assets,
liabilities and equity of Alaska RSA #1
TUA, TUN, PTICA, and PTAPCS were wholly owned subsidiaries of Pacific
Telecom, Inc. ("PTI") and PTCA was a wholly owned subsidiary of Pacific Telecom
Cellular, Inc., which was a wholly owned subsidiary of PTI. Until December 1,
1997, PacifiCorp Holdings owned 100% of the voting securities of PTI. The
Company was acquired on December 1, 1997 as a result of Century Telephone
Enterprises, Inc.'s ("CenturyTel") acquisition of Pacific Telecom, Inc. (the
"Acquisition") (Note 13). The financial statements beginning December 1, 1997
reflect the excess cost of net assets acquired and the subsequent amortization
expense which was allocated to the Alaska properties in accordance with purchase
accounting.
TUA, TUN, PTICA, and PTAPCS became wholly owned subsidiaries of CenturyTel
of the Northwest, Inc. ("CNI") which is a wholly owned subsidiary of CenturyTel.
PTCA is a wholly owned subsidiary of CenturyTel Wireless, Inc. ("CT Wireless")
which is a wholly owned subsidiary of CenturyTel.
The Company's primary business is to provide traditional and cellular
telephone service to its customers which are located in the state of Alaska. The
Company was dependent on PTI and certain subsidiaries prior to the Acquisition
and is dependent upon CenturyTel and certain CenturyTel subsidiaries to provide
construction and maintenance services, materials and supplies and managerial,
technical and accounting services. Intercompany billings include a return on
investment to the related company.
The Company's telephone operations are regulated in nature and its telephone
accounting records are maintained in accordance with the rules and regulations
of the Alaska Public Utilities Commission ("APUC") which substantially adhere to
the rules and regulations of the Federal Communications Commission. The
Company's regulated operations are subject to the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 71, ACCOUNTING FOR THE EFFECTS OF
CERTAIN TYPES OF REGULATION.
ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
F-27
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Actual results may differ
from those estimates.
REVENUE RECOGNITION--Revenues are recognized when earned. The Company
participates in toll revenue pools with other telephone companies. Such pools
are funded by toll revenue and/or access charges regulated by the APUC within
the intrastate jurisdiction and the Federal Communications Commission within the
interstate jurisdiction. Much of the interstate toll service revenue earned
through various pooling processes is initially recorded based on estimates.
These estimates are derived from interim financial statements, available
separations studies and the most recent rate of return published by the National
Exchange Carriers Association. These estimates are subject to subsequent
adjustment in future accounting periods as refined operational information
becomes available. Any subsequent adjustments have not been material.
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 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.
The Company provides depreciation for telephone plant on the straight-line
method, using rates approved by the regulatory authorities. Depreciation expense
for telephone plant amounted to $13,774, $14,406, $1,737, and $23,550 for the
year ended December 31, 1996, eleven months ended November 30, 1997, one month
ended December 31, 1997, and year ended December 31, 1998, respectively.
Included in 1998 expense is additional depreciation of approximately $1,506
which was approved by the regulatory authorities. The composite depreciation
rate was 5.7% for the year ended December 31, 1996, 5.8% for the eleven months
ended November 30, 1997 and the one month ended December 31, 1997, and 6.1% for
the year ended December 31, 1998.
Non-telephone plant is stated at 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 lives ranging from 7 to
15 years. Depreciation for non-telephone plant amounted to $1,198, $922, $190,
and $583 for the year ended December 31, 1996, eleven months ended November 30,
1997, one month ended December 31, 1997, and the year ended December 31, 1998,
respectively.
LONG-LIVED ASSETS AND EXCESS COST OF NET ASSETS ACQUIRED (GOODWILL)--The
carrying value of long-lived assets, including allocated goodwill, is reviewed
for impairment at least annually, or whenever events or changes in circumstances
indicate that such carrying value may not be recoverable, by assessing the
recoverability of such carrying value through estimated undiscounted future net
cash flows expected to be generated by the assets. The excess cost of net assets
acquired is being amortized over 40 years. Amortization expense was $333 for the
year ended
F-28
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1996, $455 during the eleven months ended November 30, 1997, $537
during the one month ended December 31, 1997, and $6,326 for the year ended
December 31, 1998.
INCOME TAXES--Prior to the Acquisition, the Company was included in the
consolidated federal income tax return of PacifiCorp Holdings and CenturyTel in
subsequent periods. For financial accounting purposes, federal income taxes are
computed and recorded as if the Company filed a separate federal income tax
return, except that, (i) in the event the Company generates a net tax loss which
is utilized in the respective consolidated return, the Company will be given the
benefit of such loss, and (ii) income taxes are calculated based upon the
statutory tax rate in effect for PacifiCorp prior to the Acquisition and
CenturyTel and its subsidiaries for subsequent periods on a consolidated basis.
The Company periodically settles amounts owed to CenturyTel for federal income
taxes. The Company is included in a consolidated Alaska state income tax return.
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are established for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Investment tax credits related to plant have been deferred and are being
amortized as a reduction of federal income tax expense over the estimated useful
lives of the assets giving rise to the credits.
Pursuant to SFAS 71, the regulatory liability, net of the related tax
impact, is being amortized as a reduction of federal income tax expense over the
estimated remaining lives of the assets which generated the deferred taxes.
CASH EQUIVALENTS--For purposes of the statement of cash flows, the Company
considers all demand deposits, central depository bank account ("CDA") deposits,
and all short-term investments with a maturity at date of purchase of three
months or less to be cash equivalents.
INVESTMENTS--The Rural Telephone Bank ("RTB") requires borrowers of RTB
funds to purchase RTB stock as a percentage of loan funds provided. These
investments have been accounted for using the cost method.
ADVANCE BILLINGS--Advance billings creditable to revenue accounts in future
months are recorded in advance billings until the service is rendered.
EARNINGS PER SHARE--The common stock of the Company is not traded in a
public market; therefore, earnings per share amounts are not presented in
accordance with SFAS 128, EARNINGS PER SHARE.
2. PCS LICENSE ACQUISITION COSTS
In early 1997, the Company was awarded three 10 MHz licenses to provide
personal communications services ("PCS") in Alaska. The Company paid $3,023 for
such licenses, which will
F-29
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
2. PCS LICENSE ACQUISITION COSTS (CONTINUED)
be amortized over the useful economic lives once construction is complete. At
this time, construction has not yet begun. These licenses are included in Other
Assets on the balance sheet.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, ACCRUED
EXPENSES, AND CUSTOMER DEPOSITS--The carrying amount approximates the fair value
due to the short maturity of these instruments.
OTHER INVESTMENTS--The Company's other investments are represented by its
investment in RTB stock. The carrying amount of such investment approximates the
fair market value of these instruments.
LONG-TERM DEBT--The carrying value of the Company's long-term debt had a
fair value of $42,669 at December 31, 1997 and $45,853 at December 31, 1998. The
fair value was estimated by discounting the scheduled payment streams to present
value based upon rates currently offered to the Company for debt of similar
remaining maturities. Prepayment penalties and other costs of debt retirement
are not reflected in the estimates.
4. PROPERTY, PLANT, AND EQUIPMENT, NET
The following table summarizes the major classes of property, plant, and
equipment as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
General support...................................... $ 33,508 $ 31,811
Central office....................................... 113,040 120,613
IOT.................................................. 21,283 5,652
Cable and wire....................................... 221,428 232,819
Construction in progress............................. 5,633 9,345
Nonregulated and other............................... 677 8,452
--------- ---------
Telephone property, plant, and equipment........... 395,569 408,692
Less accumulated depreciation........................ (238,228) (248,915)
--------- ---------
Net telephone property, plant, and equipment....... 157,341 159,777
Wireless property, plant, and equipment.............. 1,340 2,617
Less accumulated depreciation........................ (91) (684)
--------- ---------
Net wireless property, plant, and equipment........ 1,249 1,933
--------- ---------
Property, plant, and equipment, net................ $ 158,590 $ 161,710
========= =========
</TABLE>
F-30
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
4. PROPERTY, PLANT, AND EQUIPMENT, NET (CONTINUED)
The Company retired approximately $1,762 of telephone property, plant, and
equipment and a like amount of accumulated depreciation in 1998.
5. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1998 is summarized below:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
First mortgage notes:
5.0%-6.5%, due in installments to 2027................. $29,226 $28,546
7.2%-9.4%, due in installments to 2020................. 10,820 10,588
10.1%-11.8%, due in installments to 2017............... 2,904 2,672
Unsecured note at 3%, due in installments to 2007........ -- 1,602
------- -------
Subtotal............................................... 42,950 43,408
Less current maturities.................................. (1,316) (1,427)
------- -------
Total long-term debt, excluding current maturities..... $41,634 $41,981
======= =======
</TABLE>
The approximate annual debt maturities for the five years subsequent to
December 31, 1998 are as follows: 1999, $1,427; 2000, $1,527; 2001, $1,637;
2002, $1,755; and 2003, $1,551.
At December 31, 1998, under the most restrictive covenant of the Company's
long-term debt agreement, all of the Company's retained earnings were available
for the payment of cash dividends.
Substantially all of the Company's telephone property, plant, and equipment
is pledged to secure the first mortgage notes.
F-31
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
6. INCOME TAXES
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal:
Current................................... $4,733 $5,689 $575 $7,093
Deferred.................................. 265 109 (12) (177)
State:
Current................................... 1,388 1,708 170 2,101
Deferred.................................. 351 240 3 201
------ ------ ---- ------
Income tax expense...................... $6,737 $7,746 $736 $9,218
====== ====== ==== ======
</TABLE>
The following is a reconciliation from the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
ELEVEN
MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate........... 35.00% 35.00% 35.00% 35.00%
State income taxes, net of federal income
tax benefit............................... 6.00% 6.00% 8.44% 7.90%
Amortization of nondeductible excess cost of
net assets acquired....................... -- -- 14.20% 10.10%
Amortization of excess deferred income
taxes..................................... (1.67)% (1.32)% (2.18)% (1.60)%
Amortization of deferred investment tax
credits................................... (3.15)% (2.27)% (3.76)% (2.70)%
Other, net.................................. 0.78% 0.06% 6.20% 0.20%
----- ----- ----- -----
Effective income tax rate................. 36.96% 37.47% 57.90% 48.90%
===== ===== ===== =====
</TABLE>
F-32
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Regulatory liability...................................... $ 18 $ 388
Deferred investment tax credits........................... 991 374
Other..................................................... 829 567
Total gross deferred tax assets........................... 1,838 1,329
Less: Valuation allowances.............................. -- --
Net Deferred tax assets................................. 1,838 1,329
Deferred tax liabilities:
Property, plant, and equipment, primarily due to
depreciation differences................................ (13,088) (14,112)
Excess costs of net assets acquired....................... (47) (740)
-------- --------
Total gross deferred tax liabilities...................... (13,135) (14,852)
-------- --------
Net deferred tax liability................................ $(11,297) $(13,523)
======== ========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Company, except those which are members
of the International Brotherhood of Electrical Workers ("IBEW"), are covered by
a pension plan (the "Plan") which is sponsored by PTI before the Acquisition and
CNI subsequently which includes other affiliated companies. The Plan provides
benefits based upon employees' total years of service and the highest five years
compensation during their last 10 years of service. The Company's portion of
pension income was $57 during the year ended December 31, 1996, $219 during the
eleven months ended November 30, 1997, $23 during the one month ended
December 31, 1997, and $384 for the year ended December 31, 1998. Because
actuarial information regarding the status of the Plan is computed for the Plan
in total, the Company does not separately determine its portion of the actuarial
present value of the accumulated plan benefits, projected benefit obligation, or
net assets available for benefits.
In accordance with the purchase agreement with Alaska Communications Systems
Holdings, Inc., formerly known as ALEC Acquisition Corporation ("ALEC") (see
Note 13), the Plan assets and obligations will be valued at the closing date.
Based on this valuation, assets equaling the actuarial present value of the
accrued benefits of the Company's employees, plus an additional $250, will be
transferred to a replacement plan.
F-33
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE THREE
MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company participates in a postretirement health care and insurance plan
(the "PRB Plan") which is sponsored by PTI prior to acquisition and by CNI
subsequently which includes other affiliated companies.
The Company recognizes the cost of other postretirement benefits over the
active service period of its employees. PTI's policy was to fund annually an
amount of the postretirement benefit liability that will systematically reduce
that liability using available funds and allow deductibility for federal income
tax purposes. Due to income tax regulations that restrict the deductibility of
certain contributions for postretirement benefits, PTI elected to make non-tax
contributions to meet funding requirements imposed by state regulatory
commissions. PTI recognized the transition obligation, which represents the
previously unrecognized prior service cost, over a period of 20 years. Because
actuarial information regarding the status of the PRB Plan is computed for the
PRB Plan in total, PTI did not separately determine its portion of the actuarial
present value of the accumulated plan benefit, projected benefit obligations or
net assets available for benefits. At December 31, 1997, the date of the latest
actuarial evaluation for the PRB Plan, plan assets were less than the projected
benefit obligation by approximately $46,246 and the unamortized portion of the
transition obligation was $26,099. The Company's portion of the net periodic
postretirement benefit cost was $846 during the year ended December 31, 1996,
$485 during the eleven months ended November 30, 1997, $41 during the one month
ended December 31, 1997, and $471 during the year ended December 31, 1998, as
follows:
<TABLE>
<S> <C>
Service cost................................................ $183
Interest cost............................................... 392
Amortization of transition obligation....................... 116
Amortization of unrecognized prior service cost............. (4)
Expected return on assets................................... (216)
----
Net periodic postretirement benefit cost................ $471
====
</TABLE>
At the time of adoption of SFAS 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, the Company elected to amortize the
transition obligation, at the date of implementation, over 20 years.
In accordance with the purchase agreement with ALEC (see Note 13), the
purchaser assumes the liability for postretirement benefits related to employees
that retire subsequent to the closing date.
F-34
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
8. CERTAIN TRANSACTIONS
The Company purchases certain plant materials and other services (including
certain operating expenses) from PTI, CenturyTel, and other affiliated
companies. Materials and services purchased by the Company from PTI prior to
acquisition and CenturyTel and its subsidiaries subsequently totaled
approximately $9,227 for the year ended December 31, 1996, $8,581 for the eleven
months ended November 30, 1997, $1,626 for the one month ended December 31,
1997, and $29,306 (which included $15,648 of operating expenses) during the year
ended December 31, 1998. Many of the costs that are allocated to the Alaska
companies are based on time distribution and are, therefore, representative of
what costs would have been on a stand-alone basis. General and administrative
costs are allocated based on expense levels of all companies. Such costs, when
allocated to the subsidiaries, include a reasonable rate of return on investment
to the related affiliate and, therefore, are representative of what costs would
have been on a stand-alone basis.
Prior to the Acquisition, short-term advances were made to PTI under an
agreement providing interest at the prime commercial rate for funds held more
than 90 days. Interest income on these advances was $1,052 during the year ended
December 31, 1996, $797 during the eleven months ended November 30, 1997, and
$81 during the one month ended December 31, 1997.
Subsequent to the Acquisition, the Company participates in a Central
Depository Account ("CDA") with CenturyTel and other affiliates. The Company is
assessed or receives interest on the net amount of its CDA balance and the net
accounts receivable or payable to CenturyTel and its affiliates. Related
interest income amounted to $2,156 for the year ended December 31, 1998. The
rate used to calculate the related interest income was the three month U.S.
T-Bill rate. Related interest expense amounted to $637 for the year ended
December 31, 1998. The rate used to calculate the related interest expense was
the weighted average rate of CenturyTel's debt.
9. BUSINESS AND CREDIT CONCENTRATIONS
The Company provides telephone services to customers (business and
residential) located in the state of Alaska. Receivables from connecting
companies represent the amounts due from various long distance carriers such as
AT&T and the Bell operating companies.
The ultimate realization of the Company's balance in the CDA discussed above
is dependent upon the financial resources of CenturyTel.
10. COMMITMENTS AND CONTINGENCIES
Expenditures for property, plant, and equipment are anticipated to be
approximately $19,469 for telephone operations and $615 for wireless operations
during 1999.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect on the
Company's financial position or results of operations.
F-35
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company's operations are subject to federal, state and local laws and
regulations governing the use, storage, disposal of, and exposure to, hazardous
materials, the release of pollutants into the environment and the remediation of
contamination. As an owner or operator of property and a generator of hazardous
wastes, the Company could be subject to certain environmental laws that impose
liability for the entire cost of cleanup at contaminated sites, regardless of
fault or the lawfulness of the activity that resulted in contamination. The
Company believes, however, that its operations are in substantial compliance
with applicable environmental laws and regulations and that there is no material
exposure to loss related to environmental issues.
Many of the Company's properties formerly contained, or currently contain,
underground and aboveground storage tanks used for the storage of fuel or
wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.
11. BUSINESS SEGMENTS
The Company is engaged in providing local exchange telephone services and
cellular telephone services in Alaska. The following tables illustrate selected
financial data for each segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 TELEPHONE CELLULAR TOTAL
- ---------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $ 75,950 $4,823 $ 80,773
Depreciation and amortization............................... 14,383 965 15,348
Operating income............................................ 19,778 477 20,255
Capital expenditures........................................ 19,694 771 20,465
</TABLE>
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED NOVEMBER 30, 1997 TELEPHONE CELLULAR TOTAL
- ------------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $ 79,330 $5,120 $ 84,450
Depreciation and amortization............................... 15,090 733 15,823
Operating income............................................ 21,836 1,305 23,141
Capital expenditures........................................ 14,225 350 14,575
</TABLE>
<TABLE>
<CAPTION>
ONE MONTH ENDED DECEMBER 31, 1997 TELEPHONE CELLULAR TOTAL
- --------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $ 10,255 $ 181 $ 10,436
Depreciation and amortization............................... 2,375 91 2,466
Operating income (loss)..................................... 1,446 (57) 1,389
Capital expenditures........................................ 1,732 93 1,825
Total assets................................................ 450,155 9,020 459,175
</TABLE>
F-36
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
11. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 TELEPHONE CELLULAR TOTAL
- ---------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $121,933 $2,576 $124,509
Depreciation and amortization............................... 29,734 725 30,459
Operating income (loss)..................................... 20,190 (276) 19,914
Capital expenditures........................................ 26,664 135 26,799
Total assets................................................ 470,649 2,011 472,660
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998 TELEPHONE CELLULAR TOTAL
- --------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $ 27,967 $ 408 $ 28,375
Depreciation and amortization............................... 7,069 140 7,209
Operating income (loss)..................................... 4,447 (62) 4,385
Capital expenditures........................................ 2,225 96 2,321
Total assets................................................ 458,847 1,972 460,819
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 TELEPHONE CELLULAR TOTAL
- --------------------------------- --------- -------- ---------
<S> <C> <C> <C>
Operating revenues.......................................... $ 30,815 $ 546 $ 31,361
Depreciation and amortization............................... 7,643 142 7,785
Operating income (loss)..................................... 5,902 8 5,910
Capital expenditures........................................ 2,194 6 2,200
Total assets................................................ 471,652 2,017 473,669
</TABLE>
The following is a reconciliation of operating income to income before
income tax expense:
<TABLE>
<CAPTION>
ELEVEN THREE MONTHS
MONTHS ONE MONTH ENDED
YEAR ENDED ENDED ENDED YEAR ENDED MARCH 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, -------------------
1996 1997 1997 1998 1998 1999
------------ ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating income................. $20,255 $23,141 $1,389 $19,914 $4,385 $5,910
Interest expense................. (3,176) (3,027) (253) (3,588) (797) (965)
Interest income.................. 1,180 858 82 2,183 495 607
Other income (expense), net...... (33) (298) 53 356 357 80
------- ------- ------ ------- ------ ------
Income before income tax
expense........................ $18,226 $20,674 $1,271 $18,865 $4,440 $5,632
======= ======= ====== ======= ====== ======
</TABLE>
12. ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of SFAS 71. While the ongoing applicability of
SFAS 71 to the Company's telephone operations is being monitored due to the
changing regulatory, competitive, and legislative
F-37
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
12. ACCOUNTING FOR THE EFFECTS OF REGULATION (CONTINUED)
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of SFAS 101, REGULATED
ENTERPRISES--ACCOUNTING FOR THE DISCONTINUANCE OF APPLICATION OF FASB STATEMENT
NO. 71, would require the write-off of previously established regulatory assets
and liabilities, along with an adjustment of certain accumulated depreciation
accounts to reflect the difference between recorded depreciation and the amount
of depreciation that would have been recorded had the Company's telephone
operations not been subject to rate regulation. Regulatory assets were
$45,600,000, and regulatory liabilities were $880,000. Such discontinuance of
the application of SFAS 71 would result in a material, noncash charge against
earnings which would be reported as an extraordinary item. While the effect of
implementing SFAS 101 cannot be precisely estimated at this time, management
believes that the noncash, after-tax, extraordinary charge would be between
$25,000 and $28,000.
13. ACQUISITIONS AND DISPOSITIONS
On September 8, 1997, the Company acquired the outstanding stock of
Polarnet, Inc., an Internet service provider. The purchase price was
approximately $1,100 and was accounted for by the purchase method. The excess of
the purchase price over the estimated fair value of net assets acquired amounted
to approximately $968, which is included in goodwill. The results of operations
of Polarnet, Inc. from September 8, 1997 are included in the statement of
income.
On October 6, 1997, PTI acquired the net assets of the local exchange
utilities ("PTI-Fairbanks") from the City of Fairbanks. The purchase price was
approximately $87 million and was accounted for by the purchase method. The
excess of the purchase price over the estimated fair value of net assets
acquired amounted to approximately $31 million, which is included in goodwill.
The results of operations of PTI-Fairbanks from October 6, 1997 are included in
the statements of income. Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................. $86,750
Cash paid for net assets.................................. (85,000)
-------
Liabilities assumed..................................... $ 1,750
=======
</TABLE>
On December 1, 1997, PTI was sold to CenturyTel for approximately
$2.2 billion (including assumed debt). As a result of this transaction, the
Company recorded all previously retained earnings as paid-in capital and pushed
down excess costs of approximately $208 million to the Alaskan entities to
reflect the change from PTI's to CenturyTel's basis of accounting.
In August 1998 CNI and CT Wireless entered into a definitive agreement to
sell the stock of the Company to ALEC for approximately $409 million, subject to
certain adjustments. The transaction is anticipated to close in 1999 subject to
regulatory approvals and various closing conditions.
F-38
<PAGE>
CENTURYTEL ALASKA PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, ELEVEN MONTHS ENDED NOVEMBER 30, 1997,
ONE MONTH ENDED DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(INFORMATION AS OF MARCH 31, 1998 AND 1999 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
14. YEAR 2000 (UNAUDITED)
The Company has initiated a plan ("Year 2000 Plan") to identify, assess, and
remediate "Year 2000" issues within each of its significant computer programs
and certain equipment which contain micro-processors. The Year 2000 Plan is
addressing the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000, if a program or
chip uses only two digits rather than four to define the applicable year. The
Company has divided the Year 2000 Plan into four major phases--assessment,
planning, implementation, and testing. After completing the assessment and
planning phases earlier this year, the Company is currently in the
implementation and testing phases. Systems which have been determined not to be
Year 2000 compliant are being either replaced or reprogrammed, and thereafter
tested for Year 2000 compliance. The Year 2000 Plan anticipates that by
October 1999 the implementation and testing phases will be completed.
The Company is identifying and contacting critical suppliers and customers
whose computerized systems interface with the Company's systems, regarding their
plans and progress in addressing their Year 2000 issues. The Company has
received varying information from such third parties on the state of compliance
or expected compliance. Contingency plans are being developed in the event that
any critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity, and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether consequences of Year 2000 failures will
have a material impact on the Company's operations, liquidity, or financial
condition.
15. BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for
the three months ended March 31, 1998 and 1999 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year or for any future period.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Century Telephone Enterprises, Inc.
Monroe, Louisiana
We have audited the combined balance sheet of Telephone Fund of Fairbanks
Municipal Utilities Services (the "Company") as of October 6, 1997, and the
related combined statements of income and fund equity and of cash flows for the
period ended October 6, 1997 and the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Telephone Fund of
Fairbanks Municipal Utilities Services as of October 6, 1997, and the results of
their operations and their cash flows for the period ended October 6, 1997 and
the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Portland, Oregon
March 25, 1999
F-40
<PAGE>
TELEPHONE FUND OF FAIRBANKS
MUNICIPAL UTILITIES SERVICES
COMBINED BALANCE SHEET
OCTOBER 6, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable:
Customers, less allowance for doubtful accounts of
$156................................................... $ 903
Connecting companies and other.......................... 1,949
Material and supplies (at cost)........................... 2,608
Prepayments............................................... 23
-------
Total current assets.................................. 5,483
PROPERTY, PLANT, AND EQUIPMENT, Net......................... 50,279
-------
$55,762
=======
LIABILITIES AND FUND EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 290
Accrued expenses and other accrued liabilities............ 2,869
Advance billings and customer deposits (Note 1)........... 1,140
Capital leases............................................ 262
-------
Total current liabilities............................. 4,561
DEFERRED CREDIT (Note 1).................................... 1,180
FUND EQUITY................................................. 50,021
-------
$55,762
=======
</TABLE>
See accompanying notes to combined financial statements.
F-41
<PAGE>
TELEPHONE FUND OF FAIRBANKS
MUNICIPAL UTILITIES SERVICES
COMBINED STATEMENTS OF INCOME AND FUND EQUITY
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 6,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES--Telephone............................... $28,602 $22,796
OPERATING EXPENSES:
Cost of sales and operating expenses--telephone........... 17,678 14,074
Depreciation and amortization............................. 5,172 4,249
------- -------
Total operating expenses................................ 22,850 18,323
------- -------
OPERATING INCOME............................................ 5,752 4,473
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1,552) (1,520)
Interest income........................................... 462 416
Other income (expense), net............................... 555 217
------- -------
Total other expense..................................... (535) (887)
------- -------
NET INCOME.................................................. 5,217 3,586
------- -------
FUND EQUITY, BEGINNING OF YEAR.............................. 48,298 49,690
DIVIDENDS................................................... (3,825) (3,255)
------- -------
FUND EQUITY, END OF YEAR.................................... $49,690 $50,021
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-42
<PAGE>
TELEPHONE FUND OF FAIRBANKS
MUNICIPAL UTILITIES SERVICES
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
1996 OCTOBER 6, 1997
------------ ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 5,216 $3,586
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 5,172 4,249
Change in current assets and liabilities:
Accounts receivable................................... 167 996
Accounts payable...................................... (563) (2,133)
Other current assets and liabilities, net............. 132 529
------- ------
Net cash provided by operating activities........... 10,124 7,227
------- ------
INVESTING ACTIVITIES:
Payments for property, plant, and equipment............... (6,023) (3,452)
------- ------
FINANCING ACTIVITIES:
Dividends paid to MUS..................................... (3,825) (3,255)
Payments of lease obligation.............................. (276) (520)
------- ------
Net cash used in financing activities............... (4,101) (3,775)
------- ------
INCREASE (DECREASE) IN CASH................................. -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ -- --
------- ------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ -- $ --
======= ======
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Telephone Utility of Fairbanks Municipal Utilities Services' (the
"Company") primary business is to provide telephone service to its customers who
are located in the City of Fairbanks and surrounding local areas. The Company's
telephone operations are regulated in nature and its telephone accounting
records are maintained in accordance with the rules and regulations of the
Alaska Public Utilities Commission ("APUC") which substantially adhere to the
rules and regulations of the Federal Communications Commission. The Company's
regulated operations are subject to the provisions of Statement of Financial
Accounting Standards No. 71 ("SFAS 71"), ACCOUNTING FOR THE EFFECTS OF CERTAIN
TYPES OF REGULATION. In an asset purchase agreement effective October 6, 1997,
the Company was sold by the Municipal Utilities System ("MUS"), an enterprise
fund of the City of Fairbanks, to PTI Communications of Alaska, Inc. and began
doing business as PTI-Fairbanks. The financial statements do not reflect any
purchase adjustments from this transaction. The financial statements also
exclude the cellular fund which operates the RSA #1 A-Side cellular property
site license.
The accompanying financial statements represent the financial position of
the Company as of October 6, 1997 and the results of its operations and cash
flows for the period ended October 6, 1997 and the year ended December 31, 1996.
A summary of significant accounting policies followed by the Company is set
forth below:
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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. Actual results could differ from those estimates.
PROPERTY, PLANT, AND EQUIPMENT--The Company states its property, plant and
equipment at cost. Additions to plant include direct costs and related indirect
charges. Depreciation is provided using the straight-line method based primarily
on the estimated service lives of the various classes of depreciable assets. The
composite depreciation rate for depreciable telecommunications plant was 5.7%
for the period ended October 6, 1997 and 4.9% for the year ended 1996.
INCOME TAXES--As MUS is a public entity, it is exempt from paying any
federal, state or local taxes. In place of property taxes, MUS makes a payment
in lieu of taxes (see Note 2).
REVENUE RECOGNITION--The Company participates in access revenue pools for
certain interstate and intrastate revenues, which are initially recorded based
on estimates. Certain network access revenues are estimated under cost
separations procedures that base revenues on current operating costs and
investments in facilities to provide such services. These estimates are derived
from interim financial statements, available separations studies and the most
recent rate of return published by the National Exchange Carriers Association.
These estimates are subject to subsequent adjustment in future accounting
periods as refined operational information becomes available. Any subsequent
adjustments have not been material.
ADVANCE BILLINGS--Advance billings creditable to revenue accounts in future
months are recorded in advance billings until the service is rendered.
F-44
<PAGE>
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED CREDIT--In prior years contributions were made by outside third
parties to fund construction of certain property, plant, and equipment of the
Company. These contributions have been recorded as a deferred credit and are
being amortized over the lives of the funded assets.
2. TRANSACTIONS WITH RELATED PARTIES
The Company purchases certain administrative, engineering, personnel, and
legal services from the City of Fairbanks. These services, which are charged at
cost to various capital and expense accounts, were $596 for the period ended
October 6, 1997 and $853 for the year ended December 31, 1996.
The Company makes payments in lieu of taxes at 4% of gross revenue, with
payments capped at $2,243, plus a 3% supplemental, with payments capped at
$1,300 for all utilities. Payments in lieu of taxes to the City of Fairbanks
General Fund by the Company amounted to $1,536 for the period ended October 6,
1997 and $1,715 for the year ended December 31, 1996.
MUS also allocates interest expense on revenue bonds as well as interest
income earned on short-term investments to each of its utilities as part of its
centralized cash management program. The amount of interest expense and income
allocated to the Company was $1,520 and $416 during the period ended October 6,
1997 and $1,552 and $462 during the year ended December 31, 1996.
3. PROPERTY, PLANT, AND EQUIPMENT, NET
The balances by category of property, plant, and equipment, net at
October 6, 1997 are:
<TABLE>
<S> <C>
Central office equipment.................................... $25,533
Poles, cable, and conduit................................... 60,195
Buildings................................................... 6,675
Office furniture, equipment, and other...................... 25,884
Construction work in progress............................... 4,897
-------
Total property, plant, and equipment, gross............... 123,184
Accumulated depreciation.................................... (72,905)
-------
Property, plant, and equipment, net....................... $50,279
=======
</TABLE>
4. EMPLOYEE BENEFIT PLANS
All permanent employees of the Company are eligible to participate as
members of the State of Alaska Public Employees Retirement System ("PERS"), a
defined benefit agent multiple-employer public employee retirement system that
acts as a common investment and administrative agent for the State of Alaska and
any political subdivision or public organization that elects to join the system.
Eligible employees contribute 6.75% of their gross salary to PERS. The Company
is required to contribute the remaining amounts necessary to fund PERS, using
the actuarial basis specified by the PERS Board. Because actuarial information
regarding the status of the PERS plan
F-45
<PAGE>
TELEPHONE FUND OF FAIRBANKS MUNICIPAL UTILITIES SERVICES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 AND PERIOD ENDED OCTOBER 6, 1997
(DOLLARS IN THOUSANDS)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
is computed for the Plan in total, the Company does not separately determine its
portion of the actuarial present value for the accumulated plan benefits,
projected benefit obligation, or net assets available for benefits. At June 30,
1997, the date of the latest actuarial evaluation for the Plan, Plan assets of
$70,726 exceeded the projected benefit obligation by approximately $33,837.
Certain employees of the Company are members of the International
Brotherhood of Electrical Workers ("IBEW") and are eligible to participate in
two different union-sponsored multiple employer defined benefit plans, a pension
plan and a thrift plan. Under the pension plan, the Company contributed between
$4 and $5.09 per compensable hour to the Alaska Electrical Pension Fund and the
total contribution was $782 for the period ended October 6, 1997 and $864 for
the year ended December 31, 1996. Under the thrift plan, the Company pays a
minimum of 4% of the participant's gross wages into the plan plus after one year
it matches the employee's contributions, to a maximum of 3%. The Company's
contributions to the thrift plan was $332 for the period ended October 6, 1997
and $298 for the year ended December 31, 1996.
5. EMPLOYEES' DEFERRED COMPENSATION
The Company offers its employees three deferred compensation plans which are
part of the MUS multiemployer plan. The plans are available to all Company
employees and permit them to defer a portion of their salary until future years.
Participants' rights under the plans are equal to those of general creditors of
MUS in an amount equal to the fair market value of the deferred account for each
participant. The fair market value of both the assets and liabilities for the
Plan in total at October 6, 1997 was $13,247.
6. COMMITMENTS AND CONTINGENCIES
Expenditures under the Company's 1998 construction and capital expenditure
program are expected to approximate $7,193.
* * * * * *
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Honorable Mayor and Members of the Assembly
Municipality of Anchorage:
We have audited the accompanying balance sheets of the Municipality of
Anchorage Telephone Utility Fund (Utility) as of December 31, 1998 and 1997, and
the related statements of revenues, expenses, and changes in retained earnings,
and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Utility's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
The financial statements present only the Municipality of Anchorage
Telephone Utility Fund and are not intended to present fairly the financial
position and results of operations of the Municipality of Anchorage in
conformity with generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Municipality of
Anchorage Telephone Utility Fund as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Anchorage, Alaska
February 19, 1999
F-47
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................................... $ 10,474 $ 25,755 $ 23,034
Accounts receivable, net of uncollectibles of $1,586,
$1,343 and $1,735 in 1998, 1997 and March 31, 1999..... 21,216 23,733 24,026
Inventories.............................................. 4,415 3,074 3,138
-------- -------- --------
Total current assets................................... 36,105 52,562 50,198
RESTRICTED CASH............................................ 2,067 754 492
RESTRICTED INVESTMENTS..................................... 12,895 14,838 16,817
NET TELEPHONE PLANT........................................ 250,669 257,703 255,184
OTHER ASSETS
Cellular licenses........................................ 9,670 16,315 16,203
Minority investments..................................... 7,983 5,535 5,107
Other.................................................... 3,735 2,538 2,695
-------- -------- --------
Total other assets..................................... 21,388 24,388 24,005
-------- -------- --------
TOTAL ASSETS............................................... $323,124 $350,245 $346,696
======== ======== ========
FUND EQUITY AND LIABILITIES
CURRENT LIABILITIES
Accounts payable......................................... $ 23,211 $ 24,366 $ 22,967
Accrued interest......................................... 1,730 2,227 1,779
Compensated absences payable............................. 3,297 2,786 2,857
Accrued employee benefits................................ 2,141 1,938 2,313
Advance billings and customer deposits................... 4,386 4,523 3,790
Current installments of long-term obligations............ 16,719 17,614 17,249
-------- -------- --------
Total current liabilities.............................. 51,484 53,454 50,955
LONG-TERM OBLIGATIONS...................................... 135,226 154,907 150,369
FUND EQUITY
Retained Earnings........................................ 136,414 141,884 145,372
-------- -------- --------
TOTAL FUND EQUITY AND LIABILITIES.......................... $323,124 $350,245 $346,696
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES
Local telephone.................... $113,415 $116,555 $121,057 $ 29,735 $ 30,364
Cellular........................... 16,897 21,845 29,225 5,879 6,710
Long distance...................... 2 1,541 6,815 1,144 2,683
-------- -------- -------- -------- --------
Total operating revenue.......... 130,314 139,941 157,097 36,758 39,757
OPERATING EXPENSES
Cost of sales and operating
expenses--local.................. 75,980 74,994 74,240 18,231 18,844
Cost of sales and operating
expenses--cellular............... 12,379 14,455 19,961 4,048 4,740
Cost of sales and operating
expenses--long distance.......... 543 4,644 10,395 1,898 3,243
Depreciation and amortization...... 20,496 26,839 29,608 7,099 7,434
-------- -------- -------- -------- --------
Total operating expenses......... 109,398 120,932 134,204 31,276 34,261
-------- -------- -------- -------- --------
OPERATING INCOME..................... 20,916 19,009 22,893 5,482 5,496
Interest expense................... (9,187) (9,308) (9,394) (2,448) (1,996)
Equity in earnings (loss) of
minority investments............. (45) 158 (2,945) (250) (509)
Interest income.................... 2,347 2,540 2,967 608 411
Other income (expense), net........ (174) (281) 49 67 86
-------- -------- -------- -------- --------
Net other expense................ (7,059) (6,891) (9,323) (2,023) (2,008)
-------- -------- -------- -------- --------
NET INCOME......................... 13,857 12,118 13,570 3,459 3,488
======== ======== ======== ======== ========
RETAINED EARNINGS, JANUARY 1......... 126,839 132,596 136,414 136,414 141,884
Utility Revenue Distribution to
Municipality of Anchorage.......... (8,100) (8,300) (8,100) -- --
-------- -------- -------- -------- --------
RETAINED EARNINGS, PERIOD END........ $132,596 $136,414 $141,884 $139,873 $145,372
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------ -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income from operations................................ $20,477 $19,005 $22,548 $ 5,629 $ 5,666
Adjustments to reconcile income from operations to
net cash provided by operating activities
Depreciation and amortization....................... 20,496 26,839 29,608 7,099 7,434
Provision for uncollectible accounts................ 1,112 1,113 1,643 441 944
Loss on disposition of fixed assets................. 288 100 174 56 --
Nonregulated income and other....................... 439 43 95 (464) (165)
Changes in assets and liabilities which increase
(decrease) cash Accounts receivable............... (996) (4,040) (4,160) (1,184) (1,237)
Inventory of materials, supplies, and goods
for resale...................................... 159 (504) 1,341 63 (64)
Other assets...................................... (364) 120 1,244 751 (157)
Accounts payable.................................. (25) 4,172 1,155 (4,290) (1,399)
Accrued employee benefits and compensated
absences payable................................ 1,198 194 (713) 408 446
Customer deposits................................. (620) (262) (292) (115) (733)
Advance billings.................................. 306 558 428 -- --
Other liabilities................................. (350) (697) 136 -- --
------- ------- ------- -------- --------
Net cash provided by operating activities............... 42,120 46,641 53,207 8,394 10,735
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from noncapital financing activities
Utility revenue distribution--Municipality of
Anchorage......................................... (8,100) (8,300) (8,100) -- --
Cash flows from capital and related financing
activities
Acquisition of telephone plant...................... (24,958) (35,187) (29,644) 8,404 3,383
Short-term advance from Municipality of Anchorage
General Fund...................................... (12,000) -- -- -- --
Principal payments on long-term obligations......... (22,002) (19,617) (17,340) (2,497) (6,475)
Bond issuance....................................... 43,659 24,790 29,592 29,592 --
Interest payments on long-term obligations.......... (6,513) (7,952) (8,011) (2,060) (2,292)
Cost of removal of telephone plant.................. (181) (650) (77) -- --
------- ------- ------- -------- --------
Net cash provided (used) by capital and related
financing activities.................................. (21,995) (38,616) (25,480) 16,631 (12,150)
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest.............................................. 2,347 2,325 2,968 744 411
Minority investments.................................. (2,398) (5,227) (7,283) (7,283) --
Proceeds from sale of restricted investments.......... 12,865 12,109 13,912 13,912 15,655
Purchase of restricted investments.................... (13,601) (12,872) (15,256) (15,417) (17,634)
------- ------- ------- -------- --------
Net cash used by investing activities................... (787) (3,665) (5,659) (8,044) (1,568)
------- ------- ------- -------- --------
NET CHANGE IN CASH...................................... 11,238 (3,940) 13,968 16,981 (2,983)
CASH, JANUARY 1......................................... 5,243 16,481 12,541 12,541 26,509
------- ------- ------- -------- --------
CASH, PERIOD END (including Restricted Cash
(see Note 1))......................................... $16,481 $12,541 $26,509 $ 29,522 $ 23,526
======= ======= ======= ======== ========
NON-CASH CAPITAL, FINANCING, AND INVESTING ACTIVITIES
Retirement of telephone plant......................... $ 7,124 $ 9,077 $ 3,401 $ -- $ --
Write down of long-term investments................... -- -- 1,888 -- --
Financed equipment purchased.......................... -- -- 6,655 -- 1,420
------- ------- ------- -------- --------
Total Non-cash Capital, Financing, and Investing
Activities.......................................... $ 7,124 $ 9,077 $11,944 $ -- $ 1,420
======= ======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The accompanying financial statements include the activities of the
Telephone Utility Fund (Utility), a public utility of the Municipality of
Anchorage (Municipality), ATU Communications, Inc. (ACI), a holding company,
MACtel, Inc. (MACtel) and ATU Long Distance, Inc. (ATU LD), wholly owned
subsidiaries of ACI. All significant intercompany transactions have been
eliminated.
The regulated arm of the Utility provides local telecommunications service
and access to long distance telecommunications service to the Anchorage Bowl
area and to Girdwood and other small communities in the area south of the
Anchorage Bowl both inside and outside the boundaries of the Municipality. The
nonregulated arm of the Utility sells, rents, and leases customer premise
equipment to customers throughout the State of Alaska. MACtel is a
wholesale/retail cellular service provider that operates in Anchorage, the Kenai
Peninsula, and the North Star and North Slope Boroughs. ATU LD provides long
distance service to customers in Anchorage, Fairbanks, Juneau, the Kenai
Peninsula and the Matanuska Valley. Approximately 70% of the Utility's employees
are covered under a labor contract with the International Brotherhood of
Electrical Workers (IBEW) which expires on August 31, 1999.
On January 5, 1998, MACtel acquired certain assets of Pacific Telecom
Cellular of Alaska RSA #1, Inc. and stock of Prudhoe Communications, Inc.,
collectively d/b/a Cellulink, a cellular service company in Fairbanks, Alaska
for $8,900.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Property and equipment...................................... $1,817
Cellular licenses........................................... 7,083
------
$8,900
======
</TABLE>
Results of operations for the acquired companies have been included in 1998
operations since the date of acquisition. Pro forma information for prior
periods is not presented because it is not material.
SALE OF UTILITY
During 1998, the Municipal Assembly accepted a bid in the amount of $295,000
from Alaska Communications Systems, Inc. to acquire substantially all of the
assets and assume substantially all of the liabilities of the Utility. The sale
will become effective after review and approval by the Alaska Public Utilities
Commission (APUC), the Federal Communications Commission (FCC), and non-action
by the United States Department of Justice under the Hart-Scott-Rodino Act. The
sales price will be adjusted based upon levels of cash and net plant on the
closing date.
F-51
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REGULATION
The Utility is subject to rate regulation by the FCC for interstate
telecommunication service, and the APUC for intrastate and local exchange
telecommunication service. The Utility, as required by the FCC, accounts for
such activity separately.
The services of ATU LD are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the APUC for intrastate telecommunication services. The operations of MACtel are
not subject to rate regulation.
BASIS OF ACCOUNTING
The accounting records of the Utility conform to Part 32 Uniform System of
Accounts as prescribed by the FCC and the APUC.
The accompanying financial statements are prepared on the accrual basis of
accounting. The accounting policies of the Utility are in conformity with the
requirements of the FCC and the APUC. The Utility prepares its financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation". Accounting
under SFAS No. 71 is appropriate as long as rates are established by or subject
to approval by independent third-party regulators; rates are designed to recover
the specific enterprise's cost-of-service; and in view of demand for service, it
is reasonable to assume that rates are set at levels that will recover costs and
can be collected from customers.
Under Governmental Accounting Standards Board (GASB) Statement No. 20,
ACCOUNTING AND FINANCIAL REPORTING FOR PROPRIETARY FUNDS AND OTHER GOVERNMENTAL
ENTITIES THAT USE PROPRIETARY FUND ACCOUNTING, the Utility applies all
applicable GASB pronouncements and all Financial Accounting Standards Board
(FASB) Statements and Interpretations, Accounting Principles, Board Opinions and
Accounting Research Bulletins, unless they conflict with or contradict GASB
pronouncements. ATU follows the provisions of GASB Statement No. 27 to account
for pension and post-retirement costs, which differs from FAS Statement No. 87
and FAS Statement No. 106 regarding the methodology for calculation of such
costs and how they are recorded and disclosed. Specifically, GASB Statement No.
27 requires that annual pension cost be equal to the annual required
contributions of the employer (ARC) to the plan for that year calculated via an
actuarial valuation performed in accordance with specific parameters. These
parameters address such matters as the frequency of actuarial valuations,
acceptable actuarial cost methods, asset valuation methodology, minimum and
maximum amortization periods and the amortization method. Generally, employers
are required to record a net pension obligation (NPO) if the ARC calculated in
accordance with the parameters exceeds actual contributions made. Annual pension
cost is calculated as the ARC, one year's interest on the NPO, and certain
required adjustments. Under GASB Statement No. 27, employers are permitted to
apply the measurement and recognition requirements of GASB Statement No. 27 to
postemployment healthcare benefits.
F-52
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to GASB Statement No. 27, the Municipality of Anchorage Telephone
Utility Fund recorded annual pension cost of $1,041,000 for the year ended
December 31, 1998, of which $749,520 related to pension benefits and $291,480
related to postemployment healthcare benefits. As of December 31, 1998 and 1997,
there is no NPO.
Under FASB Statement No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS, the
following components are included in the net pension cost recognized for a
period by an employer sponsoring a defined benefit pension plan:
- Service cost
- Interest cost
- Actual return on plan assets, if any
- Amortization of unrecognized prior service cost, if any
- Gain or loss (including the effects of changes in assumptions) to the
extent recognized
- Amortization of the unrecognized net obligation (and loss or cost) or
unrecognized net asset (and gain) existing at the date of initial
application of FASB Statement No. 87.
The service component of net periodic pension cost, the projected benefit
obligation, and the accumulated benefit obligation are based on an attribution
of pension benefits to periods of employee service and on the use of actuarial
assumptions to calculate the actuarial present value of those benefits.
Actuarial assumptions reflect the time value of money (discount rate) and the
probability of payments (assumptions as to mortality, turnover, early
retirement, and so forth).
Under FASB Statement No. 87, a liability (unfunded accrued pension cost) is
recognized if net periodic pension cost recognized pursuant to FASB Statement
No. 87 exceeds amounts the employer has contributed to the plan. An asset
(prepaid pension cost) is recognized if net periodic pension cost is less than
amounts the employer has contributed to the plan.
If the accumulated benefit obligations exceeds the fair value of plan
assets, the employer shall recognize in the statement of financial position a
liability (including unfunded accrued pension cost) that is at least equal to
the unfunded accumulated benefit obligation. Recognition of an additional
minimum liability is required in certain other circumstances.
Accounting for postretirement benefits pursuant to FASB Statement No. 106,
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, is
similar to the accounting proscribed for pension benefits in accordance with
FASB Statement No. 87.
It is not practicable to quantify the differences between the statements
without an additional complete actuarial valuation because the actuarial
calculations for FAS Statement No. 87 purposes require different assumptions and
represent different measurement bases. Other differences between GASB and FAS
have been evaluated and have been determined not to be material for the periods
presented.
F-53
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates. The more significant accounting and reporting
policies and estimates applied in the preparation of the accompanying financial
statements are discussed below.
CASH POOLS AND RESTRICTED INVESTMENTS
The Municipality uses a central treasury to account for all cash and
investments to maximize interest income. Interest income from cash pool
investments is allocated to the Utility based on its monthly closing cash pool
equity balance. Restricted investments are recorded at fair value. All amounts
in the cash pools and in restricted investments are interest bearing and consist
primarily of repurchase agreements, banker's acceptances or U.S. Government
securities. The Utility adopted GASB Statement No. 31, ACCOUNTING AND FINANCIAL
REPORTING FOR CERTAIN INVESTMENTS AND FOR EXTERNAL INVESTMENT POOLS, during
1998. The impact of adopting this statement was not material to the financial
statements.
Under GASB Statement No. 3, DEPOSITS WITH FINANCIAL INSTITUTIONS,
INVESTMENTS (INCLUDING REPURCHASE AGREEMENTS), AND REVERSE REPURCHASE
AGREEMENTS, the Utility's cash and investments are classified in credit risk
category 1 because they are insured or registered or are securities held by the
Utility or its agent in the Utility's name.
STATEMENT OF CASH FLOWS
The Utility has adopted GASB Statement No. 9, REPORTING CASH FLOWS OF
PROPRIETARY AND NONEXPENDABLE TRUST FUNDS AND GOVERNMENTAL ENTITIES THAT USE
PROPRIETARY FUND ACCOUNTING. For purposes of the statement of cash flows, the
Utility has defined cash as the demand deposits and investments maintained in
the general and construction cash pools, including restricted and unrestricted
balances, as well as cash balances maintained separately from the cash pools.
Maturity periods of investments have been disregarded, since the Utility uses
the general and construction cash pools as demand deposit accounts.
F-54
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Equity in general cash pool................................. $14,427 $ 9,401 $19,254
Cash........................................................ 963 1,073 6,501
------- ------- -------
Total cash.............................................. 15,390 10,474 25,755
Amounts included with restricted investments:
Equity in construction cash pool............................ -- 927 --
Equity in general cash pool reserved for customer
deposits.................................................. 1,091 830 537
Cash included in revenue bond reserve investments........... -- 310 217
------- ------- -------
$16,481 $12,541 $26,509
======= ======= =======
</TABLE>
INVENTORIES
The Utility's inventories, consisting primarily of parts and supplies, are
valued at the lower of weighted average cost or market.
TELEPHONE PLANT
Telephone plant is stated at cost. The additions to telephone plant in
service are recorded at the original cost of contracted services, direct
materials and labor, and indirect overhead charges. When property is retired,
the cost of the property unit, plus removal costs, less salvage, is charged to
accumulated depreciation. Gain or loss on the retirement of regulated telephone
plant is not recognized except for extraordinary retirements.
The Utility's depreciation is computed using the straight-line method over
the estimated lives of the assets. Current rates on regulated plant were
implemented January 1, 1997 and were based on APUC Docket U-96-78. MACtel and
ATU LD property and equipment are depreciated using the straight-line and
declining balance methods over the estimated useful asset lives.
The estimated life in years of major plant and equipment categories follows:
<TABLE>
<CAPTION>
ESTIMATED
PLANT AND EQUIPMENT LIFE
- ------------------- ---------
<S> <C>
Buildings................................................... 56
Central office equipment.................................... 9-10
Cable, wire and conduit..................................... 12-46
Furniture, computers and support equipment.................. 7-22
Vehicles.................................................... 11-19
Leasehold improvements...................................... 2-3
Nonregulated................................................ 3-10
</TABLE>
F-55
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MINORITY INVESTMENTS
Minority investments consist of investments in companies which are accounted
for using the equity method.
CELLULAR LICENSES
Cellular licenses are stated at net book value. Amortization is computed on
the straight-line method over an estimated useful life of 40 years.
DISCOUNT ON REVENUE BONDS PAYABLE
The discount on revenue bonds payable is amortized over the life of the
related bond issue using the effective interest method.
REVENUE RECOGNITION
Recurring revenues are billed one month in advance and are deferred until
the month earned. Nonrecurring revenues are billed in arrears and are recognized
when earned.
During 1998 the Utility participated in both interstate and intrastate
common line pooled settlements. During 1998 the Utility did not participate in
any traffic-sensitive pools. Pooled revenues are based on settlements with the
applicable pool's administrator. Intrastate pooled revenues are settled on a
monthly basis with the Alaska Exchange Carrier Association (AECA) and are final
at the time of settlement. Participation in the AECA pool was discontinued
effective January 1, 1999. Interstate pooled revenues are settled on a monthly
basis with the National Exchange Carrier Association (NECA). The NECA
settlements may be adjusted for a period of up to twenty-four months. Interstate
traffic sensitive revenue is based on rates and charges defined in the Utility's
interstate tariff approved by the FCC. Interstate traffic sensitive revenue is
recognized when earned for both recurring and nonrecurring charges.
To the extent that disputes arise over revenue settlement procedures, the
Utility's policy is to defer revenue collected until settlement methodologies
are resolved and finalized.
MUNICIPAL UTILITY SERVICE ASSESSMENT
The Municipal Utility Service Assessment (MUSA) is assessed by the
Municipality and is calculated based on the net book value of telephone plant in
the prior year. Net book value for each tax district is multiplied by the
current mill rate to determine the assessment. The Utility also pays a gross
receipt tax, which is 1.25% of gross operating revenues, excluding nonregulated
revenues.
ADVERTISING
Advertising costs are expensed in the period in which they are incurred.
F-56
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Internal Revenue Code provides that gross income for tax purposes does
not include income accruing to a state or territory, or any political
subdivision thereof, which is derived from the exercise of any essential
governmental function or from any public utility. The Utility is a public
utility of the Municipality and is therefore exempt from federal and state
income taxes. ACI and its subsidiaries are exempt from federal and state income
taxes because ACI is a holding company owned 100% by the Utility.
GASB NO. 27
The Utility adopted GASB Statement No. 27, ACCOUNTING FOR PENSIONS BY STATE
AND LOCAL GOVERNMENTAL EMPLOYERS, during 1998. GASB No. 27 establishes standards
for the measurement, recognition and display of pension expense and related
liabilities, assets, note disclosure and applicable required supplementary
information in the financial reports of state and local governmental employers.
The impact of adopting GASB No. 27 was not material to the financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS
The Utility has adopted FASB Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
Under the provisions of this statement, the Utility has evaluated its long-lived
assets for financial impairments and will continue to evaluate them if events or
changes in circumstance indicate the carrying amount of such assets may not be
fully recoverable.
RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1997 and 1996
financial statements to conform to the current year's presentation.
F-57
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(2) TELEPHONE PLANT
A summary of telephone plant and equipment at December 31, follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Plant in Service
Cable, wire and conduit............................ $ 166,055 $ 169,705
Central office equipment........................... 124,199 126,364
Buildings.......................................... 43,908 44,207
Furniture, computers and support equipment......... 21,580 21,380
Nonregulated equipment............................. 30,413 36,269
Vehicles........................................... 7,523 7,499
Land............................................... 5,101 5,168
Leasehold improvements............................. 468 741
--------- ---------
399,247 411,333
Less accumulated depreciation...................... (162,990) (187,179)
--------- ---------
Net plant in service............................... 236,257 224,154
Construction work in progress...................... 14,412 33,549
--------- ---------
Net telephone plant................................ $ 250,669 $ 257,703
========= =========
</TABLE>
F-58
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(3) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
Bonds payable:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
1993 Series, effective interest rate of 5.49%, due in
2013.................................................... $ 17,390 $ 16,670
1994 Series, effective interest rate of 4.38%, due in
2010.................................................... 66,210 54,265
1996 Series, effective interest rate of 5.71%, due in
2016.................................................... 42,745 41,430
1997 Series, effective interest rate of 5.18%, due in
2017.................................................... 25,000 24,275
1998 Series, effective interest rate of 4.44%, due in
2010.................................................... -- 30,000
-------- --------
151,345 166,640
Less: Unamortized loss on refunding....................... (2,295) (1,643)
Less: Current portion..................................... (14,705) (16,370)
Less: Unamortized discount................................ (257) (226)
Plus: Unamortized premium................................. 238 678
-------- --------
Net long-term revenue bonds payable......................... 134,326 149,079
-------- --------
Equipment financing obligations, interest rates range from
approximately 4-5%, final payment due in 2004............. -- 6,034
Less: Current portion..................................... -- (1,071)
-------- --------
Net equipment financing obligations......................... -- 4,963
-------- --------
Note payable:
Note payable, effective interest rate of 5.98%, due in
1999.................................................... 2,187 173
Less: Current portion..................................... (2,014) (173)
-------- --------
Net note payable............................................ 173 --
-------- --------
Arbitrage payable........................................... 727 865
-------- --------
Total long-term obligations................................. $135,226 $154,907
======== ========
</TABLE>
F-59
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(3) LONG-TERM OBLIGATIONS (CONTINUED)
Debt service requirements are the following for the years ended December 31:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
--------- -------- ---------
<S> <C> <C> <C>
1999............................................ $ 17,614 $ 8,272 $ 25,886
2000............................................ 17,686 7,592 25,278
2001............................................ 18,381 6,853 25,234
2002............................................ 19,176 6,063 25,239
2003............................................ 9,989 5,152 15,141
2004-2008....................................... 41,461 18,580 60,041
2009-2013....................................... 30,825 9,164 39,989
2014-2017....................................... 17,715 1,720 19,435
-------- ------- --------
$172,847 $63,396 $236,243
======== ======= ========
</TABLE>
The 1993 revenue bond covenants require the establishment of reserves over a
five-year period equal to the maximum annual debt service on all outstanding
bonds. The 1994 refunding bond covenants require establishment of a reserve in
the amount of $9,750. The 1996 revenue bond covenants require an amount equal to
the lesser of $4,400 or the maximum annual debt service to be funded in equal
installments over four years. The 1997 revenue bond covenants require an amount
equal to the lessor of $2,500 or the maximum annual debt service to be funded in
equal installments over four years. The 1998 revenue bond covenants require an
amount equal to the lessor of $3,000 or the maximum annual debt service to be
funded in equal installments over four years. The revenue bond covenants further
stipulate that revenues less expenses will be equal to at least 1.4 times the
debt service requirements for that year. Expenses are defined as costs for
operation and maintenance of the system, excluding depreciation and MUSA for
each year. For the years ended December 31, 1998, 1997 and 1996, the Utility
complied with the revenue bond covenants.
(4) REFUNDING OF LONG-TERM OBLIGATIONS
In 1994, the Utility issued refunding bond issues for the purpose of
redeeming certain bond issues when they become due or callable. The net proceeds
of the refunding bond issue were used to purchase US Government securities which
were deposited in an irrevocable trust with an escrow agent to provide all
future debt service payments on the refunded bonds. Since payment of these
advance refunded issues has been provided, as described above, neither the
liability nor the assets irrevocably pledged, including related interest income
and expense, are reflected in the accompanying financial statements.
Defeased bonds as of December 31, 1998 total $11,390 for the 1990 issue.
F-60
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(5) RETIREMENT PLANS
Substantially all employees are covered by one of the following plans.
INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS (IBEW) PLAN
The IBEW Plan is a union sponsored defined benefit pension plan for members
of the IBEW #1547 Union. The Utility contributed $3.67 per compensable employee
hour to the Alaska Electrical Trust Fund in 1998, 1997 and 1996. Utility
contributions to this plan were $3,130, $3,379 and $3,608 for the years ended
December 31, 1998, 1997 and 1996, respectively. The hourly rate paid by the
Utility is determined by the collective bargaining process. The Utility's
obligation for IBEW employee retirement is limited to the amount paid to the
Alaska Electrical Trust Fund.
STATE OF ALASKA PUBLIC EMPLOYEES' RETIREMENT SYSTEM PLAN
As discussed in note 1, the Utility adopted the provisions of GASB Statement
No. 27, ACCOUNTING FOR PENSIONS BY STATE AND LOCAL GOVERNMENTAL EMPLOYERS (GASB
27), in 1998.
STATE OF ALASKA PUBLIC EMPLOYEES' RETIREMENT SYSTEM
A. PLAN DESCRIPTION
The Utility contributes to the State of Alaska Public Employees' Retirement
System (PERS), a defined benefit, agent multiple-employer public employee
retirement system which was established and is administered by the State of
Alaska (State) to provide pension, postemployment healthcare, death and
disability benefits to eligible employees.
All full-time Utility employees not covered by the IBEW Plan are eligible to
participate in PERS. Benefit and contribution provisions are established by
State law and may be amended only by the State Legislature.
Each fiscal year, PERS issues a publicly available financial report that
includes financial statements and required supplementary information. That
report may be obtained by writing to the State of Alaska, Department of
Administration, Division of Retirement and Benefits, P.O. Box 110203, Juneau,
Alaska, 99811-0203 or by calling (907) 465-4460.
B. FUNDING POLICY AND ANNUAL PENSION COST
Employee contribution rates are 6.75% as required by State statute. The
funding policy for PERS provides for periodic employer contributions at
actuarially determined rates that, expressed as a percentage of annual covered
payroll, are sufficient to accumulate sufficient assets to pay
F-61
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(5) RETIREMENT PLANS (CONTINUED)
benefits when due. The Utility's annual pension cost for the current year and
the related information is as follows:
<TABLE>
<CAPTION>
POSTEMPLOYMENT
PENSION HEALTHCARE
----------------------- --------------
<S> <C> <C>
Contribution rates:
Employee.......................... 4.86% 1.89%
Employer.......................... 6.36% 2.47%
Annual pension cost................. $750 $291
Contributions made.................. $750 $291
Actuarial valuation date............ June 30, 1996 Same
Actuarial cost method............... Projected unit credit Same
Amortization method................. Level dollar, open Same
Amortization period................. Rolling 25 years Same
Asset valuation method.............. 5-year smoothed market Same
Actuarial assumptions:
Inflation rate.................... 4% Same
Investment return................. 8.25% Same
Projected salary increase......... 5.5% N/A
Health cost trend................... N/A 5.5%
</TABLE>
The components of annual pension cost for the year ended December 31, 1998
are as follows:
<TABLE>
<S> <C>
Annual required contribution (ARC).......................... $1,041
Interest on the net pension obligation (NPO)................ --
Adjustment to the ARC....................................... --
------
Annual pension cost (APC)................................... 1,041
Contributions made.......................................... 1,041
Increase in NPO............................................. --
NPO, beginning of year...................................... --
------
NPO, end of year............................................ $ --
======
</TABLE>
F-62
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(5) RETIREMENT PLANS (CONTINUED)
Three year trend information follows:
<TABLE>
<CAPTION>
YEAR ENDED PERCENTAGE OF APC
DECEMBER 31 APC CONTRIBUTED NPO
----------- -------- ----------------- --------
<S> <C> <C> <C> <C>
Pension...................... 1996 $1,032 100% $
1997 827 100% --
1998 750 100% --
Postemployment healthcare.... 1996 $ 382 100% $ --
1997 306 100% --
1998 291 100% --
</TABLE>
In the current year (the transition year), the Utility determined, in
accordance with provisions of GASB No. 27, that no pension liability (asset)
existed to PERS and there was no previously reported liability (asset) to PERS.
Information regarding funding progress follows:
<TABLE>
<CAPTION>
UNFUNDED
ACTUARIAL ACTUARIAL
VALUATION ACTUARIAL ACTUARIAL ACCRUED UAAL AS A
YEAR VALUE ACCRUED LIABILITY PERCENTAGE
ENDED OF PLAN LIABILITY (ASSET) FUNDED COVERED OF COVERED
JUNE 30 ASSETS (AAL) (UAAL) RATIO PAYROLL PAYROLL
--------- --------- --------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pension benefits.................. 1995 $5,417 $4,457 $ (960) 122% $11,288 (9)%
1996 6,656 5,702 (954) 117% 11,436 (8)%
1997 10,180 7,419 (2,761) 137% 12,290 (22)%
Postemployment healthcare
benefits........................ 1995 $2,036 $1,675 $ (361) 122% $11,288 (3)%
1996 2,565 2,198 (367) 117% 11,436 (3)%
1997 3,794 2,765 (1,029) 137% 12,290 (8)%
Total............................. 1995 $7,453 $6,132 $(1,321) 122% $11,288 (12)%
1996 9,221 7,900 (1,321) 117% 11,436 (11)%
1997 13,974 10,184 (3,790) 137% 12,290 (31)%
</TABLE>
(6) OTHER EMPLOYEE BENEFITS
The Municipality offers its employees, including employees of the Utility, a
deferred compensation plan (Plan) created in accordance with Internal Revenue
Code Section 457. The Plan, available to all Municipal employees, permits them
to defer a portion of their salary until future years. The deferred compensation
is not available to employees until termination, retirement, death or
unforeseeable emergency. It is the opinion of the Municipality's legal counsel
that the
F-63
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(6) OTHER EMPLOYEE BENEFITS (CONTINUED)
Municipality has no liability for losses under the Plan but does have the duty
of due care that would be required of an ordinary prudent investor.
The municipality believes that it is unlikely that it will use the assets to
satisfy the claims of general creditors in the future.
In accordance with labor agreements, IBEW employees' medical/dental coverage
is provided through the Alaska Electrical Health and Welfare Trust Fund. Utility
contributions to this fund were $2,859, $3,143 and $2,888 for the years ended
December 31, 1998, 1997 and 1996, respectively.
(7) MINORITY INVESTMENTS
Minority investments held consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998 OWNERSHIP %
-------- -------- -----------
<S> <C> <C> <C>
Alaskan Choice Television, LLC................ $4,627 $2,651 33%
Alaska Network Systems, Inc................... 2,353 2,015 47%
Internet Alaska, Inc.......................... 803 500 30%
Security One, LLC............................. 200 369 20%
------ ------
$7,983 $5,535
====== ======
</TABLE>
The Utility is one of three members of a limited liability company, Alaskan
Choice Television, LLC (ACTV). ACTV has accumulated substantial losses since
inception and is not generating sufficient cash flow to sustain operations.
These factors, among others, indicate that ACTV may be unable to continue as a
going concern for a reasonable period of time. ACTV's continuation as a going
concern is dependent upon its ability to attain additional equity and debt
financing and achieve positive cash flow and profitability. ACTV is in
negotiation with a potential investor who will provide working capital. The
other two members of the limited liability company have agreed to sell their
interests to this investor. ACTV expects to complete this transaction in the
second quarter of 1999. Additionally, ACTV is in discussion with several
financial institutions to provide the necessary debt financing. Pursuant to
Statement of Financial Accounting Principles Board Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock", the Utility assessed the
recoverability of its investment in ACTV during 1998 and adjusted the carrying
value of the investment to its estimated fair value resulting in a noncash
impairment loss of approximately $1,500.
(8) RELATED PARTY TRANSACTIONS
INTRAGOVERNMENTAL CHARGES
Certain general and administrative functions of the Municipality, including
data processing, workers' compensation insurance and medical/dental/life
insurance, are centralized and the related cost is allocated to the various
funds of the Municipality, including the Utility. Such costs allocated
F-64
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
to the Utility totaled $3,187, $3,672, and $3,204 for the years ended
December 31, 1998, 1997, and 1996, respectively.
These costs are allocated to ATU from the Municipality of Anchorage through
an inter-governmental charge system ("IGC") based upon ATU's proportionate share
of certain cost drivers, such as manned positions, building square footage or
number of transactions processed, depending upon the type of cost being
allocated. Certain IGC's are based upon work orders for specific projects
between departments. Management believes that the methodology utilized is
reasonable. It is not practicable to quantify what such costs would have been on
a stand-alone basis.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.
The following methods and assumptions were used by the Utility in estimating
fair value disclosures for financial instruments:
Cash, restricted investments, accounts receivable, accounts payable and
accrued liabilities, accrued interest, customer deposits and accrued
employee benefits--The carrying amounts at December 31, 1998 and 1997
approximate the fair values due to the short maturity of these instruments.
Long-term debt--The fair value of the Utility's long-term debt is
estimated by discounting the future cash flows of the various instruments at
rates currently available to the Utility for similar debt instruments of
comparable maturities.
The carrying amount of long-term debt and its estimated fair value at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Carrying amount....................................... $153,532 $172,847
Fair value............................................ 161,000 181,000
</TABLE>
(10) BUSINESS SEGMENTS
The Utility has adopted FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. The Utility has three reportable
segments: local telephone, long distance and cellular. The accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. Each reportable segment is a strategic business offering
different services and is managed separately.
F-65
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(10) BUSINESS SEGMENTS (CONTINUED)
The following table illustrates selected financial data for each segment.
<TABLE>
<CAPTION>
LOCAL LONG
YEAR ENDED 1996 TELEPHONE DISTANCE CELLULAR TOTAL
- --------------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Operating income (loss)............................. $ 18,975 $ (542) $ 2,483 $ 20,916
Depreciation and amortization....................... 18,460 -- 2,036 20,496
Capital expenditures................................ 22,280 -- 4,992 27,272
Total assets........................................ 278,354 81 30,375 308,810
YEAR ENDED 1997
Operating income (loss)............................. $ 17,850 $(3,218) $ 4,377 $ 19,009
Depreciation and amortization....................... 23,712 114 3,013 26,839
Capital expenditures................................ 28,922 664 6,201 35,787
Total assets........................................ 287,419 1,757 33,948 323,124
YEAR ENDED 1998
Operating income (loss)............................. $ 21,490 $(3,744) $ 5,147 $ 22,893
Depreciation and amortization....................... 25,327 164 4,117 29,608
Capital expenditures................................ 26,751 275 9,431 36,457
Total assets........................................ 295,810 2,532 51,903 350,245
THREE MONTHS ENDED MARCH 31, 1998
Operating income (loss)............................. $ 5,318 $ (753) $ 917 $ 5,482
Depreciation and amortization....................... 6,184 -- 915 7,099
Total assets........................................ 304,132 2,494 44,564 351,190
THREE MONTHS ENDED MARCH 31, 1999
Operating income (loss)............................. $ 5,807 $ (605) $ 916 $ 5,496
Depreciation and amortization....................... 6,335 45 1,054 7,434
Total assets........................................ 292,581 3,083 51,032 346,696
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
CONSTRUCTION COMMITMENTS
The Municipal Assembly has approved the Utility's 1999 capital budget of
$29,200.
CONTINGENCIES
The Utility is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect on the
Utility's financial position or results of operations.
F-66
<PAGE>
MUNICIPALITY OF ANCHORAGE
TELEPHONE UTILITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
(12) BASIS OF PRESENTATION FOR UNAUDITED QUARTERLY INFORMATION
The accompanying unaudited financial information at March 31, 1999 and for
the three months ended March 31, 1998 and 1999 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year or for any future period.
F-67
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 12
Use of Proceeds........................... 21
Dividend Policy........................... 21
Capitalization............................ 22
Dilution.................................. 23
Selected Historical Consolidated Financial
Data--Alaska Communications Systems
Group................................... 24
Selected Historical Combined Financial
Data--Century's Alaska Properties....... 26
Selected Historical Financial Data--ATU... 28
Unaudited Pro Forma Combined Financial
Statements.............................. 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 36
Industry Overview......................... 57
Business.................................. 59
Regulation................................ 72
Management................................ 82
Insider Relationships and Related Party
Transactions............................ 95
Security Ownership by Management and
Principal Stockholders.................. 96
Description of Indebtedness............... 98
Description of Capital Stock.............. 105
Shares Eligible for Future Sale........... 107
U.S. Tax Consequences to Non-U.S.
Holders................................. 109
Validity of Shares........................ 111
Experts................................... 111
Additional Information.................... 113
Underwriting.............................. 114
Index To Financial Statements............. F-1
</TABLE>
10,000,000 Shares
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
CIBC WORLD MARKETS
DEUTSCHE BANC ALEX. BROWN
HAMBRECHT & QUIST
Representatives of the Underwriters
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
common stock being registered, all of which will be paid by the Registrant:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC registration fee........................................ $ 55,600
NASD filing fee............................................. 20,500
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 300,000
Legal fees and expenses..................................... 1,500,000
Accounting fees and expenses................................ 300,000
Blue sky fees and expenses.................................. 5,000
Transfer agent and registrar fees and expenses.............. 30,000
Miscellaneous............................................... 293,900
----------
Total....................................................... $2,600,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation ("DGCL") provides that a
corporation has the power to indemnify its officers, directors, employees and
agents (or persons serving in such positions in another entity at the request of
the corporation) against expenses, including attorney's fees, judgments, fines
or settlement amounts actually and reasonably incurred by them in connection
with the defense of any action by reason of being or having been directors or
officers, if such person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation (and, with respect to any criminal action, had no reasonable cause
to believe the person's conduct was unlawful), except that if such action shall
be by or in the right of the corporation, no such indemnification shall be
provided as to any claim, issue or matter as to which such person shall have
been judged to have been liable to the corporation unless and to the extent that
the Court of Chancery of the State of Delaware, or another court in which the
suit was brought, shall determine upon application that, in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity. The Registrant's Amended and Restated Certificate of Incorporation
provides that the Registrant will indemnify its officers and directors to the
fullest extent permitted by Delaware law.
As permitted by Section 102 of the DGCL, the Registrant's Amended and
Restated Certificate of Incorporation provides that no director shall be liable
to the Registrant or its stockholders for monetary damages for any breach of
fiduciary duty as a director other than (i) for breaches of the director's duty
of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for the unlawful payment of dividends or unlawful stock purchases or
redemptions under Section 174 of the DGCL, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Underwriting Agreement is expected to provide that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
II-1
<PAGE>
The Registrant maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act:
(1) Pursuant to a Stock Subscription Agreement, dated as of May 14,
1999, by and among the Registrant and the Investors (as defined therein),
(a) Fox Paine Capital Fund, L.P. was issued 16,251,658 shares, par value
$.01 per share, of common stock ("Common Stock"), (b) FPC Investors, L.P.
was issued 241,144 shares of Common Stock, (c) ALEC Coinvestment Fund I, LLC
was issued 812,453 shares of Common Stock, (d) ALEC Coinvestment Fund II,
LLC was issued 406,227 shares of Common Stock, (e) ALEC Coinvestment Fund
III, LLC was issued 487,472 shares of Common Stock, (f) ALEC Coinvestment
Fund IV, LLC was issued 487,472 shares of Common Stock, (g) ALEC
Coinvestment Fund V, LLC was issued 812,453 shares of Common Stock,
(h) ALEC Coinvestment Fund VI, LLC was issued 56,872 shares of Common Stock,
(i) Chamer Company, Inc. was issued 42,248 shares of Common Stock,
(j) Charles E. Robinson was issued 69,059 shares of Common Stock,
(k) Wesley E. Carson was issued 43,872 shares of Common Stock and
(l) Michael E. Holmstrom was issued 16,249 shares of Common Stock. Each
Investor thereunder paid approximately $6.15 in cash per share of Common
Stock.
(2) In connection with the acquisitions of Century's Alaska properties
and ATU on May 14, 1999, the Registrant granted (a) 172,729 shares of Common
Stock to Charles E. Robinson, (b) 85,469 shares of Common Stock to Wesley E.
Carson, (c) 64,996 shares of Common Stock to James H. Huesgen and
(d) 32,498 shares of Common Stock to Wayne P. Graham. Mr. Huesgen and
Mr. Graham are former members of management. In connection with these
grants, Mr. Robinson, Mr. Carson and Mr. Graham each borrowed approximately
40% of the fair market value of their respective grants on a non-recourse
basis to pay taxes on the income deemed received by virtue of such grants.
(3) Pursuant to a Purchase Agreement, dated as of May 11, 1999, by and
among the Registrant, on the one hand, DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc. and DLJ ESC II L.P., on the other hand
(collectively, the "Initial Purchasers"), the Initial Purchasers purchased
$46,928,435 aggregate principal amount of 13% Senior Discount Debentures due
2011 (the "Senior Discount Debentures"). In connection with this purchase,
the Registrant and the Initial Purchasers entered into a Warrant Agreement,
dated as of May 14, 1999, pursuant to which the Initial Purchasers were
issued 828,261 warrants (the "Warrants"), each such warrant entitling the
Initial Purchasers to purchase one share of Common Stock for $.01 (subject
to adjustment). In consideration for the Senior Discount Debentures and the
Warrants, the Initial Purchasers paid the Registrant $25.0 million in cash.
(4) Pursuant to a Purchase Agreement, dated as of May 11, 1999, by and
among the Alaska Communications Systems Holdings, Inc., on the one hand,
Chase Securities, Inc., CIBC World Markets Corp. and Credit Suisse First
Boston Corporation (collectively, the "Notes Initial Purchasers"), the Notes
Initial Purchasers purchased $150,000,000 aggregate principal amount of
9 3/8% Senior Subordinated Notes due 2009 (the "Notes") for $150,000,000 in
cash. The Registrant and each of Alaska Communications Systems Holdings'
subsidiaries has guaranteed Alaska Communications Systems Holdings'
obligations under the Notes on a senior subordinated basis.
II-2
<PAGE>
(5) Pursuant to a Stock Subscription Agreement, dated as of July 6,
1999, by and between the Registrant and Cook Inlet Region, Inc. ("CIRI"),
CIRI purchased 1,624,907 shares of Common Stock for $10 million in cash.
(6) Pursuant to a Stock Subscription Agreement, dated as of July 6,
1999, by and between the Registrant and Donn T. Wonnell, Mr. Wonnell
purchased 16,249 shares of Common Stock for $100,000 in cash.
(7) On September 27, 1999, John Ayers purchased 16,249 shares of Common
Stock for $100,000 in cash.
(8) The Registrant granted 50,000 shares of Common Stock to Donn T.
Wonnell on July 31, 1999. In connection with this grant, Mr. Wonnell
borrowed approximately 40% of the fair market value of this grant on a
non-recourse basis to pay taxes on the income deemed received by virtue of
such grant.
(9) Pursuant to the ALEC Holdings, Inc. 1999 Stock Incentive Plan, the
Registrant granted 3,385,497 options to officers and other employees of the
Registrant and its subsidiaries, each such option entitling the holder
thereof, once such option vests, to purchase one share of Common Stock for
$6.1542 (subject to adjustment). 38,997 of these options were exercised by a
consulting company on October 5, 1999.
The sales described in this Item 15 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. The foregoing transactions
did not involve a distribution or public offering. Except as set forth above, no
underwriters were engaged in connection with the foregoing issuances of
securities, and no commissions or discounts were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
1.1 Form of Underwriting Agreement
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.*
2.2 Asset Purchase Agreement, dated as of October 20, 1998, by
and between Alaska Communications Systems, Inc. and the
Municipality of Anchorage*
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Amended and Restated By-Laws of the Registrant
4.1 Specimen of Common Stock Certificate
4.2 Stockholders' Agreement, dated as of May 14, 1999, by and
among the Registrant and the Investors listed on the
signature pages thereto*
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*
4.4 Second Amendment to Stockholders' Agreement, dated as of
November 16, 1999 by and among the Registrant and the
Stockholder's listed on the signature pages thereto
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*
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*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
4.7 Indenture, dated as of May 14, 1999, by and between the
Registrant and The Bank of New York*
4.8 First Amendment, dated as of October 29, 1999, to Indenture
listed as Exhibit No. 4.7**
4.9 Form of Second Amendment dated as of November , 1999 to
Indenture listed as Exhibit No. 4.7
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.*
5.1 Opinion of Wachtell, Lipton, Rosen & Katz (including
consent)
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*
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.*
10.3 Credit Agreement, dated as of May 14, 1999, by and among
Alaska Communications Systems Holdings, Inc., the
Registrant, the financial institutions Lenders party
thereto, The Chase Manhattan Bank, Credit Suisse First
Boston and Canadian Imperial Bank of Commerce*
10.4 Amendment No. 1, dated as of October 19, 1999 to Credit
Agreement listed as Exhibit No. 10.3**
10.5 Employment Agreement, dated as of March 12, 1999, by and
among Alaska Communications Systems Holdings, Inc., the
Registrant and Charles E. Robinson*
10.6 Employment Agreement, dated as of March 12, 1999, by and
among Alaska Communications Systems Holdings, Inc., the
Registrant and Wesley E. Carson*
10.7 ALEC Holdings, Inc. 1999 Stock Incentive Plan*
10.8 Alaska Communications Systems Group, Inc. 1999 Stock
Incentive Plan
10.9 Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Compensation Plan
10.10 Alaska Communications Systems Group, Inc. 1999 Employee
Stock Purchase Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP relating to the audited
financial statements of ALEC Holdings, Inc. as of March 31,
1999
23.2 Consent of Deloitte & Touche LLP relating to the audited
financial statements of Alaska Communications Systems
Holdings, Inc. and subsidiaries as of December 31, 1998 and
for the period from June 16, 1998 (date of inception)
through December 31, 1998 (included in Exhibit No. 23.1)
23.3 Consent of KPMG LLP relating to the audited combined
financial statements of CenturyTel's Alaska Properties as of
December 31, 1998 and for the year then ended
23.4 Consent of Deloitte & Touche LLP relating to the audited
combined financial statements of Telephone Fund of Fairbanks
Municipal Utilities Services as of October 6, 1997 and for
the year ended December 31, 1996 and the period ended
October 6, 1997 (included in Exhibit No. 23.1)
23.5 Consent of KPMG LLP relating to the audited financial
statements of Municipality of Anchorage Telephone Utility
Fund as of December 31, 1997 and 1998 and for each of the
years in the three-year period ended December 31, 1998
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
23.6 Consent of Deloitte & Touche LLP relating to the audited
combined financial statements of CenturyTel Alaska
Properties as of December 31, 1997 and for the year ended
December 31, 1996, the eleven months ended November 30, 1997
and the one month ended December 31, 1997 (included in
Exhibit No. 23.1)
23.7 Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit No. 5.1)
24.1 Powers of Attorney (included on signature page)***
27.1 Financial Data Schedule****
</TABLE>
- ------------------------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-4
No. 333-82361
** Filed as an exhibit to the Registrant's Form 8-K filed on November 5, 1999
*** Previously filed on October 8, 1999
**** Previously filed on November 1, 1999
(B) FINANCIAL STATEMENT SCHEDULES
None
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement (No. 333-88753)
to be signed on its behalf by the undersigned, thereunto duly authorized, in The
City of New York, State of New York, on the 17th day of November 1999.
<TABLE>
<S> <C>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
BY: /S/ MICHAEL E. HOLMSTROM
-------------------------------------------------
Name: Michael E. Holmstrom
Title: Senior Vice President and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendement
No. 2 to Registration Statement (No. 333-88753) has been signed by the following
persons in the capacities indicated on November 17, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board and Chief Executive
------------------------------------------- Officer
Charles E. Robinson
/s/ WESLEY E. CARSON President and Chief Operating Officer
-------------------------------------------
Wesley E. Carson
/s/ MICHAEL E. HOLMSTROM Senior Vice President and Chief Financial
------------------------------------------- Officer
Michael E. Holmstrom
* Vice President, Controller and Assistant
------------------------------------------- Secretary
Dean A. Ryland
* Director
-------------------------------------------
W. Dexter Paine, III
* Director
-------------------------------------------
Saul A. Fox
Director
-------------------------------------------
Jason B. Hurwitz
* Director
-------------------------------------------
Carl H. Marrs
</TABLE>
<TABLE>
<S> <C>
* By: /s/ MICHAEL E. HOLMSTROM
--------------------------------------
Name: Michael E. Holmstrom
Title: Senior Vice President and
Chief Financial Officer
</TABLE>
II-6
<PAGE>
Exhibit 1.1
Alaska Communications Systems Group, Inc.
Common Stock
_________________________________________
UNDERWRITING AGREEMENT
_________________________________________
November [ ], 1999
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
CIBC World Markets Corp.
Deutsche Bank Securities Inc. and
Hambrecht & Quist LLC
As representatives of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Alaska Communications Systems Group, Inc., a Delaware corporation
formerly known as ALEC Holdings, Inc. (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Underwriters named
in Schedule I hereto (the "Underwriters") an aggregate of [10,000,000] shares
(the "Firm Shares") and, at the election of the Underwriters, up to [1,500,000]
additional shares (the "Optional Shares") of common stock, par value $0.01 per
share ("Stock"), of the Company (the Firm Shares and the Optional Shares that
the Underwriters elect to purchase pursuant to Section 2 hereof being
collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-88753)
(as amended by any pre-effective amendment, the "Initial Registration
Statement") in respect of the Shares has been filed with the Securities
and Exchange Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form
heretofore delivered to you, and, excluding exhibits thereto heretofore
delivered to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement") filed pursuant to
<PAGE>
2
Rule 462(b) under the Securities Act of 1933, as amended (the "Act"),
which became effective upon filing, no other document with respect to
the Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto
or the Rule 462(b) Registration Statement, if any, has been issued
and no proceeding for that purpose has been initiated or threatened
by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the
Act is hereinafter called a "Preliminary Prospectus"; the various
parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the
time it was declared effective, each as amended at the time such part
of the Initial Registration Statement became effective or such part of
the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first
filed pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus");
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(c) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder and do not and will not, as of the applicable effective date
as to the Registration Statement and any amendment thereto and as of
the applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED,
HOWEVER, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(d) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements of
Alaska Communications Systems Holdings, Inc., a Delaware corporation
and a wholly owned subsidiary of the Company ("ACS"), included in the
Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, which could reasonably be expected to have a material
adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole (a "Material Adverse Effect),
otherwise than as set forth or contemplated in the Prospectus; and,
since the date as of which information is given in the Prospectus,
except as otherwise set forth or contemplated in the Prospectus, (i)
there has been
<PAGE>
3
no adverse change, or any development involving a prospective adverse
change, in the condition, financial or otherwise, or in the earnings,
business affairs or management of the Company and its subsidiaries,
taken as a whole, which could reasonably be expected to have a Material
Adverse Effect, (ii) the Company and its subsidiaries, taken as a
whole, have not incurred any material liability or obligation, direct
or contingent, other than in the ordinary course of business and (iii)
there has not been any change in the capital stock (as such term is
defined under U.S. generally accepted accounting principles ("GAAP)) or
long-term debt (as such term is defined under GAAP) of the Company or
any of its subsidiaries, other than an increase in the capital stock of
the Company of $240,000 at November 15, 1999 as compared to September
30, 1999, or any dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock;
(e) The Company and its subsidiaries have good and marketable
title in fee simple to, or have valid rights to lease or otherwise use,
all items of real property and good and marketable title to, or have
valid rights to lease or otherwise use, all items of personal property
which are material to the business of the Company and its subsidiaries,
in each case free and clear of all liens, encumbrances and defects and
imperfections of title except such as (i) do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries, (ii) could not reasonably be expected to have a Material
Adverse Effect, (iii) arise under the Credit Agreement dated as of May
14, 1999, among the Company, ACS, the lenders named therein, The Chase
Manhattan Bank, as Administrative Agent and Collateral Agent, Credit
Suisse First Boston Corporation, as Documentation Agent, and Canadian
Imperial Bank of Commerce, as Syndication Agent (as amended in
accordance with the terms thereof, the "Credit Agreement") or (iv) are
otherwise described in the Prospectus;
(f) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
power and authority (corporate and other) to own or hold their
respective properties and conduct their respective businesses as
described in the Prospectus, and each has been duly qualified as a
foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, except where the failure to have such power or authority
or to so qualify could not, singularly or in the aggregate, be
reasonably expected to have a Material Adverse Effect;
(g) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description of the Stock
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly or indirectly by the Company (with the exception of Alaskan
Choice Television, LLC ("ACTV"), in respect of which the Company owns
66 2/3% of the issued shares of capital stock), free and clear of all
liens, charges, encumbrances, security interests, restrictions upon
voting or transfer (except for regulatory restrictions created under
the Communications Act of 1934, as amended by the Telecommunications
Act of 1996, as amended (the "Communications Act"), and the rules and
regulations of the Federal Communications Commission (the "FCC") and
the Regulatory Commission of Alaska) or any other claims of any third
party, except as created
<PAGE>
4
pursuant to the Credit Agreement; the Company has no subsidiaries other
than those entities listed on Exhibit 21.1 to the Registration
Statement;
(h) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and
non-assessable and will conform to the description of the Stock
contained in the Prospectus;
(i) The Company has full right, power and authority (corporate
and other) to execute and deliver this Agreement and to perform its
obligations hereunder; and all corporate action required to be taken
for the due and proper authorization, execution and delivery of this
Agreement and the consummation of the transactions contemplated herein
have been duly and validly taken;
(j) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company;
(k) The issue and sale of the Shares by the Company hereunder
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not (i) conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries is bound
or to which any of the property or assets of the Company or any of its
subsidiaries is subject, (ii) result in any violation of the provisions
of the charter or by-laws of the Company or any of its subsidiaries or
(iii) result in any violation of any of the provisions of any statute,
judgment, order, decree, rule or regulation of any court or arbitrator
or governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties or assets except, in
the cases of clauses (i) and (iii) above, any conflict, breach,
violation, default or creation or imposition that could not reasonably
be expected to have a Material Adverse Effect; and no consent,
approval, authorization, order, registration, filing or qualification
of or with any such court or arbitrator or governmental agency or body
under any such statute, judgment, order, decree, rule or regulation is
required for the execution, delivery and performance by the Company of
this Agreement and the compliance by the Company with the terms hereof,
the issue and sale of the Shares or the consummation by the Company of
the transactions contemplated in this Agreement except (i) the
registration under the Act of the Shares and the registration under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), of
the Stock and (ii) such consents, approvals, authorizations,
registrations, filings or qualifications (A) as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters, (B) which shall have
been made prior to the Time of Delivery (as defined in Section 4
hereof) with respect to the Shares to be issued and sold by the Company
to the Underwriters hereunder or (C) the failure of which to obtain
would not materially restrain, prevent or impose material burdensome
conditions on the issuance of the Shares to be issued and sold by the
Company to the Underwriters hereunder;
(l) Neither the Company nor any of its subsidiaries is (i) in
violation of its charter
<PAGE>
5
or by-laws, (ii) in default in any respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by
which it is bound or to which any of its property or assets is subject,
other than any such default as would not, singularly or in the
aggregate, be reasonably expected to have a Material Adverse Effect or
(iii) in violation in any respect of any law, ordinance, governmental
rule, regulation or court decree to which it or its property or assets
are subject, other than any such violation as would not, singularly or
in the aggregate, be reasonably expected to have a Material Adverse
Effect;
(m) There are no judgements, orders or decrees under the laws
of the State of New York, the General Corporation Law of the State of
Delaware or the laws of the United States of America of any court or
arbitrator or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or
assets; PROVIDED that this representation is not made with respect to
the laws of the State of Alaska or matters within the jurisdiction of
the FCC or the Regulatory Commission of Alaska (formerly Alaska Public
Utilities Commission) (or any other laws applicable to corporations
conducting telecommunications or utility businesses, in their capacity
as such, similar to those conducted by the Company or any other matters
within the jurisdiction of any governmental authority charged with
regulating such corporations);
(n) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are, in all material
respects, accurate, complete and fair;
(o) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property or assets of
the Company or any of its subsidiaries is the subject which (i)
singularly or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or (ii) would be reasonably likely to affect
the validity of this Agreement or any action taken or to be taken
pursuant hereto; and, to the best knowledge of the Company, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(p) Neither the Company nor any of its subsidiaries is, and
after giving effect to the offering and sale of the Shares, the Company
will not be (i) an "investment company" or a company "controlled by" an
investment company within the meaning of the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and
regulations of the Commission thereunder or (ii) a "holding company" or
a "subsidiary company" of a holding company or an "affiliate" thereof
within the meaning of the Public Utility Holding Company Act of 1935,
as amended;
(q) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes;
(r) Deloitte & Touche LLP, who have certified certain
financial statements of (i) the Company, (ii) ACS, (iii) the CenturyTel
Alaska Properties and (iv) Telephone Fund of
<PAGE>
6
Fairbanks Municipal Utilities Services, and KPMG LLP, who have
certified certain financial statements of (i) the CenturyTel Alaska
Properties and (ii) the Municipality of Anchorage Telephone Utility
Fund, are each independent public accountants as required by the Act
and the rules and regulations of the Commission thereunder; the
historical financial statements (including the related notes) contained
in the Prospectus comply in all material respects with the requirements
applicable to a registration statement on Form S-1 under the Act; such
financial statements fairly present, in all material respects, the
financial position of the entities purported to be covered thereby at
the respective dates indicated and the results of their operations and
their cash flows for the respective periods indicated in accordance
with GAAP consistently applied throughout such periods; and the
financial information contained in the Prospectus under the headings
"Summary--Summary Unaudited Pro Forma Combined Financial and Operating
Data", "Summary--Summary Historical Combined Financial Data--Century's
Alaska Properties", "Summary--Summary Historical Financial Data--ATU",
"Selected Historical Consolidated Financial Data--ALEC Holdings",
"Selected Historical Combined Financial Data--Century's Alaska
Properties", "Selected Historical Financial Data--ATU", "Unaudited Pro
Forma Combined Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are derived
from the accounting records of (i) the Company and its subsidiaries,
(ii) Telephone Utilities of Alaska, Inc., Telephone Utilities of the
Northland, Inc., PTI Communications of Alaska, Inc., Pacific Telecom of
Alaska PCS, Inc. and Pacific Telecom Cellular of Alaska, Inc.
(collectively, "Century's Alaska Properties") and (iii) ATU
Communications, Inc., MACtel, Inc., MACtel Fairbanks, Inc., ATU Long
Distance, Inc., Peninsula Cellular Services, Inc. and Prudhoe
Communications, Inc. (collectively, "ATU"), as the case may be, and
fairly present, in all material respects, the information purported to
be shown thereby; the PRO FORMA financial statements contained in the
Prospectus have been prepared on a basis consistent with the historical
financial statements contained in the Prospectus (except for the PRO
FORMA adjustments specified therein), include all material adjustments
to the historical financial information required by Rule 11-02 of
Regulation S-X under the Act and the Exchange Act to reflect the
historical and proposed transactions described in the Prospectus under
the heading "Unaudited Pro Forma Combined Financial Statements", give
effect to assumptions made on a reasonable basis and fairly present, in
all material respects, the historical and proposed transactions
described in the Prospectus under the heading "Unaudited Pro Forma
Combined Financial Statements"; PROVIDED that no representation is made
with respect to the compliance of the calculation of "Adjusted EBITDA"
with the requirements of Rule 11-02 of Regulation S-X under the
Exchange Act as such rule does not require such calculation; the other
historical financial information and data included in the Prospectus
are, in all material respects, fairly presented in accordance with
GAAP; and the other statistical information and data included in the
Prospectus are, in all material respects, fairly presented;
(s) To the best knowledge of the Company, no action has been
taken and no statute, rule, regulation or order has been enacted,
adopted or issued by any governmental agency or body which prevents the
issuance of the Shares or suspends the sale of the Shares in any
jurisdiction; no injunction, restraining order or order of any nature
by any Federal or state court of competent jurisdiction has been issued
with respect to the Company or any of its subsidiaries which would
prevent or suspend the issuance or sale of the Shares or the use of the
Prospectus in any
<PAGE>
7
jurisdiction; no action, suit or proceeding is pending against or, to
the best knowledge of the Company, threatened against or affecting the
Company or any of its subsidiaries before any court or arbitrator or
any governmental agency, body or official, domestic or foreign, which
could reasonably be expected to prevent or adversely affect the
issuance of the Shares or the validity or enforceability of this
Agreement or any action taken or to be taken pursuant hereto; and
neither the Company nor any of its subsidiaries has received any
requests by any securities authority in any jurisdiction for additional
information to be included in the Prospectus;
(t) The Company and each of its subsidiaries possess all
licenses, certificates, authorizations and permits issued by, and have
made all declarations and filings with, the appropriate Federal, state
or foreign regulatory agencies or bodies which are necessary or, in the
reasonable judgment of the Company, desirable for the ownership of
their respective properties or the conduct of their respective
businesses as described in the Prospectus, except where the failure to
possess or make the same could not, singularly or in the aggregate, be
reasonably expected to have a Material Adverse Effect, and, except as
disclosed in the Prospectus, neither the Company nor any of its
subsidiaries has received notification of any revocation or
modification of any license, certificate, authorization or permit that
is material to the operation of the business of the Company and its
subsidiaries, taken as a whole, or has any reason to believe that any
such license, certificate, authorization or permit will not be renewed
in the ordinary course;
(u) The Company and each of its subsidiaries have filed all
Federal, state, local and foreign income and franchise tax returns
required to be filed through the date hereof and have paid all taxes
due thereon (other than those taxes (i) being contested in good faith
or those taxes currently payable without penalty or interest, in each
case, for which adequate reserves have been provided in accordance with
GAAP or (ii) with respect to which the failure to do so could not
reasonably be expected to result in a Material Adverse Effect), and no
tax deficiency has been determined adversely to the Company or any of
its subsidiaries which has had (nor does the Company have any knowledge
of any tax deficiency which could reasonably be expected to have) a
Material Adverse Effect;
(v) The Company and each of its subsidiaries have insurance
covering their respective properties, operations, personnel and
businesses, which insurance is in amounts and insures against such
losses and risks as are, in the reasonable judgment of the Company,
adequate to protect the Company, its subsidiaries and their respective
businesses; none of the Company or any of its subsidiaries has received
notice from any insurer or agent of such insurer that material capital
improvements or other material expenditures are required or necessary
to be made in order to continue such insurance;
(w) The Company and each of its subsidiaries own or possess
adequate rights to use all patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) necessary for the conduct of their
respective businesses, except as could not reasonably be expected to
have a Material Adverse Effect; and the conduct of their respective
businesses will not conflict in any respect with, and the Company and
its subsidiaries have not received any notice of any claim of conflict
with, any such rights of others which conflict, singularly or in the
aggregate, could reasonably be expected to result in a Material Adverse
Effect;
<PAGE>
8
(x) No labor disturbance by or material dispute with the
employees of the Company or any of its subsidiaries exists or, to the
best knowledge of the Company, is contemplated or threatened;
(y) No "prohibited transaction" (as defined in Section 406 of
the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder
("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code")) or "accumulated funding
deficiency" (as defined in Section 302 of ERISA) or any of the events
set forth in Section 4043(b) of ERISA (other than events with respect
to which the 30-day notice requirement under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan of
the Company or any of its subsidiaries which could reasonably be
expected to have a Material Adverse Effect; each such employee benefit
plan is in compliance in all material respects with applicable law,
including ERISA and the Code; the Company and each of its subsidiaries
have not incurred and do not expect to incur liability under Title IV
of ERISA with respect to the termination of, or withdrawal from, any
pension plan for which the Company or any of its subsidiaries would
have any liability, which liability could reasonably be expected to
have a Material Adverse Effect; and, to the best knowledge of the
Company, each such pension plan that is intended to be qualified under
Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which
could reasonably be expected to cause the loss of such qualification;
(z) There has been no storage, generation, transportation,
handling, treatment, disposal, discharge, emission or other release of
any kind of toxic or other wastes or other hazardous substances by, due
to or caused by the Company or any of its subsidiaries (or, to the best
knowledge of the Company, any other entity (including any predecessor)
for whose acts or omissions the Company or any of its subsidiaries is
or could reasonably be expected to be liable) upon any of the property
now or previously owned or leased by the Company or any of its
subsidiaries, or upon any other property, in violation of any statute
or any ordinance, rule, regulation, order, judgment, decree or permit
or which would, under any statute or any ordinance, rule (including
rule of common law), regulation, order, judgment, decree or permit,
give rise to any liability, except for any violation or liability that
could not reasonably be expected to have, singularly or in the
aggregate with all such violations and liabilities, a Material Adverse
Effect; and there has been no disposal, discharge, emission or other
release of any kind onto such property or into the environment
surrounding such property of any toxic or other wastes or other
hazardous substances with respect to which the Company has knowledge,
except for any such disposal, discharge, emission or other release of
any kind which could not reasonably be expected to have, singularly or
in the aggregate with all such discharges and other releases, a
Material Adverse Effect;
(aa) Neither the Company nor, to the best knowledge of the
Company, any director, officer, agent, employee or other person
associated with or acting on behalf of the Company or any of its
subsidiaries has (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense relating to
political activity; (ii) made any unlawful payment to any foreign or
domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or (iv) made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment;
<PAGE>
9
(bb) Except as described in the Prospectus, there are no
outstanding subscriptions, rights, warrants, calls or options to
acquire, or instruments convertible into or exchangeable for, or
agreements or understandings with respect to the sale or issuance of,
any shares of capital stock of or other equity or other ownership
interest in the Company or any of its subsidiaries other than those
provided in the agreement dated as of April 8, 1999, by and among
Chamer Corporation, Fox Paine & Company, LLC and the Company, as
amended;
(cc) None of the Company or any of its subsidiaries is a party
to any contract, agreement or understanding with any person that would
give rise to a valid claim against the Company, its subsidiaries or the
Underwriters for a brokerage commission, finder's fee or like payment
in connection with the offering and sale of the Shares;
(dd) There are no securities of the Company or any of its
subsidiaries registered under the Exchange Act, or listed on a national
securities exchange or quoted in a U.S. automated inter-dealer
quotation system, although exchange notes for the 9 3/8%, Senior
Subordinated Notes issued by ACS and exchange debentures for the 13%
Senior Discount Debentures issued by the Company are registered under
the Act;
(ee) Neither the Company nor any of its subsidiaries has taken
or will take, directly or indirectly, any action prohibited by
Regulation M under the Exchange Act in connection with the offering of
the Shares;
(ff) No forward-looking statement (within the meaning of
Section 27A of the Act and Section 21E of the Exchange Act) contained
in the Prospectus has been made or reaffirmed without a reasonable
basis or has been disclosed other than in good faith;
(gg) The Company has conducted a comprehensive systems
assessment of the risk that the computer hardware and software used by
the Company and its subsidiaries may be unable to recognize and
properly execute date-sensitive functions involving certain dates prior
to and any dates after December 31, 1999 (the "Year 2000 Problem"),
and, except as set forth in the Prospectus, has remedied such risk
without material expense; and the Company believes, after due inquiry,
that each third party that has a material relationship with the Company
and its subsidiaries has remedied or will remedy on a timely basis the
Year 2000 Problem, although the failure of any third party that has
such a relationship with the Company to remedy the Year 2000 Problem on
a timely basis could have a Material Adverse Effect; and
(hh) Except with respect to any matter that, singularly or in
the aggregate, could not reasonably be expected to result in a Material
Adverse Effect, none of the Company or any of its subsidiaries (i) has
failed to comply with any law, rule, regulation, code, ordinance,
order, decree, judgment, injunction, notice or binding agreement
issued, promulgated or entered into by any governmental authority
(including but not limited to the FCC and the Regulatory Commission of
Alaska) relating in any way to the offering or provision of
communications (collectively, "Communications Laws") or to obtain,
maintain or comply with any permit, license or other approval required
under any Communications Law, (ii) has become subject to any liability,
<PAGE>
10
contingent or otherwise (including any liability for damages, costs,
fines, penalties or indemnities) directly or indirectly resulting from
or based upon (w) the violation of any Communications Law, (x) the
generation or use of communications, (y) exposure to communications or
radio frequency emissions or (z) any contract, agreement or other
consensual agreement pursuant to which liability is assumed or imposed
with respect to any of the foregoing (collectively, "Communication
Liabilities"), (iii) has received notice of any claim with respect to
any Communication Liability or (iv) knows of any basis for any
Communication Liability.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $[ ], the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto and (b) in the event and to
the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to [1,500,000] Optional Shares, at the purchase price per
share set forth in the paragraph above, for the purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company to Goldman, Sachs & Co.
at least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery with respect thereto at the
office of DTC or its designated custodian (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9:30 a.m., New York City time, on November [ ], 1999 or such other time and date
as Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
<PAGE>
11
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Sections 7(p) hereof, will be delivered at the offices
of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
1:00 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Agreement, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you, upon request, with copies thereof; to advise you,
promptly after it receives notice thereof, of the issuance by the
Commission of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or prospectus, of the suspension
of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction or to take any action that could subject the Company to
any material tax to which it would not otherwise be subject in any
jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next
<PAGE>
12
succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for
any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify
you and upon your request to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter,
to prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose
of, except as provided hereunder, any securities of the Company that
are substantially similar to the Shares, including but not limited to
any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to (i) employee stock option plans
existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement
or (ii) any shareholders' rights plan), without the prior written
consent of Goldman, Sachs & Co.;
(f) To furnish to its stockholders (i) as soon as available
(and in any event no later than the time within which the Company is
required to file a Report on Form 10-K with the Commission in respect
of such fiscal year) after the end of each fiscal year an annual report
(including a balance sheet and statements of income, stockholders'
equity and cash flows of the Company and its consolidated subsidiaries
certified by independent public accountants) and (ii) as soon as
available (and in any event no later than the time within which the
Company is required to file a Report on Form 10-Q with the Commission
in respect of such quarter) after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), to make
available to its stockholders consolidated summary financial
information of the Company and its subsidiaries for such quarter in
reasonable detail, in each case, so long as the Company is required to
furnish such annual report and summary financial information under the
Federal securities laws;
(g) During a period of five years from the effective date of
the Registration
<PAGE>
13
Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders that are
not publicly available without charge on the Commission's EDGAR system
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed that are not publicly available
without charge on the Commission's EDGAR system and (ii) such
additional information concerning the business and financial condition
of the Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of
the Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares
on the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers, except as otherwise specified in
Section 5(c) hereof; (ii) the cost of printing or producing any Agreement among
Underwriters, this Agreement, closing documents (including compilations thereof)
and any other documents in connection with the offering, purchase, sale and
delivery of the Shares; (iii) all expenses in connection with the qualification
of the Shares for offering and sale under state securities laws as provided in
Section 5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with any
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on the NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section 6.
It is understood, however, that, except as provided in this Section 6, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of Time of Delivery, true and correct,
<PAGE>
14
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to rely
upon Rule 462(b), the Rule 462(b) Registration Statement shall have
become effective by 10:00 p.m., Washington, D.C. time, on the date of
this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Cravath, Swaine & Moore, counsel for the Underwriters,
shall have furnished to you such written opinion or opinions (a draft
of each such opinion is attached as Annex I(a) hereto), dated such Time
of Delivery, with respect to the matters covered in paragraphs (i),
(ii), (vii), (x) and (xii) of subsection (c) below as well as such
other related matters as you may reasonably request, and such counsel
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Wachtell, Lipton, Rosen & Katz, counsel for the Company,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex I(b) hereto), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and
authority necessary to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized equity
capitalization as set forth in the Prospectus, and all of the
issued shares of capital stock of the Company (including the
Shares being delivered at such Time of Delivery) have been
duly and validly authorized and issued and are fully paid and
nonassessable; and the Shares conform, in all material
respects, to the description of the Stock contained in the
Prospectus;
(iii) The Company has been duly qualified as a
foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in
which it owns or leases properties or conducts any business so
as to require such qualification, except where the failure to
so qualify would not, singularly or in the aggregate, have a
Material Adverse Effect (such counsel being entitled to rely
in respect of the opinion in this clause upon certificates of
government officials in the relevant jurisdictions regarding
the Company's qualification as a foreign corporation and good
standing and, in respect of matters of fact, upon certificates
of officers of the Company, provided that such counsel shall
state that they believe that both you and they are justified
in relying upon such certificates);
<PAGE>
15
(iv) Each subsidiary of the Company that is
incorporated in the State of Delaware and listed in Exhibit A
attached hereto (collectively, the "Delaware Subsidiaries")
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of
Delaware; and all of the outstanding shares of capital stock
of each such subsidiary have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all
liens, charges, encumbrances, security interests, restrictions
upon voting or transfer (except for regulatory restrictions
created under the Communications Act and the rules and
regulations of the FCC and the Regulatory Commission of
Alaska) or any other claims of any third party, except as
created pursuant to the Credit Agreement (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of special counsel, certificates of government
officials in the State of Delaware regarding each Delaware
Subsidiary's good standing and, in respect to matters of fact,
upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon
such opinions and certificates);
(v) Each of the Delaware Subsidiaries has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, except where
the failure to so qualify would not, singularly or in the
aggregate, have a Material Adverse Effect (such counsel being
entitled to rely in respect of the opinion in this clause upon
certificates of government officials in the relevant
jurisdictions regarding each Delaware Subsidiary's
qualification as a foreign corporation and good standing and,
in respect of matters of fact, upon certificates of officers
of the Company, provided that such counsel shall state that
they believe that both you and they are justified in relying
upon such certificates);
(vi) The Company has all requisite corporate power
and authority to execute and deliver this Agreement and to
perform its obligations hereunder; and all corporate action
required to be taken for the due and proper authorization,
execution and delivery of this Agreement and the consummation
of the transactions contemplated herein have been duly and
validly taken by the Company;
(vii) This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid
and legally binding agreement of the Company;
(viii) The issue and sale of the Shares being
delivered at such Time of Delivery by the Company and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein
contemplated will not (A) conflict with or result in a breach
or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to
which the Company or any of the Delaware Subsidiaries is a
party or by which the Company or any of the Delaware
Subsidiaries is bound or to which any of the property or
assets of the Company or any of the Delaware Subsidiaries is
subject, and which, in each instance, is included as an
exhibit to the Registration Statement pursuant to Item 601 of
Regulation S-K under the Securities Act, (B) result in any
violation of the provisions of the Certificate of
Incorporation or By-laws
<PAGE>
16
of the Company or any of the Delaware Subsidiaries or (C)
result in any violation of the provisions of any statute, rule
or regulation under the laws of the State of New York, the
General Corporation Law of the State of Delaware or the laws
of the United States of America (other than Blue Sky or state
securities laws as to which such counsel need express no
opinion, and other than the anti-fraud provisions of the
United States federal securities laws, as to which such
counsel need express no opinion except as otherwise expressly
set forth in such opinion) in effect on the date of such
opinion of any governmental agency or body having jurisdiction
over the Company or any of the Delaware Subsidiaries or any of
their properties or assets, other than, in the case of this
clause (C), any violation that could not reasonably be
expected to have a Material Adverse Effect;
(ix) No consent, approval, authorization, order,
registration, filing or qualification of or with any such
governmental agency or body referred to in clause (viii) above
under any statute, rule or regulation referred to in clause
(viii) above is required for the issue and sale of the Shares
or the consummation by the Company of the transactions
contemplated in this Agreement, except (A) the registration
under the Act of the Shares and the registration under the
Exchange Act of the Stock and (B) such consents, approvals,
authorizations, registrations, filings or qualifications (1)
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
the Underwriters, (2) which shall have been obtained or made
prior to such Time of Delivery and (3) the failure to obtain
which would not materially restrain, prevent or impose
material burdensome conditions on the issuance of the Shares;
(x) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the Stock, and
under the caption "U.S. Tax Consequences to Non-U.S. Holders"
and under the caption "Underwriting", insofar as they purport
to summarize the provisions of the laws and documents referred
to therein, have been reviewed by such counsel and fairly
summarize the matters described therein in all material
respects; and such counsel does not have actual knowledge of
any current or pending legal or governmental actions, suits or
proceedings which, to the knowledge of such counsel, are
required to be described in the Prospectus which are not
described as required;
(xi) Neither the Company nor any of its subsidiaries
is, and after giving effect to the offering and sale of the
Shares, the Company will not be, an "investment company" or a
company "controlled by" an investment company within the
meaning of the Investment Company Act and the rules and
regulations of the Commission thereunder; and neither the
Company nor any of its subsidiaries is, and after giving
effect to the offering and sale of the Shares, the Company
will not be, an "investment company" under the Investment
Company Act and the rules and regulations of the Commission
thereunder (without taking account of any exemption under the
Investment Company Act and the rules and regulations of the
Commission thereunder arising out of the number of holders of
the securities of the Company or any of its subsidiaries); and
(xii) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the
Company prior to such Time of
<PAGE>
17
Delivery (other than the financial statements, related notes
and schedules and other financial data therein, as to which
such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the
rules and regulations thereunder; such counsel shall also
state that they have participated in conferences with
directors, officers and other representatives of the Company,
representatives of the independent accountants of the Company,
representatives of the Underwriters and representatives of
counsel for the Underwriters, at which conferences the
contents of the Registration Statement and the Prospectus and
related matters were discussed and, although they do not
assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration
Statement or the Prospectus, except for those referred to in
the opinion in subsection (x) of this Section 7(c); they have
no reason to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the
financial statements, related notes and schedules and other
financial data therein, as to which such counsel need express
no opinion) contained an untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial
statements, related notes and schedules and other financial
data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of such Time
of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the
financial statements, related notes and schedules, and other
financial data therein, as to which such counsel need express
no opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading; and they do not know of
any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration
Statement or the Prospectus which are not filed or described
as required;
In rendering such opinion, such counsel may state that they have not
considered, and express no opinion as to, the laws of any jurisdiction other
than the laws of the State of New York, the General Corporation Law of the State
of Delaware and the laws of the United States of America, in each case as in
effect on the date of such opinion, and, specifically, that they have not
considered, and express no opinion as to, the laws of the State of Alaska or
matters within the jurisdiction of the FCC or the Regulatory Commission of
Alaska (formerly Alaska Public Utilities Commission) (or any other laws
applicable to corporations conducting telecommunications or utility businesses,
in their capacity as such, similar to those conducted by the Company or any
other matters within the jurisdiction of any governmental authority charged with
regulating such corporations).
(d) Birch, Horton, Bittner and Cherot, special Alaskan counsel
for the Company, shall have furnished to you their written opinion (a
draft of such opinion is attached as Annex I(c) hereto), dated such
Time of Delivery, in form and substance satisfactory to you, to the
effect that:
<PAGE>
18
(i) Each subsidiary of the Company that is
incorporated in the State of Alaska (the "Alaska
Subsidiaries") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the State of Alaska and all of the outstanding shares of
capital stock of each such subsidiary have been duly and
validly authorized and issued, are fully paid and
non-assessable and are owned directly or indirectly by the
Company (with the exception of ACTV, in respect of which the
Company owns 66 2/3% of the outstanding shares of capital
stock), free and clear of all liens, charges, encumbrances,
security interests, restrictions upon voting or transfer
(except for regulatory restrictions created under the
Communications Act and the rules and regulations of the FCC
and the Regulatory Commission of Alaska) or any other claims
of any third party, except as created pursuant to the Credit
Agreement (such counsel being entitled to rely in respect of
the opinion in this clause upon certificates of government
officials in the State of Alaska regarding each Alaska
Subsidiary's good standing and, in respect of matters of fact,
upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they
believe that both you and they are justified in relying upon
such certificates);
(ii) Each of the Alaska Subsidiaries has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, except where
the failure to so qualify would not, singularly or in the
aggregate, have a Material Adverse Effect (such counsel being
entitled to rely in respect of the opinion in this clause upon
certificates of government officials in the relevant
jurisdictions regarding each Alaska Subsidiary's qualification
as a foreign corporation and good standing);
(iii) [The Company and its subsidiaries have good and
marketable title in fee simple to, or have valid rights to
lease or otherwise use, all items of real property and good
and marketable title to, or have valid rights to lease or
otherwise use, all items of personal property which are
material to the business of the Company and its subsidiaries,
in each case free of all liens, encumbrances, claims and
defects and imperfections of title except such as (A) do not
materially affect the value of such property and do not
interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries, (B) could not
reasonably be expected to have a Material Adverse Effect, (C)
arise under the Credit Agreement or (D) are otherwise
described in the Prospectus];
(iv) The issue and sale of the Shares being delivered
at such Time of Delivery by the Company and the compliance by
the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will
not (A) conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of any of
the Alaska Subsidiaries pursuant to, any material indenture,
mortgage, deed of trust, loan agreement or other material
agreement or instrument to which any of the Alaska
Subsidiaries is a party or by which any of the Alaska
Subsidiaries is bound or to which any of the property or
assets of the Alaska Subsidiaries is subject, (B) result in
any violation of the provisions of the charter or by-laws of
any of the Alaska Subsidiaries or (C) result in any violation
of the provisions of any statute or any judgment, order,
decree, rule or regulation of any court
<PAGE>
19
or arbitrator or governmental agency or body having
jurisdiction over the Company or any of the Alaska
Subsidiaries;
(v) No consent, approval, authorization, order,
registration, filing or qualification of or with any such
court or arbitrator or governmental agency or body under any
such statute, judgment, order, decree, rule or regulation is
required for the issue and sale of the Shares or the
consummation of the transactions contemplated in this
Agreement, except (A) the registration under the Act of the
Shares and the registration under the Exchange Act of the
Stock and (B) such consents, approvals, authorizations,
registrations, filings or qualifications (1) as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters and (2) which shall have been made or obtained
prior to such Time of Delivery;
(vi) To the best knowledge of such counsel, neither
the Company nor any of its subsidiaries is (A) in violation of
its charter or by-laws, (B) in default in any respect, and no
event has occurred which, with notice or lapse of time or
both, would constitute such a default, in the due performance
or observance of any term, covenant or condition contained in
any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which it is a party or by
which it is bound or to which any of its property or assets is
subject, other than any such default as would not, singularly
or in the aggregate, be reasonably expected to have a Material
Adverse Effect or (C) in violation in any respect of any law,
ordinance, governmental rule, regulation or court decree to
which it or its property or assets are subject, other than any
such violation as would not, singularly or in the aggregate,
be reasonably expected to have a Material Adverse Effect;
(vii) The execution, delivery, filing, or recording,
as applicable, and performance by the Company of the
Underwriting Agreement does not require any further
authorization, consent or approval of, or any further filing
with, the Regulatory Commission of Alaska;
(viii) Each of the Regulatory Commission of Alaska
Certificates of Public Convenience and Necessity identified on
a schedule to such opinion (the "State Certificates") is held
by the entity as identified on such schedule as the holder
thereof and is in full force and effect; none of the State
Certificates is subject to any conditions (A) that would
suspend the Alaska Subsidiaries' currently effective authority
to provide local exchange, intrastate interexchange, or
cellular telecommunications service, or that would reduce the
geographic areas in which the Alaska Subsidiaries are
currently authorized to provide local exchange, intrastate
interexchange, and cellular telecommunications services, or
that would restrict the types of telecommunications services
that the Company or the Alaska Subsidiaries may provide or (B)
that are not restrictions which are generally applicable to
local exchange, intrastate interexchange and cellular
telecommunications companies; each of the State Certificates
is in effect indefinitely or for the term as set forth on such
schedule and, except as may be set forth in such
<PAGE>
20
schedule, is renewable in the ordinary course; the conditions
imposed by the Alaska Public Utilities Commission on the State
Certificates in the orders approving the acquisition of the
Alaska Subsidiaries by the Company are set forth on a schedule
to such opinion; except as to the conditions described in such
schedule, there are no conditions on the State Certificates
that would restrict the Company or the Alaska Subsidiaries in
any material respect in the conduct of their present
operations; no appeal or petition for rehearing,
reconsideration, stay or other administrative action
contesting any of the State Certificates has been filed and
remains pending; there is no license, permit, or authorization
of the Regulatory Commission of Alaska required for the
conduct by the Company or the Alaska Subsidiaries of their
respective businesses that is not identified on such schedule;
(ix) There are no judgments, decrees, or orders
issued by the Regulatory Commission of Alaska relating to the
operations of the Company or the Alaska Subsidiaries that (A)
could reasonably be expected to result in a suspension,
revocation, material impairment, termination prior to its
expiration date, non-renewal or materially adverse
modification of any of the State Certificates or (B) could
reasonably be expected to have a material adverse effect upon,
or cause material disruption to, operations pursuant to the
State Certificates; there is no complaint, investigation,
action or proceeding pending before the Regulatory Commission
of Alaska, including any notice of violation, notice of
apparent liability, notice of failure to pay regulatory fees
or to file material reports, order to show cause or any
similar order or notice, except for proceedings for the
formulation of regulatory policy that may affect the
telecommunications industry generally [and except for
proceedings related to the termination of the rural exemptions
held by Telephone Utilities of Alaska, Inc., Telephone
Utilities of the Northland, Inc. or PTI Communications of
Alaska, Inc.], (1) that could reasonably be expected to result
in a suspension, revocation, material impairment, non-renewal,
or adverse modification of any of the State Certificates or
(2) that could reasonably be expected to have a material
adverse effect upon, or cause disruption to, the operations of
the Company or the Alaska Subsidiaries; and
(x) Such counsel has no reason to believe that, as of
its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment
or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or
omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading or that, as of such Time
of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
such counsel does not
<PAGE>
21
know of any amendment to the Registration Statement required
to be filed which is not filed as required.
In rendering such opinion, such counsel may state that such counsel
expresses no opinion as to the laws of any jurisdiction outside the United
States.
(e) Donn T. Wonnell, Executive Vice President, General Counsel
and Corporate Secretary of the Company, shall have furnished to you his
written opinion (a draft of such opinion is attached as Annex I(d)
hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or of which any property or assets of the Company or any
of its subsidiaries is the subject which, (A) other than as
set forth in the Prospectus, singularly or in the aggregate,
if determined adversely to the Company or any of its
subsidiaries, could reasonably be expected to have a Material
Adverse Effect or (B) question the validity of this Agreement
or any action taken or to be taken pursuant hereto; and to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(ii) There is no license, permit or other
authorization of the FCC required for the lawful conduct of
the businesses of the Company and its subsidiaries as
presently being conducted on the date of such opinion and not
included among the licenses, permits and authorizations
enumerated on an attachment to such opinion;
(iii) Such counsel has no reason to believe that, as
of its effective date, the Registration Statement or any
further amendment thereto made by the Company prior to such
Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need
express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement
of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or
that, as of such Time of Delivery, either the Registration
Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under
which they were made, not misleading; and such counsel does
not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of
a character required to be filed as an exhibit to the
Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed
or described as required.
In rendering such opinion, such counsel may state that such counsel
expresses no opinion as to the
<PAGE>
22
laws of any jurisdiction outside the State of Alaska or United States.
(f) Latham & Watkins, special FCC counsel to the Company,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex I(e) hereto), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) Except as disclosed on an attachment to such
opinion, each of the FCC licenses, permits and authorizations
issued by the FCC listed on such attachment (the "FCC
Licenses") is in full force and effect, has not been
suspended, revoked, canceled or modified in any materially
adverse way, is held by one of its subsidiaries of the
Company, has the expiration date shown on such attachment, and
authorizes, without further license, permit or other
authorization of the FCC, the operation of each of the
services identified on such attachment at the locations and on
the channels or frequencies identified on such attachment;
(ii) Each subsidiary of the Company has timely filed
all applications for the renewal of any FCC Licenses set forth
opposite the name of such subsidiary on the attachment to such
opinion for which applications for renewal were required so to
be filed on or before the date of such opinion;
(iii) The execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement do not violate the Communications Act or the
rules, regulations or published policies of the FCC;
(iv) To the knowledge of such counsel, except as
disclosed in an attachment to such opinion, (A) no petition to
deny, petition for revocation, complaint or informal objection
is pending before the FCC against any of the FCC Licenses or
the Company or any of its subsidiaries and (B) there is no
outstanding decree, notice or order that has been issued by
the FCC against the Company or any of its subsidiaries or with
respect to the FCC Licenses, which either now, or after notice
or lapse of time or both, and there is no pending or
threatened litigation, proceeding, notice of violation, notice
of apparent liability, order to show cause, complaint, inquiry
or investigation before the FCC against the Company or any of
its subsidiaries which could reasonably be expected to result
in the cancelation, termination, revocation, forfeiture or
material impairment of any of the FCC Licenses, or have any
material adverse effect upon, or cause material disruption to,
the Company, any of its subsidiaries or the ownership or
operation of their respective businesses (such counsel being
entitled to rely in respect of the opinion in this clause upon
certificates of officers of the Company in respect of matters
of fact, provided that such counsel shall state that they
believe that both you and they are justified in relying upon
such certificates);
(v) No authorizations, consents, approvals, licenses,
filings or registrations with the FCC are required under the
Communications Act in connection with the execution and
delivery by the Company of, and the performance by the Company
of its obligations under, this Agreement on the date of such
opinion;
(vi) To the knowledge of such counsel, there are no
actions, suits or proceedings by or before the FCC pending or
threatened against or involving this
<PAGE>
23
Agreement or any of the transactions contemplated herein; and
(vii) The statements in the Prospectus under the
headings "Risk Factors--Revocation of the substantial
protections from competition granted to our rural local
exchange carriers under the Telecommunications Act of 1996
could result in increased competition", "Risk Factors--A
reduction in the rates we charge our local telephone customers
by the RCA would reduce our revenues and earnings", "Risk
Factors--Revenues from access charges may be reduced or lost",
"Risk Factors--A reduction in the universal service support
currently received by some of our subsidiaries would reduce
our revenues and earnings" and "Regulation," to the extent
such statements purport to summarize applicable provisions of
the Communications Act and the written rules, regulations and
published policies of the FCC promulgated thereunder, are
accurate summaries in all material respects of the provisions
purported to be summarized under such captions in the
Prospectus; and, to the best knowledge of such counsel, there
are no current or pending proceedings before the FCC which are
not described in the Prospectus and which, to the best
knowledge of such counsel are required to be described in the
Prospectus.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any state or jurisdiction outside the United States.
(g) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, Deloitte & Touche LLP shall have furnished to
you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set
forth in Annex II hereto (the executed copy of the letter delivered
prior to the execution of this Agreement is attached as Annex II(a)
hereto, and such letter shall also constitute the form of letter to be
delivered on the effective date of any post-effective amendment to the
Registration Statement and as of each Time of Delivery);
(h) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, KPMG LLP, Shreveport, Louisiana, shall have
furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the
effect set forth in Annex II hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex
II(b) hereto, and such letter shall also constitute the form of letter
to be delivered on the effective date of any post-effective amendment
to the Registration Statement and as of each Time of Delivery);
(i) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, KPMG LLP, Anchorage, Alaska, shall have
furnished to you a letter or letters, dated the
<PAGE>
24
respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex II hereto (the
executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex II(c) hereto, and such letter shall also
constitute the form of letter to be delivered on the effective date of
any post-effective amendment to the Registration Statement and as of
each Time of Delivery);
(j) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements of ACS included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the date as of which
information is given in the Prospectus, there shall not have been any
change in the capital stock (as such term is defined under GAAP) or
long-term debt (as such term is defined under GAAP) of the Company or
any of its subsidiaries, other than an increase in the capital stock of
the Company of $240,000 at November 15, 1999 as compared to September
30, 1999, or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries, otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being
delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(k) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating organization", as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities;
(l) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in
trading in securities generally on the New York Stock Exchange or on
NASDAQ; (ii) a suspension or material limitation in trading in the
Company's securities on NASDAQ; (iii) a general moratorium on
commercial banking activities declared by either Federal or New York
State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of
a national emergency or war, if the effect of any such event specified
in this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(m) The Shares to be sold at such Time of Delivery shall have
been duly listed for quotation on NASDAQ;
(n) The Company shall have obtained and delivered to the
Underwriters executed copies of an agreement from each Fox Paine
Capital, LLC, Fox Paine Capital Fund, L.P., FPC Investors, L.P., ALEC
Coinvestment Fund I, LLC, ALEC Coinvestment Fund II, LLC, ALEC
Coinvestment Fund III, LLC, ALEC Coinvestment Fund IV, LLC, ALEC
Coinvestment Fund V, LLC, ALEC Coinvestment Fund VI, LLC, Cook Inlet
Region, Inc., Carl H. Marrs, John R. Ayers,
<PAGE>
25
Wesley E. Carson, Michael E. Holmstrom, Charles E. Robinson and Donn T.
Wonnell, substantially to the effect set forth in Subsection 5(e)
hereof in form and substance satisfactory to you;
(o) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
(p) The Company shall have furnished or caused to be furnished
to you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder
to be performed at or prior to such Time of Delivery, as to the matters
set forth in subsections (a) and (j) of this Section 7 and as to such
other matters as you may reasonably request, including, without
limitation, as to the absence of any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject which is
required to be filed as an exhibit to the Registration Statement that
is not filed as required; and
(q) Prior to the First Time of Delivery, the Company shall
have furnished or caused to be furnished to you an executed copy of any
amendment to the Credit Agreement and any such amendment shall have
become effective.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged
<PAGE>
26
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Goldman, Sachs & Co. expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering of the Shares
purchased under this Agreement (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters with respect to the Shares purchased under this Agreement, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the
<PAGE>
27
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by PRO RATA allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall
be in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section 9 with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company as provided in subsection (a) above, the
<PAGE>
28
aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its PRO RATA
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company as provided in subsection (a) above, the aggregate number of such
Shares which remains unpurchased exceeds one-eleventh of the aggregate number of
all the Shares to be purchased at such Time of Delivery, or if the Company shall
not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting Underwriter or
Underwriters, then this Agreement (or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company, except for the expenses
to be borne by the Company and the Underwriters as provided in Section 6 hereof
and the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, Shares are
not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives of the Underwriters.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary, with a copy to Wachtell, Lipton,
Rosen & Katz, 51 West 52nd Street, New York, New York
<PAGE>
29
10019, Attention: Mitchell S. Presser, Esq.; provided, however, that any notice
to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by
mail, telex or facsimile transmission to such Underwriter at its address set
forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
at the time of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
<PAGE>
30
If the foregoing is in accordance with your understanding, please sign
and return to us eight counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Alaska Communications Systems Group, Inc.
By:
---------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
CIBC World Markets Corp.
Deutsche Bank Securities Inc.
Hambrecht & Quist LLC
By:
-----------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(originally incorporated on October 13, 1998
under the name ALEC Holdings, Inc.)
===============================================
ARTICLE I
---------
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Alaska Communications Systems Group, Inc.
ARTICLE II
----------
The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
----------
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
-----------
Section 1. The Corporation shall be authorized to issue 150,000,000
shares of capital stock, of which 145,000,000 shares shall be shares of Common
Stock, $.01 par value per
<PAGE>
share ("Common Stock"), and 5,000,000 shares shall be shares of Preferred Stock,
$.01 par value per share ("Preferred Stock").
Section 2. Except as otherwise provided by law, or as otherwise
provided in or pursuant to this Article IV, the Common Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes. Each share of Common Stock shall have one vote, and the Common
Stock shall vote together as a single class.
Section 3. The Board of Directors of the Corporation (the "Board") is
expressly authorized to provide for the issuance of all or any shares of the
Preferred Stock, in one or more series, and to fix for each such series such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board providing for
the issue of such series (a "Preferred Stock Designation") and as may be
permitted by the General Corporation Law of the State of Delaware. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, without a separate
vote of the holders of the Preferred Stock, or any series thereof, unless a vote
of any such holders is required pursuant to any Preferred Stock Designation.
ARTICLE V
----------
Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
-2-
<PAGE>
ARTICLE VI
-----------
In furtherance and not in limitation of the powers conferred by law,
the Board is expressly authorized and empowered to make, alter, amend and repeal
the By-Laws of the Corporation by a majority vote of the directors present at
any meeting at which a quorum is present, or by written consent in accordance
with the General Corporation Law of the State of Delaware.
ARTICLE VII
-----------
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, and any other provisions authorized by
the laws of the State of Delaware at the time in force may be added or inserted,
in the manner now or hereafter prescribed by law; and all rights, preferences
and privileges of whatsoever nature conferred upon stockholders, directors or
any other persons whomsoever by and pursuant to this Amended and Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article.
ARTICLE VIII
------------
Section 1. ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. A director
of the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i ) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which
-3-
<PAGE>
the director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
Section 2. INDEMNIFICATION AND INSURANCE.
(a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (hereinafter a "proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the General Corporation Law of the State of Delaware, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, to the fullest extent permitted by law, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such
-4-
<PAGE>
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, amounts paid or to be paid in settlement, and excise taxes or
penalties arising under the Employee Retirement Income Security Act of 1974)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; PROVIDED, HOWEVER, that, except as provided in
paragraph (b) hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board. The right to indemnification conferred in this Section shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; PROVIDED, HOWEVER, that, if the General Corporation Law of the
State of Delaware requires, the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may, by action of the Board, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
(b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after a
written claim has been
-5-
<PAGE>
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
(c) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, By-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) INSURANCE. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation,
-6-
<PAGE>
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
ARTICLE IX
----------
The Corporation shall not be governed by Section 203 of the General
Corporation Law of the State of Delaware.
-7-
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation, which restates and integrates and further amends the provisions
of the Certificate of Incorporation of this Corporation, as amended, and which
has been duly adopted in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware, has been executed by its duly
authorized officer this 9th day of November 1999.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
By: /s/ Michael E. Holmstrom
_______________________________________________
Name: Michael E. Holmstrom
Title: Senior Vice President and
Chief Financial Officer
-8-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE -- The registered office of
Alaska Communications Systems Group, Inc. (the "Corporation") shall be
established and maintained at the office of The Corporation Trust Company at The
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle, State of Delaware, and said Corporation Trust Company shall be
the registered agent of the Corporation in charge thereof.
SECTION 2. OTHER OFFICES -- The Corporation may have other
offices, either within or without the State of Delaware, at such place or places
as the Board of Directors may from time to time select or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS -- Annual meetings of stockholders
for the election of directors shall be held at such place, either within or
without the State of Delaware, and at such time and date as the Board of
Directors, by resolution, shall determine and as set forth in the notice of the
meeting. If the Board of Directors fails so to determine the time, date and
place of meeting, the annual meeting of stockholders shall be held at the
registered office of the Corporation on the first Tuesday in April. If the date
of the annual meeting shall fall upon a legal holiday, the meeting shall be held
on the next succeeding business day. At each annual meeting, the stockholders
entitled to vote shall elect a Board of Directors and they may transact such
other corporate business as shall be stated in the notice of the meeting.
SECTION 2. SPECIAL MEETINGS -- Special meetings of the
stockholders for any purpose or purposes may be called by the Chairman of the
Board or the President or by resolution of the Board of Directors.
SECTION 3. VOTING -- Each stockholder entitled to vote in
accordance with the terms of the Amended and Restated Certificate of
Incorporation of the Corporation ("the Certificate of Incorporation") and these
Amended and Restated By-Laws (the "By-Laws") may vote in person or by proxy, but
no proxy shall be voted after three years from its date unless such proxy
provides for a longer period. All elections for directors shall be decided by
plurality vote;
<PAGE>
all other questions shall be decided by majority vote except as otherwise
provided by the Certificate of Incorporation or the laws of the State of
Delaware.
A complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is entitled to be present.
SECTION 4. QUORUM -- Except as otherwise required by law, by
the Certificate of Incorporation or by these By-Laws, the presence, in person or
by proxy, of stockholders holding shares constituting a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors shall constitute a
quorum at all meetings of the stockholders. In case a quorum shall not be
present at any meeting, the Chairman of the Board or a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until the requisite amount of stock entitled
to vote shall be present; provided, however, that if the date of any adjourned
meeting is more than thirty (30) days after the date for which the meeting was
originally noticed, or if a new record date is fixed for the adjourned meeting,
written notice of the place, date, and time of the adjourned meeting shall be
given in conformity herewith. At any adjourned meeting, any business may be
transacted which might have been transacted at the original meeting. At any such
adjourned meeting at which a quorum is present, any business may be transacted
that might have been transacted at the meeting as originally noticed; but,
unless a new record date is fixed in accordance with applicable laws, only those
stockholders entitled to vote at the meeting as originally noticed shall be
entitled to vote at any adjournment or adjournments thereof.
SECTION 5. NOTICE OF MEETINGS -- Written notice, stating the
place, date and time of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called shall be given to each
stockholder entitled to vote thereat, at his or her address as it appears on the
records of the Corporation, not less than ten nor more than sixty days before
the date of the meeting (except as otherwise required by applicable law). No
business other than that stated in the notice shall be transacted at any meeting
without the unanimous consent of all the stockholders entitled to vote thereat.
SECTION 6. ACTION WITHOUT MEETING -- Unless otherwise provided
by the Certificate of Incorporation, any action required or permitted to be
taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon
-2-
<PAGE>
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for such meeting had been the date that written consents signed by a
sufficient number of stockholders to take the action were delivered to the
Corporation in accordance with Section 228 of the General Corporation Law of the
State of Delaware.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM -- The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors.
The exact number of directors shall initially be three and may thereafter be
fixed from time to time by the Board of Directors. Directors shall be elected at
the annual meeting of stockholders and each director shall be elected to serve
until his or her successor shall be elected and shall qualify. A director need
not be a stockholder.
SECTION 2. RESIGNATIONS -- Any director may resign at any
time. Such resignation shall be made in writing, and shall take effect at the
time specified therein, and if no time be specified, at the time of its receipt
by the Chairman of the Board, the President or the Secretary. The acceptance of
a resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES -- If the office of any director becomes
vacant or any new directorship is created, the remaining directors in office,
though less than a quorum, by a majority vote, may appoint any qualified person
to fill such vacancy or new directorship, who shall hold office for the
unexpired term and until his or her successor shall be duly chosen. If the
office of any director becomes vacant or any new directorship is created and
there are no remaining directors, the stockholders may elect any qualified
person to fill such vacancy or new directorship, in accordance with the
provisions of Article II, Section 3, of these By-Laws, at a special meeting
called for such purpose.
SECTION 4. REMOVAL -- Except as hereinafter provided, any
director or directors may be removed either for or without cause at any time by
the affirmative vote of the holders of a majority of the voting power of all of
the then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, at an annual meeting or a special
meeting called for the purpose, and the vacancy thus created may be filled, at
such meeting, by the affirmative vote of holders of shares constituting a
majority of the voting power of all of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors.
SECTION 5. COMMITTEES -- The Board of Directors may designate
one or more committees, including an Executive Committee, each committee to
consist of one or more directors of the Corporation. The Executive Committee, if
any, shall be authorized to exercise all of the powers and authority of the
Board to the fullest extent permitted under Delaware law.
-3-
<PAGE>
To the fullest extent permitted by Delaware law, any other
committee, to the extent provided in the resolution of the Board of Directors,
or in these By-Laws, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
SECTION 6. MEETINGS -- The newly elected directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent of
all the Directors.
Regular meetings of the Board of Directors may be held without
notice at such places and times as shall be determined from time to time by
resolution of the Board of Directors.
Special meetings of the Board of Directors may be called by
the Chairman of the Board or the President, or by the Secretary on the written
request of any two directors, on at least one day's notice of the place, date
and time of such meeting given to each director (except that notice to any
director may be waived in writing by such director).
Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in any meeting
of the Board of Directors or any committee thereof by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
SECTION 7. QUORUM -- A majority of the Directors then in
office shall constitute a quorum for the transaction of business. If at any
meeting of the Board of Directors there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time until a
quorum is obtained, and no further notice thereof need be given other than by
announcement at the meeting which shall be so adjourned. The vote of the
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors unless the Certificate of
Incorporation or these By-Laws shall require the vote of a greater number.
SECTION 8. ACTION WITHOUT MEETING -- Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if a written consent thereto is
signed by all members of the Board of Directors or of such committee, as the
case may be, and such written consent is filed with the minutes of proceedings
of the Board of Directors or such committee.
-4-
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS -- The officers of the Corporation shall
be a Chairman of the Board (if an officer), a President, one or more Vice
Presidents, a Treasurer and a Secretary, all of whom shall be elected by the
Board of Directors and shall hold office until their successors are duly elected
and qualified. In addition, the Board of Directors may elect such Assistant
Secretaries and Assistant Treasurers as they may deem proper. The Board of
Directors may appoint such other officers and agents as it may deem advisable,
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors.
SECTION 2. CHAIRMAN OF THE BOARD -- The Chairman of the Board
may or may not be an officer of the Corporation, at the discretion of the Board
of Directors. He or she shall preside at all meetings of the Board of Directors
and shall have and perform such other duties as may be assigned to him or her by
the Board of Directors. The Chairman of the Board (if an officer) shall have the
power to execute bonds, mortgages and other contracts on behalf of the
Corporation, and to cause the seal of the Corporation to be affixed to any
instrument requiring it, and when so affixed the seal shall be attested to by
the signature of the Secretary or the Treasurer or an Assistant Secretary or an
Assistant Treasurer.
SECTION 3. PRESIDENT -- The President shall have the general
powers and duties of supervision and management usually vested in the office of
President of a corporation. The President shall have the power to execute bonds,
mortgages and other contracts on behalf of the Corporation, and to cause the
seal to be affixed to any instrument requiring it, and when so affixed the seal
shall be attested to by the signature of the Secretary or the Treasurer or an
Assistant Secretary or an Assistant Treasurer.
SECTION 4. VICE PRESIDENTS -- Each Vice President shall have
such powers and shall perform such duties as shall be assigned to him or her by
the Board of Directors.
SECTION 5. TREASURER -- The Treasurer shall be the Chief
Financial Officer of the Corporation. He or she shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He or she
shall deposit all moneys and other valuables in the name and to the credit of
the Corporation in such depositaries as may be designated by the Board of
Directors. He or she shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, the Chairman of the Board (if an officer), or
the President, taking proper vouchers for such disbursements. He or she shall
render to the Chairman of the Board, the President and Board of Directors at the
regular meetings of the Board of Directors, or whenever they may request it, an
account of all his or her transactions as Treasurer and of the financial
condition of the Corporation. If required by the Board of Directors, he or she
shall give the Corporation a bond
-5-
<PAGE>
for the faithful discharge of his or her duties in such amount and with such
surety as the Board of Directors shall prescribe.
SECTION 6. SECRETARY -- The Secretary shall give, or cause to
be given, notice of all meetings of stockholders and of the Board of Directors
and all other notices required by law or by these By-Laws, and in case of his or
her absence or refusal or neglect so to do, any such notice may be given by any
person thereunto directed by the Chairman of the Board or the President, or by
the Board of Directors, upon whose request the meeting is called as provided in
these By-Laws. He or she shall record all the proceedings of the meetings of the
Board of Directors, any committees thereof and the stockholders of the
Corporation in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him or her by the Board of Directors, the Chairman
of the Board or the President. He or she shall have the custody of the seal of
the Corporation and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors, the Chairman of the Board or the
President, and attest to the same.
SECTION 7. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES --
Assistant Treasurers and Assistant Secretaries, if any, shall be elected and
shall have such powers and shall perform such duties as shall be assigned to
them, respectively, by the Board of Directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK -- A certificate of stock
shall be issued to each stockholder certifying the number of shares owned by
such stockholder in the Corporation. Certificates of stock of the Corporation
shall be of such form and device as the Board of Directors may from time to time
determine.
SECTION 2. LOST CERTIFICATES -- A new certificate of stock may
be issued in the place of any certificate theretofore issued by the Corporation,
alleged to have been lost or destroyed, and the Board of Directors may, in its
discretion, require the owner of the lost or destroyed certificate, or such
owner's legal representatives, to give the Corporation a bond, in such sum as
they may direct, to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss of any such certificate, or the
issuance of any such new certificate.
SECTION 3. TRANSFER OF SHARES -- The shares of stock of the
Corporation shall be transferable only upon its books by the holders thereof in
person or by their duly authorized attorneys or legal representatives, and upon
such transfer the old certificates shall be surrendered to the Corporation by
the delivery thereof to the person in charge of the stock and transfer books and
ledgers, or to such other person as the Board of Directors may designate, by
whom they shall be cancelled, and new certificates shall thereupon be issued. A
-6-
<PAGE>
record shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
SECTION 4. STOCKHOLDERS RECORD DATE -- In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and which
record date: (1) in the case of determination of stockholders entitled to vote
at any meeting of stockholders or adjournment thereof, shall, unless otherwise
required by law, not be more than sixty nor less than ten days before the date
of such meeting; (2) in the case of determination of stockholders entitled to
express consent to corporate action in writing without a meeting, shall not be
more than ten days from the date upon which the resolution fixing the record
date is adopted by the Board of Directors; and (3) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (1) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
when no prior action of the Board of Directors is required by law, shall be the
first day on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in accordance with
applicable law, or, if prior action by the Board of Directors is required by
law, shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 5. DIVIDENDS -- Subject to the provisions of the
Certificate of Incorporation and any Preferred Stock Designation (as defined
therein) the Board of Directors may, in its sole discretion, declare dividends
upon stock of the Corporation out of funds legally available therefor. Before
declaring any dividend there may be set apart out of any funds of the
Corporation available for dividends, such sum or sums as the Board of Directors
from time to time in their discretion deem proper for such purposes as the Board
of Directors shall deem conducive to the interests of the Corporation.
SECTION 6. SEAL -- The corporate seal of the Corporation shall
be in such form as shall be determined by resolution of the Board of Directors.
Said seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise imprinted upon the subject document or paper.
-7-
<PAGE>
SECTION 7. FISCAL YEAR -- The fiscal year of the Corporation
shall be determined by resolution of the Board of Directors.
SECTION 8. CHECKS -- All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, or agent or
agents, of the Corporation, and in such manner as shall be determined from time
to time by resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE -- Whenever any notice
is required to be given under these By-Laws, personal notice is not required
unless expressly so stated, and any notice so required shall be deemed to be
sufficient if given by depositing the same in the United States mail, postage
prepaid, addressed to the person entitled thereto at his or her address as it
appears on the records of the Corporation, and such notice shall be deemed to
have been given on the day of such mailing. Stockholders not entitled to vote
shall not be entitled to receive notice of any meetings except as otherwise
required by law. Whenever any notice is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation or of these By-Laws, a waiver thereof, in writing and signed by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to such required notice.
ARTICLE VI
AMENDMENTS
These By-Laws may be altered, amended or repealed at any
annual meeting of the stockholders (or at any special meeting thereof if notice
of such proposed alteration, amendment or repeal to be considered is contained
in the notice of such special meeting) by the affirmative vote of the holders of
shares constituting a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors. Except as otherwise provided in the
Certificate of Incorporation, the Board of Directors may by majority vote of
those present at any meeting at which a quorum is present alter, amend or repeal
these By-Laws, or enact such other By-Laws as in their judgment may be advisable
for the regulation and conduct of the affairs of the Corporation.
-8-
<PAGE>
EXHIBIT 4.1
[SPECIMEN COMMON STOCK CERTIFICATE]
[FACE OF CERTIFICATE]
COMMON STOCK COMMON STOCK
NUMBER SHARES
[LOGO]
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
NEW YORK, NY OR RIDGEFIELD PARK, NJ CERTAIN DEFINITIONS
CUSIP 01167P 10 1
THIS CERTIFIES THAT is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE
PER SHARE, OF
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC. (hereinafter, the "Corporation"),
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Donn T. Wonnell [SEAL] /s/ Charles B. Robinson
SECRETARY CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
By:
AUTHORIZED SIGNATURE
<PAGE>
[BACK OF CERTIFICATE]
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
The Corporation will furnish without charge to each stockholder who so requests
a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent and Registrar.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
COM PROP -- as community property
UNIF GIFT MIN ACT -- _______________ Custodian _____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _________________
(State)
UNIF TRF MIN ACT -- _______________ Custodian (until age _____)
(Cust)
_______ under Uniform Transfer
(Minor)
to Minors Act _________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Authority
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
<PAGE>
Dated __________________________
________________________________________________________________________________
________________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By______________________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 4.4
SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT, dated as of
November __, 1999 (this "AMENDMENT"), is made by and among Alaska Communications
Systems Group, Inc., a Delaware corporation (the "Company"), (formerly known as
ALEC Holdings, Inc.) and the other persons listed on the signature pages hereto.
WITNESSETH:
WHEREAS, the Company and the stockholders listed on the signature pages
hereto are parties to a Stockholders' Agreement, dated as of May 14, 1999 (as
amended, the "STOCKHOLDERS' AGREEMENT", capitalized terms used but not defined
herein having the meanings assigned to them in the Stockholders' Agreement);
WHEREAS, in connection with the Company's proposed IPO, the parties
hereto wish to amend the Stockholders' Agreement in the manner set forth below
to limit the IPO to sales of Common Stock by the Company;
NOW, THEREFORE, in consideration of the premises and of the terms and
conditions contained herein and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto, intending to be
legally bound, agree as follows:
SECTION 1. PIGGYBACK REGISTRATIONS. Notwithstanding anything in Section
3.1.1 of the Stockholders' Agreement to the contrary, and pursuant to the
provisions of Section 5.11 of the Stockholders' Agreement, the undersigned
hereby agree that any and all rights under Section 3.1.1 of the Stockholders'
Agreement, including any rights to receive the Piggyback Notice or to effect or
participate in a Piggyback Registration of the undersigned's shares of Common
Stock, shall not apply to the proposed IPO, as contemplated by the Registration
Statement on Form S-1 (File No. 333-88753) filed by the Company with the SEC
under the Securities Act, as the same may be amended or supplemented; PROVIDED
that this Amendment shall expire and have no further effect if the Company does
not consummate the proposed IPO by March 31, 2000.
SECTION 2. EFFECTS OF AMENDMENT. Except as set forth in Section 1 hereof,
no other rights or obligations of the undersigned holders of Registrable
Securities or the Company under the Stockholders' Agreement shall be affected
hereby, including any rights with respect to any subsequent registration. From
and after the date hereof, all references to the Stockholders' Agreement shall
be deemed to refer to the Stockholders' Agreement as amended by this Amendment.
SECTION 3. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
shall inure to the benefit of the parties, and their respective successors and
assigns. If any Stockholder or any Affiliate thereof or any Transferee of any
Stockholder shall acquire any shares of Common Stock in any manner, whether by
operation of law or otherwise, such shares shall be
<PAGE>
held subject to all of the terms of the Stockholders' Agreement as amended by
this Amendment, and by taking and holding such shares such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Amendment.
(b) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
(c) DESCRIPTIVE HEADINGS, ETC. The headings in this Amendment are for
convenience of reference only and shall not limit or otherwise affect the
meaning of terms contained herein. Unless the context of this Amendment
otherwise requires, references to "hereof," "herein," "hereby," "hereunder" and
similar terms shall refer to this entire Amendment.
(d) SEVERABILITY. If any term or provision of this Amendment shall to any
extent be invalid or unenforceable, the remainder of this Amendment shall not be
affected thereby, and each term and provision of this Amendment shall be valid
and enforceable to the fullest extent permitted by law. Upon the determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Amendment so
as to effect their original intent as closely as possible in an acceptable
manner to the end that transactions contemplated hereby are fulfilled to the
extent possible.
(e) FURTHER ASSURANCES. The parties hereto shall from time to time
execute and deliver all such further documents and do all acts and things as the
other parties may reasonably require to effectively carry out or better evidence
or perfect the full intent and meaning of this Amendment.
(f) COMPLETE AMENDMENT; COUNTERPARTS. This Amendment (together with the
Stockholders' Agreement and the other agreements referred to herein and therein)
constitutes the entire agreement of the parties and supersedes all other
agreements and understandings, both written and oral, among the parties or any
of them, with respect to the subject matter hereof. This Amendment may be
executed by any one or more of the parties hereto in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts shall
together constitute one and the same instrument and shall become effective upon
execution by holders of a sufficient number of shares of Common Stock, including
shares of Common Stock issuable upon exercise of Options and Warrants, as set
forth in Section 5.11 of the Stockholders' Agreement.
[SIGNATURE PAGES FOLLOW]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed on the date first written above.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(formerly ALEC HOLDINGS, INC.)
By: /s/ Charles E. Robinson
---------------------------------------
Name: Charles E. Robinson
Title: Chairman and
Chief Executive Officer
FOX PAINE CAPITAL FUND, L.P.,
By Fox Paine Capital Fund, LLC, its
General Partner
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
FPC INVESTORS, L.P.,
By Fox Paine Capital, LLC, its General Partner
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
ALEC COINVESTMENT FUND I, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
ALEC COINVESTMENT FUND II, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT]
<PAGE>
ALEC COINVESTMENT FUND III, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
ALEC COINVESTMENT FUND IV, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
ALEC COINVESTMENT FUND V, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
ALEC COINVESTMENT FUND VI, LLC,
By Fox Paine Capital, LLC, its Manager
By: /s/ W. Dexter Paine, III
---------------------------------------
Name:
Title:
DLJ INVESTMENT PARTNERS, L.P.,
By DLJ Investment Partners, Inc., Managing
General Partner
By: /s/ Ivy Dodes
---------------------------------------
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT]
<PAGE>
DLJ INVESTMENT FUNDING, INC.
By: /s/ Ivy Dodes
---------------------------------------
Name:
Title:
DLJ ESC II L.P.,
By DLJ LBO Plans Management Corporation,
its General Partner
By: /s/ Ivy Dodes
---------------------------------------
Name:
Title:
CHAMER COMPANY, INC.,
By: /s/ William H. Bittner
---------------------------------------
Name: William H. Bittner
Title: President
COOK INLET REGION, INC.
By: /s/ Mark Kroloff
---------------------------------------
Name:
Title:
/s/ Charles E. Robinson
-------------------------------------------
Charles E. Robinson
Management Investor
-------------------------------------------
James H. Huesgen
Management Investor
[SIGNATURE PAGE TO SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT]
<PAGE>
/s/ Wesley E. Carson
-------------------------------------------
Wesley E. Carson
Management Investor
/s/ Michael E. Holmstrom
-------------------------------------------
Michael E. Holmstrom
Management Investor
-------------------------------------------
Wayne Graham
Management Investor
/s/ Donn T. Wonnell
-------------------------------------------
Donn T. Wonnell
Management Investor
/s/ John Ayers
-------------------------------------------
John Ayers
Management Investor
[SIGNATURE PAGE TO SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT]
<PAGE>
Exhibit 4.9
SECOND AMENDMENT TO INDENTURE
SECOND AMENDMENT TO INDENTURE (this "Second Amendment")
dated as of November ____, 1999, among ALASKA COMMUNICATIONS
SYSTEMS GROUP, INC. (formerly known as ALEC Holdings, Inc.), a
Delaware corporation (the "Company"), and THE BANK OF NEW YORK, a
New York banking corporation, as trustee (the "Trustee").
W I T N E S S E T H :
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an Indenture (as amended, the "Indenture") dated as of May 14, 1999, providing
for the issuance of an aggregate principal amount of up to $46,928,435 of 13%
Senior Discount Debentures due 2011 (the "Securities");
WHEREAS, the parties to the Indenture wish to cure a defect and
inconsistency in the definition of EBITDA set forth in Section 1.01
(Definitions) of the Indenture;
WHEREAS, pursuant to Sections 9.01 (and in accordance with Section 9.02)
of the Indenture, the Trustee and the Company are authorized to execute and
deliver this Second Amendment;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the Company
and the Trustee mutually covenant and agree for the equal and ratable benefit of
the holders of the Securities as follows:
1. DEFINITION OF EBITDA. The last paragraph of the definition of "EBITDA"
in Section 1.01 (Definitions) of the Indenture is deleted and replaced in its
entirety by the following:
"Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary of Holdings shall
be added to Consolidated Net Income to compute EBITDA only to the
extent (and in the same proportion) that the net income of such
Restricted Subsidiary was included in calculating Consolidated Net
Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders."
<PAGE>
2. DEFINITION OF CONSOLIDATED NET INCOME. Clause (3) in the proviso to
the definition of "Consolidated Net Income" in Section 1.01 (Definitions) of
the Indenture is deleted and replaced in its entirety by the following:
(3) any net income of any Restricted Subsidiary (other than the Company) to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of its net income is not, at
the date of determination, permitted without any prior governmental
approval (which has not been obtained) or, directly or indirectly, by the
operation of the terms of its charter, or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders (in either
case, other than the Company), unless such restrictions with respect to
the payment of dividends or similar distributions have been legally
waived; except that the net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net
Income;
3. RATIFICATION OF INDENTURE; SECOND AMENDMENT PART OF INDENTURE. Except
as expressly amended hereby, the Indenture is in all respects ratified and
confirmed and all the terms, conditions and provisions thereof shall remain in
full force and effect. This Second Amendment shall form a part of the Indenture
for all purposes, and every holder of Securities heretofore or hereafter
authenticated and delivered shall be bound hereby.
4. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
5. REPRESENTATIONS. (a) DLJ Investment Partners, L.P., DLJ Investment
Funding, Inc. and DLJ ESC II, L.P. represent and warrant that they hold all of
the outstanding Securities.
(b) The Trustee makes no representation as to the validity or sufficiency
of this Second Amendment.
6. COUNTERPARTS. The parties may sign any number of copies of this Second
Amendment. Each signed copy shall be an original, but all of them together
represent the same agreement.
7. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and shall not affect the construction thereof.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be duly executed as of the date first above written.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(formerly known as ALEC Holdings, Inc.)
By:
----------------------------------------
Name:
Title:
THE BANK OF NEW YORK, as Trustee
By:
----------------------------------------
Name:
Title:
AGREED AND CONSENTED TO:
DLJ Investment Partners, L.P.,
By DLJ Investment Partners, Inc.,
Its General Partner
By:
----------------------------------
Name:
Title:
DLJ Investment Funding, Inc.,
By:
----------------------------------
Name:
Title:
DLJ ESC II, L.P.,
DLJ LBO Plans Management Corporation,
Its General Partner
By:
----------------------------------
Name:
Title:
[SIGNATURE PAGE TO SECOND AMENDMENT TO INDENTURE]
-3-
<PAGE>
Exhibit 5.1
[LETTERHEAD OF WACHTELL, LIPTON, ROSEN & KATZ]
November 17, 1999
Alaska Communications Systems Group, Inc.
510 L. Street, Suite 500
Anchorage, Alaska 99501
Ladies and Gentlemen:
In connection with the registration of 10,000,000 shares of
common stock, par value $.01 per share (the "Shares"), of Alaska Communications
Systems Group, Inc., a Delaware corporation (the "Company"), under the
Securities Act of 1933, as amended, on Form S-1 filed with the Securities and
Exchange Commission (the "Commission") on October 8, 1999 (File No.
333-88753), as amended by Amendment No. 1 filed with the Commission on
November 1, 1999 and Amendment No. 2 filed with the Commission on
November 17, 1999 (collectively, and as it may be further amended,
the "Registration Statement"), you have requested our opinion with
respect to the following matters.
In connection with the delivery of this opinion, we have
examined originals or copies of the Amended and Restated Certificate of
Incorporation and a form of the Amended and Restated By-Laws of the Company
as set forth in exhibits to the Registration Statement, the Registration
Statement, certain resolutions adopted or to be adopted by the Board of
Directors, the form of stock certificate representing the Shares and such
other records, agreements, instruments, certificates and other documents of
public officials, the Company and its officers and representatives and have
made such inquiries of the Company and its officers and representatives, as
we have deemed necessary or appropriate in connection with the opinions set
forth herein. We are familiar with the proceedings heretofore taken, and with
the additional proceedings proposed to be taken, by the Company in connection
with the authorization, registration, issuance and sale of the Shares. With
respect to certain factual matters material to our opinion, we have relied
upon representations from, or certificates of, officers of the Company. In
making such examination and rendering the opinions set forth below, we have
assumed without verification the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the authenticity
of the originals of such documents submitted to us as certified copies, the
conformity to originals of all documents submitted to us as copies, the
authenticity of the originals of such latter documents, and that all
documents submitted to us as certified copies are true and correct copies of
such originals.
Based on such examination and review, and subject to the
foregoing, we are of the opinion that the Shares have been duly authorized and,
upon issuance, delivery and payment therefor in the manner contemplated by the
Registration Statement, will be validly issued, fully paid and non-assessable.
We are members of the Bar of the State of New York, and we
have not considered, and we express no opinion as to, the laws of any
jurisdiction other than the laws of the
<PAGE>
Alaska Communications Systems Group, Inc.
November 17, 1999
Page 2
United States of America, the State of New York and the General Corporation
Law of the State of Delaware.
We consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm in the Prospectus that
is a part of the Registration Statement. In giving such consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Wachtell, Lipton, Rosen & Katz
<PAGE>
EXHIBIT 10.8
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers, employees and/or consultants
and to provide the Company and its Subsidiaries and Affiliates with a stock plan
providing incentives directly linked to the profitability of the Company's
businesses and increases in the Company's shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
(a) "AFFILIATE" means a corporation or other entity controlled by,
controlling or under common control with the Company and designated by the
Committee from time to time as such.
(b) "AWARD" means a Stock Appreciation Right, Stock Option, Restricted
Stock, Performance Unit, or other stock-based award.
(c) "AWARD AGREEMENT" means a written agreement setting forth the terms
and conditions of an Award.
(d) "AWARD CYCLE" shall mean a period of consecutive fiscal years or
portions thereof designated by the Committee over which Performance Units are to
be earned.
(e) "BOARD" means the Board of Directors of the Company.
(f) "BUSINESS COMBINATION" has the meaning set forth in Section
10(b)(iii).
(g) "CAUSE" means, unless otherwise provided by the Committee, (1)
"Cause" as defined in any Individual Agreement to which the participant is a
party, or (2) if there is no such Individual Agreement or, if it does not define
Cause, any of the following on the part of the participant: an intentional
failure to perform assigned duties; willful misconduct in the course of the
participant's employment; breach of a fiduciary duty involving personal profit;
or acts or omissions of personal dishonesty, any of which results in material
loss to the Company or any of its Subsidiaries or Affiliates. The Committee
shall, unless otherwise provided in an Individual Agreement with the
participant, have the sole discretion to determine whether "Cause" exists, and
its determination shall be final.
(h) "CHANGE IN CONTROL" has the meaning set forth in Section 10(b).
(i) "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(j) "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
<PAGE>
(k) "COMMITTEE" means the Committee referred to in Section 2.
(l) "COMMON STOCK" means the common stock, par value $.01 per share, of
the Company.
(m) "COMPANY" means Alaska Communications Systems Group, Inc., a
Delaware corporation.
(n) "COVERED EMPLOYEE" means a participant designated prior to or at
the time of the grant of Restricted Stock or Performance Units by the Committee
as an individual who is or may be a "covered employee" within the meaning of
Section 162(m)(3) of the Code in the year in which Restricted Stock or
Performance Units are expected to be taxable to such participant.
(o) "DISABILITY" means, unless otherwise provided by the Committee, the
permanent and total inability of a participant by reason of mental or physical
infirmity, or both, to perform the work customarily assigned to him or her, if a
medical doctor selected or approved by the Board, and knowledgeable in the field
of such infirmity, advises the Committee either that it is not possible to
determine when such Disability will terminate or that it appears probable that
such Disability will be permanent during the remainder of said participant's
lifetime.
(p) "ELIGIBLE INDIVIDUALS" means officers, employees and consultants of
the Company or any of its Subsidiaries or Affiliates, and prospective employees
and consultants, who have accepted offers of employment or consultancy from the
Company or its Subsidiaries or Affiliates, and who are or will be responsible
for or contribute to the management, growth or profitability of the business of
the Company, or its Subsidiaries or Affiliates.
(q) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.
(r) "FAIR MARKET VALUE" of the Common Stock means, as of any given
date, the closing sale price of the Common Stock as reported by The Nasdaq
National Market on such date or, if there are no reported sales on such date, on
the last day prior to such date on which there were sales of the Common Stock on
the The Nasdaq National Market or, if the Common Stock is not quoted on The
Nasdaq National Market, the closing sale price of the Common Stock on any
national securities exchange on which the Common Stock is listed on such date.
If there is no regular public trading market for such Common Stock, the Fair
Market Value of the Common Stock shall be determined by the Committee in good
faith.
(s) "FOX PAINE" has the meaning set forth in Section 10(b)(i).
(t) "FREESTANDING STOCK APPRECIATION RIGHT" has the meaning set forth
in Section 6(a).
(u) "INCUMBENT BOARD" has the meaning set forth in Section 10(b)(ii).
(v) "INCENTIVE STOCK OPTION" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
(w) "INDIVIDUAL AGREEMENT" means an employment, consulting or similar
agreement between
-2-
<PAGE>
a participant and the Company or one of its Subsidiaries or Affiliates.
(x) "NONQUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option.
(y) "OUTSTANDING COMPANY COMMON STOCK" has the meaning set forth in
Section 10(b)(i).
(z) "OUTSTANDING COMPANY VOTING POWER" has the meaning set forth in
Section 10(b)(i).
(aa) "PERFORMANCE GOALS" means the performance goals established by the
Committee in connection with the grant of Restricted Stock or Performance Units.
In the case of Qualified Performance-Based Awards, (i) such goals shall be based
on the attainment of specified levels of one or more of the following measures:
return on equity, return on assets, operating income, earnings per share, net
income and/or achievement of pre-determined, objectively defined strategic
performance goals, and (ii) such Performance Goals shall be set by the Committee
within the time period prescribed by Section 162(m) of the Code and related
regulations. Performance Goals may be stated in the alternative or in
combination.
(bb) "PERFORMANCE UNITS" means an Award granted under Section 8.
(cc) "PERFORMANCE UNITS AGREEMENT" means a written agreement setting
forth the terms and conditions of an award of Performance Units.
(dd) "PERSON" has the meaning set forth in Section 10(b)(i).
(ee) "PLAN" means the Alaska Communications Systems Group, Inc. 1999
Stock Incentive Plan, as set forth herein and as hereinafter amended from time
to time.
(ff) "QUALIFIED PERFORMANCE-BASED AWARD" means an Award of Restricted
Stock or Performance Units designated as such by the Committee at the time of
grant, based upon a determination that (i) the recipient is a Covered Employee
and (ii) the Committee wishes such Award to qualify for the Section 162(m)
Exemption.
(gg) "RESTRICTED STOCK" means an Award granted under Section 7.
(hh) "RESTRICTED STOCK AGREEMENT" means a written agreement setting
forth the terms and conditions of an award of Restricted Stock.
(ii) "RESTRICTION PERIOD" has the meaning set forth in Section
7(c)(ii).
(jj) "RETIREMENT" means retirement from the employ of the Company or
its Subsidiaries or Affiliates at the normal or early retirement date as set
forth in any tax-qualified retirement/pension plan of the Company.
(kk) "RULE 16b-3" means Rule 16b-3, as promulgated by the Commission
under Section 16(b) of the Exchange Act, as amended from time to time.
-3-
<PAGE>
(ll) "SECTION 162(m) EXEMPTION" means the exemption from the limitation
on deductibility imposed by Section 162(m) of the Code that is set forth in
Section 162(m)(4)(C) of the Code.
(mm) "STOCK APPRECIATION RIGHT" means an Award granted under Section 6.
(nn) "STOCK OPTION" means an Award granted under Section 5.
(oo) "SUBSIDIARY" means any corporation, partnership, joint venture or
other entity during any period in which at least a 50% voting or profits
interest is owned, directly or indirectly, by the Company or any successor to
the Company.
(pp) "TANDEM STOCK APPRECIATION RIGHT" has the meaning set forth in
Section 6(a).
(qq) "TERMINATION OF EMPLOYMENT" means the termination of the
participant's employment with, or performance of services for, the Company and
any of its Subsidiaries or Affiliates. A participant employed by, or performing
services for, a Subsidiary or an Affiliate shall also be deemed to incur a
Termination of Employment if the Subsidiary or Affiliate ceases to be such a
Subsidiary or an Affiliate, as the case may be, and the participant does not
immediately thereafter become an employee of, or service-provider for, the
Company or another Subsidiary or Affiliate. Temporary absences from employment
because of illness, vacation or leave of absence and transfers among the Company
and its Subsidiaries and Affiliates shall not be considered Terminations of
Employment. For purposes of the Plan, a participant's employment shall be deemed
to have terminated at the close of business on the day preceding the first date
on which he or she is no longer for any reason whatsoever employed by the
Company or any of its Subsidiaries or Affiliates.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee of the
Board or such other committee of the Board as the Board may from time to time
designate (the "Committee"), which shall be composed of not less than two
directors, and shall be appointed by and serve at the pleasure of the Board.
The Committee shall have plenary authority to grant Awards pursuant to
the terms of the Plan to Eligible Individuals.
Among other things, the Committee shall have the authority, subject to
the terms of the Plan:
(a) To select the Eligible Individuals to whom Awards may from time to
time be granted;
(b) To determine whether and to what extent Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Units and other stock-based awards or any combination thereof are to
be granted hereunder;
(c) To determine the number of shares of Common Stock to be covered by
each Award
-4-
<PAGE>
granted hereunder;
(d) To determine the terms and conditions of any Award granted
hereunder (including, but not limited to, the option price (subject to Section
5(a)), any vesting condition, restriction or limitation (which may be related to
the performance of the participant, the Company or any Subsidiary or Affiliate)
and any vesting acceleration or forfeiture waiver regarding any Award and the
shares of Common Stock relating thereto, based on such factors as the Committee
shall determine;
(e) To modify, amend or adjust the terms and conditions of any Award,
at any time or from time to time, including but not limited to Performance
Goals; PROVIDED, HOWEVER, that the Committee may not (i) subject to the last
paragraph of Section 3, reduce the exercise price or cancel and regrant a Stock
Option theretofore granted or (ii) adjust upwards the amount payable with
respect to a Qualified Performance-Based Award or waive or alter the Performance
Goals associated therewith;
(f) To determine to what extent and under what circumstances Common
Stock and other amounts payable with respect to an Award shall be deferred; and
(g) To determine under what circumstances an Award may be settled in
cash or Common Stock under Sections (5)(i), 5(j), 6(b), 6(c) and 8(b)(iv).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the Committee may, except to the extent prohibited by applicable law
or the applicable rules of a stock exchange or automated quotation system,
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it; PROVIDED, that no such
delegation may be made that would cause Awards or other transactions under the
Plan to cease to be exempt from Section 16(b) of the Exchange Act or cause an
Award designated as a Qualified Performance-Based Award not to qualify for, or
to cease to qualify for, the Section 162(m) Exemption. Any such allocation or
delegation may be revoked by the Committee at any time.
Any determination made by the Committee or pursuant to delegated
authority pursuant to the provisions of the Plan with respect to any Award shall
be made in the sole discretion of the Committee or such delegate at the time of
the grant of the Award or, unless in contravention of any express term of the
Plan, at any time thereafter. All decisions made by the Committee or any
appropriately delegated officer pursuant to the provisions of the Plan shall be
final and binding on all persons, including the Company and Plan participants.
Any authority granted to the Committee may also be exercised by the
full Board, except to the extent that the grant or exercise of such authority
would cause any Award or transaction to
-5-
<PAGE>
become subject to (or lose an exemption under) Section 16(b) of the Exchange Act
or cause an Award designated as a Qualified Performance-Based Award not to
qualify for, or to cease to qualify for, the Section 162(m) Exemption. To the
extent that any permitted action taken by the Board conflicts with action taken
by the Committee, the Board action shall control.
SECTION 3. COMMON STOCK SUBJECT TO PLAN
The maximum number of shares of Common Stock that may be delivered to
participants and their beneficiaries under the Plan shall be 1,500,000. No
participant may be granted Stock Options and Freestanding Stock Appreciation
Rights covering in excess of 500,000 shares of Common Stock in any calendar
year. No participant may be granted more than 500,000 shares of Restricted Stock
or Performance Units covering in excess of 500,000 shares of Common Stock under
this Plan. Shares subject to an Award under the Plan may be authorized and
unissued shares or may be treasury shares.
If any Award is forfeited or if any Stock Option (and related Stock
Appreciation Right, if any) terminates, expires or lapses without being
exercised, or if any Stock Appreciation Right is exercised for cash, shares of
Common Stock subject to such Awards shall again be available for distribution in
connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a
stock split or an extraordinary corporate transaction, such as any merger,
consolidation, separation, including a spin-off, or other distribution of
stock or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company, the Committee or
Board may make such substitution or adjustments to reflect such change or
transaction in (i) the aggregate number and kind of shares reserved for
issuance under the Plan; (ii) the limitation upon Stock Options, Stock
Appreciation Rights, Restricted Stock and Performance Units to be granted to
any participant, to the extent such adjustment does not cause any Qualified
Performance-Based Award to fail to qualify for the Section 162(m) Exemption;
(iii) the number, kind and option or base price of shares or other property
subject to outstanding Stock Options, Stock Appreciation Rights, Restricted
Stock and Performance Units, to the extent such adjustment does not cause any
Qualified Performance Based Award to fail to qualify for the Section 162(m)
Exemption; (iv) the number and kind of shares or other property subject to
other outstanding Awards granted under the Plan; and/or (v) such other
equitable manner, in each case, as it may determine to be appropriate in its
sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any
Award shall always be a whole number. Such adjusted option price shall also
be used to determine the amount payable by the Company upon the exercise of
any Tandem Stock Appreciation Right.
SECTION 4. ELIGIBILITY
Awards may be granted under the Plan to Eligible Individuals. No grant
shall be made under this Plan to a director who is not an officer or a salaried
employee of the Company or its Subsidiaries or Affiliates.
-6-
<PAGE>
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards
granted under the Plan and may be of two types: Incentive Stock Options and
Nonqualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Nonqualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights); PROVIDED, HOWEVER, that
grants hereunder are subject to the aggregate limit on grants to individual
participants set forth in Section 3. Incentive Stock Options may be granted only
to employees of the Company and its subsidiaries (within the meaning of Section
424(f) of the Code). To the extent that any Stock Option is not designated as an
Incentive Stock Option or even if so designated does not qualify as an Incentive
Stock Option on or subsequent to its grant date, it shall constitute a
Nonqualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Nonqualified Stock Option. The grant of a Stock Option shall occur on the date
the Committee by resolution selects an Eligible Individual to receive a grant of
a Stock Option, determines the number of shares of Common Stock to be subject to
such Stock Option to be granted to such Eligible Individual and specifies the
terms and provisions of the Stock Option. The Company shall notify an Eligible
Individual of any grant of a Stock Option, and a written option agreement or
agreements shall be duly executed and delivered by the Company to the
participant. Such agreement or agreements shall become effective upon execution
by the Company and the participant.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee and set
forth in the option agreement, and shall not be less than the Fair Market Value
of the Common Stock subject to the Stock Option on the date of grant unless
otherwise determined by the Committee at the time of grant.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than 10 years after the
date the Stock Option is granted.
(c) EXERCISABILITY. Except as otherwise provided herein or as
determined by the Committee at the time of grant, each Stock Option shall be
exercisable in four equal annual installments, beginning on the first
anniversary of the date of grant. The Committee may at any time waive such
installment exercise provisions, in whole or in part, based on such factors as
the Committee may determine. In addition, the Committee may at any time
accelerate the exercisability of any Stock Option.
(d) METHOD OF EXERCISE. Subject to the provisions of this Section 5,
Stock Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of
-7-
<PAGE>
exercise to the Company specifying the number of shares of Common Stock subject
to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price by certified or bank check or such other instrument as the Company may
accept. If approved by the Committee, payment, in full or in part, may also be
made in the form of unrestricted Common Stock (by delivery of such shares or by
attestation) already owned by the optionee of the same class as the Common Stock
subject to the Stock Option (based on the Fair Market Value of the Common Stock
on the date the Stock Option is exercised); PROVIDED, HOWEVER, that, in the case
of an Incentive Stock Option, the right to make a payment in the form of already
owned shares of Common Stock of the same class as the Common Stock subject to
the Stock Option may be authorized only at the time the Stock Option is granted;
and PROVIDED, FURTHER, that such already owned shares have been held by the
optionee for at least six months at the time of exercise or had been purchased
on the open market.
If approved by the Committee, payment in full or in part may also be
made by delivering a properly executed exercise notice to the Company, together
with a copy of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds necessary to pay the purchase price,
and, if requested, reduced by the amount of any federal, state, local or foreign
withholding taxes. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
In addition, if approved by the Committee, payment in full or in part
may also be made by instructing the Committee to withhold a number of such
shares having a Fair Market Value on the date of exercise equal to the aggregate
exercise price of such Stock Option.
No shares of Common Stock shall be issued until full payment therefor
has been made. Except as otherwise provided in Section 5(j), an optionee shall
have all of the rights of a shareholder of the Company holding the Common Stock
that is subject to such Stock Option (including, if applicable, the right to
vote the shares and the right to receive dividends), when the optionee has given
written notice of exercise, has paid in full for such shares and, if requested,
has given the representation described in Section 13(a).
(e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution or (ii) in the case of a Nonqualified Stock Option, as
otherwise expressly permitted by the Committee including, if so permitted,
pursuant to a transfer to such optionee's immediate family, whether directly or
indirectly or by means of a trust or partnership or otherwise. For purposes of
the Plan, unless otherwise determined by the Committee, "immediate family" shall
mean, except as otherwise defined by the Committee, any child, sibling,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse,
niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
sister-in-law or brother-in-law, including adoptive relationships, of the
optionee. All Stock Options shall be exercisable, subject to the terms of the
Plan, only by the optionee, the guardian or legal representative of the
optionee, or any person to whom such option is transferred pursuant to this
paragraph, it being understood that the terms "holder" and
-8-
<PAGE>
"optionee" include such guardian, legal representative and other transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined by the Committee
or as set forth in an Award Agreement, if an optionee incurs a Termination of
Employment by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent then exercisable, or on such accelerated
basis as the Committee may determine, for a period of one year (or such other
period as the Committee may specify in the option agreement) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is shorter.
(g) TERMINATION BY REASON OF DISABILITY OR RETIREMENT. Unless otherwise
determined by the Committee or as set forth in an Award Agreement, if an
optionee incurs a Termination of Employment by reason of Disability or
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of termination, or
on such accelerated basis as the Committee may determine, for a period of one
year (or such other period as the Committee may specify in the option agreement)
from the date of such Termination of Employment or until the expiration of the
stated term of such Stock Option, whichever period is shorter; PROVIDED,
HOWEVER, that if the optionee dies within such period, any unexercised Stock
Option held by such optionee shall, notwithstanding the expiration of such
period, continue to be exercisable to the extent to which it was exercisable at
the time of death for a period of 12 months from the date of such death or until
the expiration of the stated term of such Stock Option, whichever period is
shorter. If an Incentive Stock Option is exercised after the expiration of the
exercise periods that apply for purposes of Section 422 of the Code, such Stock
Option will thereafter be treated as a Nonqualified Stock Option.
(h) OTHER TERMINATION. Unless otherwise determined by the Committee or
as set forth in an Award Agreement: (A) if an optionee incurs a Termination of
Employment for Cause, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Employment for any
reason other than death, Disability, Retirement or for Cause, any Stock Option
held by such optionee, to the extent it was then exercisable at the time of
termination, or on such accelerated basis as the Committee may determine, may be
exercised for the lesser of three months from the date of such Termination of
Employment or the balance of such Stock Option's term; PROVIDED, HOWEVER, that
if the optionee dies within such three-month period, any unexercised Stock
Option held by such optionee shall, notwithstanding the expiration of such
three-month period, continue to be exercisable to the extent to which it was
exercisable at the time of death for a period of 12 months from the date of such
death or until the expiration of the stated term of such Stock Option, whichever
period is shorter. Notwithstanding any other provision of this Plan to the
contrary, in the event an optionee incurs a Termination of Employment other than
for Cause during the 24-month period following a Change in Control, any Stock
Option held by such optionee may thereafter be exercised by the optionee, to the
extent it was exercisable at the time of termination, including on such
accelerated basis as provided in Section 10(a), for (x) the longer of (i) one
year from such date of termination or (ii) such other period as may be provided
in the Plan for such Termination of Employment or as the Committee may provide
in the option agreement, or (y) until expiration of the stated term of such
Stock Option, whichever period is shorter. If an Incentive Stock Option is
exercised after the
-9-
<PAGE>
expiration of the post-termination exercise periods that apply for purposes of
Section 422 of the Code, such Stock Option will thereafter be treated as a
Nonqualified Stock Option.
(i) CASHING OUT OF STOCK OPTION. On receipt of written notice of
exercise, the Committee may elect to cash out all or part of the portion of the
shares of Common Stock for which a Stock Option is being exercised by paying the
optionee an amount, in cash or Common Stock, equal to the excess of the Fair
Market Value of the Common Stock over the option price times the number of
shares of Common Stock for which the Option is being exercised on the effective
date of such cash-out.
(j) DEFERRAL OF OPTION SHARES. The Committee may from time to time
establish procedures pursuant to which an optionee may elect to defer, until a
time or times later than the exercise of an Option, receipt of all or a portion
of the shares of Common Stock subject to such Option and/or to receive cash at
such later time or times in lieu of such deferred shares, all on such terms and
conditions as the Committee shall determine. If any such deferrals are
permitted, then notwithstanding Section 5(d) above, an optionee who elects such
deferral shall not have any rights as a stockholder with respect to such
deferred shares unless and until shares are actually delivered to the optionee
with respect thereto, except to the extent otherwise determined by the
Committee.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted
without relationship to a Stock Option (each, a "Freestanding Stock Appreciation
Right") or in conjunction with all or part of any Stock Option granted under the
Plan (each, a "Tandem Stock Appreciation Right"). In the case of a Nonqualified
Stock Option, Tandem Stock Appreciation Rights may be granted either at or after
the time of grant of such Stock Option. In the case of an Incentive Stock
Option, Tandem Stock Appreciation Rights may be granted only at the time of
grant of such Stock Option. A Tandem Stock Appreciation Right shall terminate
and no longer be exercisable upon the termination or exercise of the related
Stock Option.
(b) TERMS OF FREESTANDING STOCK APPRECIATION RIGHTS. Freestanding Stock
Appreciation Rights shall be subject to such terms and conditions as shall be
determined by the Committee, including the following:
(i) a Freestanding Stock Appreciation Right shall be exercisable as
determined by the Committee, but in no event after ten years from
the date of grant;
(ii) the base price of a Freestanding Stock Appreciation Right shall
be the Fair Market Value of a share of Common Stock on the date
of grant. A Freestanding Stock Appreciation Right shall entitle
the holder, upon exercise of such right, to an amount in cash,
shares of Common Stock or both (as determined by the Committee),
with a value equal to the product of (A) the excess of the Fair
Market Value of a share of Common Stock on the date of exercise
of the Stock Appreciation Right over the base price of the Stock
Appreciation Right and (B) the number of shares of Common Stock
as to which such Stock Appreciation Right
-10-
<PAGE>
shall have been exercised with the Committee having the right to
determine the form of payment;
(iii) a Freestanding Stock Appreciation Right shall be exercised by
giving written notice of exercise to the Company or its
designated agent specifying the number of shares of Common Stock
as to which such Stock Appreciation Right is being exercised; and
(iv) a Freestanding Stock Appreciation Right shall not be transferable
other than by will or laws of descent and distribution.
(c) TERMS OF TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock
Appreciation Rights shall be subject to such terms and conditions as shall be
determined by the Committee, including the following:
(i) Tandem Stock Appreciation Rights shall be exercisable only at
such time or times and to the extent that the Stock Options to
which they relate are exercisable in accordance with the
provisions of Section 5 and this Section 6;
(ii) upon the exercise of a Tandem Stock Appreciation Right, an
optionee shall be entitled to receive an amount in cash, shares
of Common Stock or both, in value equal to the excess of the Fair
Market Value of one share of Common Stock over the option price
per share specified in the related Stock Option multiplied by the
number of shares in respect of which the Stock Appreciation Right
shall have been exercised, with the Committee having the right to
determine the form of payment;
(iii) a Tandem Stock Appreciation Right may be exercised by an optionee
in accordance with this Section 6(c) by surrendering the
applicable portion of the related Stock Option in accordance with
procedures established by the Committee, and upon such exercise
and surrender, the optionee shall be entitled to receive an
amount determined in the manner prescribed in this Section 6(c);
and Stock Options which have been so surrendered shall no longer
be exercisable to the extent the related Tandem Stock
Appreciation Rights have been exercised;
(iv) upon the exercise of a Tandem Stock Appreciation Right, the Stock
Option or part thereof to which such Tandem Stock Appreciation
Right is related shall be deemed to have been exercised for the
purpose of the limitation set forth in Section 3 on the number of
shares of Common Stock to be issued under the Plan, but only to
the extent that the number of shares covered by the Tandem Stock
Appreciation Right at the time of exercise is based on the value
of the Tandem Stock Appreciation Right at such time; and
(v) Tandem Stock Appreciation Rights shall be transferable only to
permitted transferees of the underlying Stock Option in
accordance with Section 5(e).
-11-
<PAGE>
SECTION 7. RESTRICTED STOCK
(a) ADMINISTRATION. Shares of Restricted Stock may be awarded either
alone or in addition to other Awards granted under the Plan. The Committee shall
determine the Eligible Individuals to whom and the time or times at which grants
of Restricted Stock will be awarded, the number of shares to be awarded to any
Eligible Individual, the conditions for vesting, the time or times within which
such Awards may be subject to forfeiture and any other terms and conditions of
the Awards, in addition to those contained in Section 7(c).
(b) AWARDS AND CERTIFICATES. Shares of Restricted Stock shall be
evidenced in such manner as the Committee may deem appropriate, including
book-entry registration or issuance of one or more stock certificates. Any
certificate issued in respect of shares of Restricted Stock shall be registered
in the name of such participant and shall bear an appropriate legend referring
to the terms, conditions and restrictions applicable to such Award,
substantially in the following form:
The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions
(including forfeiture) of the Alaska Communications Systems Group,
Inc. 1999 Stock Incentive Plan and a Restricted Stock Agreement.
Copies of such Plan and Agreement are on file at the offices of
Alaska Communications Systems Group, Inc., 510 L. Street, Suite
500, Anchorage, Alaska 99501.
The Committee may require that the certificates evidencing such shares be held
in custody by the Company until the restrictions thereon shall have lapsed and
that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
(c) TERMS AND CONDITIONS. Shares of Restricted Stock shall be subject
to the following terms and conditions:
(i) the Committee may, prior to or at the time of grant, designate an
Award of Restricted Stock as a Qualified Performance-Based Award,
in which event it shall condition the grant or vesting, as
applicable, of such Restricted Stock upon the attainment of
Performance Goals. If the Committee does not designate an Award
of Restricted Stock as a Qualified Performance-Based Award, it
may also condition the grant or vesting thereof upon the
attainment of Performance Goals. Regardless of whether an Award
of Restricted Stock is a Qualified Performance-Based Award, the
Committee may also condition the grant or vesting thereof upon
the continued service of the participant. The conditions for
grant or vesting and the other provisions of Restricted Stock
Awards (including without limitation any applicable Performance
Goals) need not be the same with respect to each recipient. The
Committee may at any time, in its sole discretion, accelerate or
waive, in whole or in part, any of the foregoing restrictions;
PROVIDED, HOWEVER, that (except as otherwise provided in Section
7(c)(iv) or 10(a)(ii)) in the case of Restricted Stock that is a
Qualified Performance-Based Award, the applicable
-12-
<PAGE>
Performance Goals have been satisfied;
(ii) subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 7(c)(vi), during the period, if
any, set by the Committee, commencing with the date of such Award
for which such participant's continued service is required (the
"Restriction Period"), and until the later of (i) the expiration
of the Restriction Period and (ii) the date the applicable
Performance Goals (if any) are satisfied, the participant shall
not be permitted to sell, assign, transfer, pledge or otherwise
encumber shares of Restricted Stock;
(iii) except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) and in the Restricted Stock Agreement and except as
otherwise determined by the Committee, the participant shall
have, with respect to the shares of Restricted Stock, all of the
rights of a stockholder of the Company holding the class or
series of Common Stock that is the subject of the Restricted
Stock, including, if applicable, the right to vote the shares and
the right to receive any cash dividends. If so determined by the
Committee in the applicable Restricted Stock Agreement and
subject to Section 13(e) of the Plan, (A) cash dividends or
distributions of property other than Common Stock with respect to
the class or series of Common Stock that is the subject of the
Restricted Stock Award shall be automatically deferred and
reinvested in additional Restricted Stock, held subject to the
vesting of the underlying Restricted Stock, or held subject to
meeting Performance Goals applicable only to dividends or
distributions, and (B) dividends payable in Common Stock shall be
paid in the form of Restricted Stock of the same class as the
Common Stock with which such dividend was paid, held subject to
the vesting of the underlying Restricted Stock, or held subject
to meeting Performance Goals applicable only to dividends;
(iv) except to the extent otherwise provided in the applicable
Restricted Stock Agreement or Section 7(c)(i), 7(c)(ii), 7(c)(v)
or 10(a)(ii), upon a participant's Termination of Employment for
any reason during the Restriction Period or before the applicable
Performance Goals are satisfied, all shares still subject to
restriction shall be forfeited by the participant; PROVIDED,
HOWEVER, that the Committee shall have the discretion to waive,
in whole or in part, any or all remaining restrictions (other
than, in the case of Restricted Stock which is a Qualified
Performance-Based Award, satisfaction of the applicable
Performance Goals unless the participant's employment is
terminated by reason of death or Disability) with respect to any
or all of such participant's shares of Restricted Stock;
(v) if and when any applicable Performance Goals are satisfied and
the Restriction Period expires without a prior forfeiture of the
Restricted Stock, unlegended certificates for such shares shall
be delivered to the participant upon surrender of the legended
certificates; and
(vi) each Award shall be confirmed by, and be subject to, the terms of
a Restricted Stock
-13-
<PAGE>
Agreement.
SECTION 8. PERFORMANCE UNITS
(a) ADMINISTRATION. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the Eligible Individuals to whom and the time or times at which Performance
Units shall be awarded, the number of Performance Units to be awarded to any
Eligible Individual, the duration of the Award Cycle and any other terms and
conditions of the Award, in addition to those contained in Section 8(b).
(b) TERMS AND CONDITIONS. Performance Units Awards shall be subject to
the following terms and conditions:
(i) the Committee may, prior to or at the time of the grant,
designate Performance Units as Qualified Performance-Based
Awards, in which event it shall condition the settlement thereof
upon the attainment of Performance Goals, except as otherwise
provided in Section 8(b)(ii) or 10(a)(iii). If the Committee does
not designate Performance Units as Qualified Performance-Based
Awards, it may also condition the settlement thereof upon the
attainment of Performance Goals. Regardless of whether
Performance Units are Qualified Performance-Based Awards, the
Committee may also condition the settlement thereof upon the
continued service of the participant. The provisions of such
Awards (including without limitation any applicable Performance
Goals) need not be the same with respect to each recipient.
Subject to the provisions of the Plan and the Performance Units
Agreement referred to in Section 8(b)(v), Performance Units may
not be sold, assigned, transferred, pledged or otherwise
encumbered during the Award Cycle;
(ii) except to the extent otherwise provided in the applicable
Performance Unit Agreement or Section 8(b)(iii) or 10(a)(iii),
upon a participant's Termination of Employment for any reason
during the Award Cycle or before any applicable Performance Goals
are satisfied, all rights to receive cash or stock in settlement
of the Performance Units shall be forfeited by the participant;
PROVIDED, HOWEVER, that the Committee shall have the discretion
to waive, in whole or in part, any or all remaining payment
limitations (other than, in the case of Performance Units that
are Qualified Performance-Based Awards, satisfaction of the
applicable Performance Goals unless the participant's employment
is terminated by reason of death or Disability) with respect to
any or all of such participant's Performance Units;
(iii) a participant may elect to further defer receipt of cash or
shares in settlement of Performance Units for a specified period
or until a specified event, subject in each case to the
Committee's approval and to such terms as are determined by the
Committee. Subject to any exceptions adopted by the Committee,
such election must generally be made prior to commencement of the
Award Cycle for the Performance Units in question;
-14-
<PAGE>
(iv) at the expiration of the Award Cycle, the Committee shall
evaluate and certify the Company's performance in light of any
Performance Goals for such Award, and shall determine the number
of Performance Units granted to the participant which have been
earned, and the Committee shall then cause to be delivered (A) a
number of shares of Common Stock equal to the number of
Performance Units determined by the Committee to have been
earned, or (B) cash equal to the Fair Market Value of such number
of shares of Common Stock to the participant, as the Committee
shall elect (subject to any deferral pursuant to Section
8(b)(iii)); and
(v) each Award shall be confirmed by, and be subject to, the terms of
a Performance Unit Agreement.
SECTION 9. OTHER STOCK-BASED AWARDS
Other Awards of Common Stock and other Awards that are valued in whole
or in part by reference to, or are otherwise based upon, Common Stock, including
(without limitation) dividend equivalents and convertible debentures, may be
granted either alone or in conjunction with other Awards granted under the Plan.
In the event that an Award is granted under this Section 9 to a participant who
is an officer, the Award shall be granted in lieu of additional cash
compensation to the officer for services.
SECTION 10. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to
the contrary, except as otherwise provided in the applicable Award Agreement, in
the event of a Change in Control:
(i) any Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control is determined to have occurred,
and which are not then exercisable and vested, shall become fully
exercisable and vested to the full extent of the original grant;
(ii) the restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall
become free of all restrictions and become fully vested and
transferable to the full extent of the original grant;
(iii) all Performance Units shall be considered to be earned and
payable in full, and any deferral or other restriction shall
lapse and such Performance Units shall be settled in cash as
promptly as is practicable; PROVIDED, that, if such cash
settlement would make a Change in Control transaction ineligible
for pooling-of-interests accounting under APB No. 16 (that but
for the nature of such payment would otherwise be eligible for
such accounting treatment), the Committee shall have the ability
to substitute Common Stock with a Fair Market Value (as of the
effective date of the Change in Control) equal to the cash that
would otherwise be payable hereunder for such cash settlement or,
if necessary to preserve such accounting
-15-
<PAGE>
treatment, otherwise modify or eliminate such right; and
(iv) the Committee may also make additional adjustments and/or
settlements (including without limitation cash settlements) of
outstanding Awards as it deems appropriate and consistent with
the Plan's purposes and shall, with respect to any right granted
under this Plan that would make a Change in Control transaction
ineligible for pooling-of-interests accounting under APB No. 16
(that but for the nature of such grant would otherwise be
eligible for such accounting treatment), equitably adjust such
Award or, if necessary to preserve such accounting treatment,
otherwise modify or eliminate such right (as determined by the
Committee in its sole discretion).
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a
"Change in Control" shall mean the happening of any of the following events:
(i) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of both (A) 30% or more
of either (1) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (2) the
combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Power") and (B) more
than both the Outstanding Company Common Stock and the
Outstanding Company Voting Power owned or controlled directly or
indirectly by Fox Paine Capital, LLC and/or its controlled
affiliates (collectively, "Fox Paine"); PROVIDED, HOWEVER, that
for purposes of this subsection (i), the following acquisitions
shall not constitute a Change in Control: (1) any acquisition
directly from the Company, (2) any acquisition by the Company,
(3) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company or (4) any acquisition by any
corporation pursuant to a transaction which complies with clauses
(1), (2) and (3) of subsection (iii) of this Section 10(b); or
(ii) individuals who, as of the effective date of the Plan, constitute
the Board (the "Incumbent Board") cease for any reason not to
constitute at least a majority of the Board; PROVIDED, HOWEVER,
that any individual becoming a director subsequent to the
effective date of the Plan whose election, or nomination for
election by the Company's stockholders, was approved by Fox Paine
at a time when such entity controlled at least a majority of the
Outstanding Company Voting Power or by a vote of at least a
majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person
other than the Board; or
-16-
<PAGE>
(iii) consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless,
following such Business Combination: (1) all or substantially all
of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Power immediately prior to such
Business Combination beneficially own, directly or indirectly,
more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries), (2)
in the event that Fox Paine does not own or control at least 50%
of the Outstanding Company Voting Power upon the consummation of
the Business Combination, no Person (excluding any employee
benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities
of such corporation (and such amount exceeds the amount owned or
controlled by Fox Paine) except to the extent that such person
had such ownership of the Outstanding Company Common Stock or
Outstanding Company Voting Power immediately prior to the
Business Combination and (3) at least a majority of the members
of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the
time of the execution of the initial agreement, or of the action
of the Board, providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
SECTION 11. TERM, AMENDMENT AND TERMINATION
The Plan will terminate on the tenth anniversary of the effective date
of the Plan. Awards outstanding under the Plan as of such date shall not be
affected or impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of an
optionee under a Stock Option or a recipient of a Stock Appreciation Right,
Restricted Stock Award, Performance Unit Award or other stock-based Award
theretofore granted without the optionee's or recipient's consent, except such
an amendment made to comply with applicable law, stock exchange rules or
-17-
<PAGE>
accounting rules. In addition, no such amendment shall be made without the
approval of the Company's stockholders to the extent such approval is required
by applicable law or stock exchange rules; PROVIDED, HOWEVER, that stockholder
approval shall be required for any amendment which (i) increases the maximum
number of shares for which Stock Options may be granted under the Plan (subject,
however, to the provisions of Section 3 hereof), (ii) reduces the exercise price
at which Awards may be granted (subject, however, to the provisions of Section 3
hereof), (iii) extends the period during which Stock Options may be granted or
exercised beyond the times originally prescribed, (iv) changes the persons
eligible to participate in the Plan, or (v) materially increases the benefits
accruing to participants under the Plan.
Subject to the repricing restrictions in Section 2(e)(i), the Committee
may amend the terms of any Stock Option or other Award theretofore granted,
prospectively or retroactively, but no such amendment shall be permitted that
would cause an Award that is, or is intended to be, a Qualified
Performance-Based Award to fail or cease to qualify for the Section 162(m)
Exemption, nor shall any such amendment impair the rights of any holder without
the holder's consent except such an amendment made to cause the Plan or Award to
comply with applicable law, stock exchange or automated quotation system rules
or accounting rules.
Subject to the above provisions, the Board shall have the authority to
amend the Plan to take into account changes in law and in tax and accounting
rules as well as other developments, and to grant Awards which qualify for
beneficial treatment under such rules without stockholder approval.
SECTION 12. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan
for incentive and deferred compensation. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or make payments; PROVIDED, HOWEVER, that
unless the Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 13. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving
shares pursuant to an Award to represent to and agree with the Company in
writing that such person is acquiring the shares without a view to the
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made
pursuant thereto, the Company shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:
(1) quotation or approval for quotation upon notice of issuance of
such shares on The Nasdaq National Market, or listing on such
other securities exchange as may at the time be the principal
market for the Common Stock;
-18-
<PAGE>
(2) any registration or other qualification of such shares of the
Company under any state or federal law or regulation, or the
maintaining in effect of any such registration or other
qualification which the Committee shall, in its absolute
discretion upon the advice of counsel, deem necessary or
advisable; and
(3) obtaining any other consent, approval, or permit from any state
or federal governmental agency which the Committee shall, in its
absolute discretion after receiving the advice of counsel,
determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
(c) The Plan shall not constitute a contract of employment, and
adoption of the Plan shall not confer upon any employee any right to continued
employment, nor shall it interfere in any way with the right of the Company or
any Subsidiary or Affiliate to terminate the employment of any employee at any
time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for federal income tax
purposes with respect to any Award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Company regarding the
payment of, any federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise determined by
the Company, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements, and the Company and its Affiliates shall, to
the extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the participant. The Committee may establish such
procedures as it deems appropriate, including making irrevocable elections, for
the settlement of withholding obligations with Common Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the
time of any dividend payment shall only be permissible if sufficient shares of
Common Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Awards).
(f) The Committee shall establish such procedures as it deems
appropriate for a participant to designate a beneficiary to whom any amounts
payable in the event of the participant's death are to be paid or by whom any
rights of the participant, after the participant's death, may be exercised.
(g) In the case of a grant of an Award to any employee of a Subsidiary
of the Company, the Company may, if the Committee so directs, issue or transfer
the shares of Common Stock, if any, covered by the Award to the Subsidiary, for
such lawful consideration as the Committee may specify, upon the condition or
understanding that the Subsidiary will transfer the shares of
-19-
<PAGE>
Common Stock to the employee in accordance with the terms of the Award specified
by the Committee pursuant to the provisions of the Plan. All shares of Common
Stock underlying Awards that are forfeited or canceled shall revert to the
Company.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
(i) Except as otherwise provided in Section 5(e) or 6(c)(v) or by the
Committee, Awards under the Plan are not transferable except by will or by the
laws of descent and distribution.
(j) In the event an Award is granted to an Eligible Individual who is
employed or providing services outside the United States and who is not
compensated from a payroll maintained in the United States, the Committee may,
in its sole discretion, modify the provisions of the Plan as they pertain to
such individual to comply with applicable foreign law.
SECTION 14. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is adopted by the Board,
subject to the approval of the Company's stockholders.
-20-
<PAGE>
EXHIBIT 10.9
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK
COMPENSATION PLAN
SECTION 1. PURPOSE
The purposes of the Plan are to assist the Company in (a)
promoting a greater identity of interests between the Company's non-employee
directors and its stockholders, and (b) attracting and retaining directors by
affording them an opportunity to share in the future successes of the Company.
SECTION 2. DEFINITIONS
"AWARD" shall mean an award of Common Stock or Share Units as
contemplated by Sections 6 and 7 of the Plan.
"BOARD" shall mean the Board of Directors of the Company.
"BUSINESS COMBINATION" shall have the meaning set forth in
Section 10(b).
"CASH ACCOUNT" shall have the meaning set forth in Section
7(b).
"CASH DEFERRAL ELECTION" shall have the meaning set forth in
Section 7(b).
"CHANGE IN CONTROL" shall have the meaning set forth in
Section 10(b).
"CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations thereunder.
"COMMITTEE" shall have the meaning set forth in Section 5.
"COMMON STOCK" shall mean the common stock, $.01 par value, of
the Company.
"COMPANY" shall mean Alaska Communications Systems Group,
Inc., a Delaware corporation.
"DEFERRAL ELECTION" shall mean a Cash Deferral Election or a
Stock Deferral Election.
"EFFECTIVE DATE" shall have the meaning set forth in Section
12.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"FAIR MARKET VALUE" of a share of Common Stock shall mean,
as of any given date, the closing sale price of the Common Stock as reported
by The Nasdaq National Market on such date or, if there are no reported sales
on such date, on the last day prior to such date on
<PAGE>
which there were sales of the Common Stock on the The Nasdaq National Market or,
if the Common Stock is not quoted on The Nasdaq National Market, the closing
sale price of the Common Stock on any national securities exchange on which the
Common Stock is listed on such date. If there is no regular public trading
market for such Common Stock, the Fair Market Value of the Common Stock shall be
determined by the Committee in good faith.
"FEES" shall mean the annual retainer fee for a Non-Employee
Director in connection with his or her service on the Board for any calendar
year of the Company, any additional annual fees for such Non-Employee Director's
service as chairman of a Board or Committee and any fees scheduled to be paid
for attendance at Board or committee meetings, including telephonic meetings,
during the calendar year.
"FOX PAINE" has the meaning set forth in Section 10(b)(i).
"INCUMBENT BOARD" shall have the meaning set forth in Section
10(b).
"IPO" shall mean the Company's initial public offering of
Common Stock pursuant to a registration statement under the Securities Act of
1933, as amended.
"MANDATORY STOCK GRANT" shall have the meaning set forth in
Section 6(a).
"NEW DIRECTOR" shall have the meaning set forth in Section
6(d).
"NON-EMPLOYEE DIRECTOR" shall mean each member of the Board
who is not an employee of the Company; PROVIDED, HOWEVER, that any director,
officer, employee, partner or other affiliate of Fox Paine and/or its controlled
affiliates who is a member of the Board shall not be deemed a Non-Employee
Director for purposes of the Plan unless he or she so elects from time to time,
or with respect to specific Fees, in writing to the Board.
"OUTSTANDING COMPANY COMMON STOCK" shall have the meaning set
forth in Section 10(b).
"OUTSTANDING COMMON VOTING POWER" shall have the meaning set
forth in Section 10(b).
"PERSON" shall have the meaning set forth in Section 10(b).
"PLAN" shall mean the Alaska Communications Systems Group,
Inc. Non-Employee Director Stock Compensation Plan, as set forth herein and as
hereinafter amended from time to time.
"RETIREMENT" shall mean the retirement by a Non-Employee
Director from the Board in accordance with any stated policy of the Company on
retirement by members of the Board.
"SHARE ACCOUNT" shall have the meaning set forth in Section
7(a).
-2-
<PAGE>
"SHARE ELECTION" shall have the meaning set forth in Section
6(b).
"STOCK DEFERRAL ELECTION" shall have the meaning set forth in
Section 7(a).
SECTION 3. ELIGIBILITY
Each Non-Employee Director shall be eligible to participate in
the Plan. Any Non-Employee Director who becomes an employee of the Company shall
not thereafter be entitled to Awards under the Plan, but shall retain all
existing Awards pursuant to the terms of the Plan.
SECTION 4. SHARES SUBJECT TO THE PLAN
The maximum number of shares of Common Stock which shall be
reserved and available for use under the Plan shall be 150,000, subject to
adjustment pursuant to Section 11 hereunder. The shares issued under the Plan
may be authorized and unissued shares or may be treasury shares or both.
SECTION 5. ADMINISTRATION
The Plan shall be administered by the Board or any committee
thereof so designated by the Board (the "Committee"), which shall have full
authority to construe and interpret the Plan, to establish, amend and rescind
rules and regulations relating to the Plan, and to take all such actions and
make all such determinations in connection with the Plan as it may deem
necessary or desirable.
SECTION 6. STOCK IN LIEU OF RETAINER
(a) MANDATORY STOCK IN LIEU OF RETAINER. Each Non-Employee
Director shall receive in lieu of cash the number of shares of Common Stock
equal in value to 25% of the Fees (the "Mandatory Stock Grant"). Except with
respect to shares as to which a Stock Deferral Election is made in accordance
with the procedures established by the Committee from time to time, such shares
of Common Stock shall be delivered quarterly pursuant to Section 6(c) hereof.
(b) ELECTIVE STOCK IN LIEU OF RETAINER. Each Non-Employee
Director who delivers to the Company written notice of an irrevocable election
(a "Share Election"), in accordance with the procedures established by the
Committee from time to time, concerning the portion of the Fees remaining after
the Mandatory Stock Grant shall receive in lieu of cash (subject to a Stock
Deferral Election) an amount of shares of Common Stock equal in value to the
portion of such remaining Fees, as so designated by the Non-Employee Director in
such written notice (but only in increments of 25% of the Fees, and in no event
to exceed 100% of the Fees).
(c) NUMBER OF SHARES. The shares of Common Stock to be
delivered with respect to a Mandatory Stock Grant shall be determined by
dividing (i) 25% of the Non-Employee Director's Fees for the applicable calendar
quarter by (ii) the Fair Market Value of a share of Common Stock on the last
business day of such calendar quarter. The shares of Common Stock to be
-3-
<PAGE>
delivered with respect to a Share Election shall be determined by dividing (A)
the dollar amount of a Non-Employee Director's Fees for the appropriate calendar
quarter to which the Share Election applies, by (B) the Fair Market Value of the
Common Stock on the last business day of such calendar quarter. Notwithstanding
the foregoing, only whole numbers of shares shall be obtainable pursuant to this
Section 6, and any remaining Fees which otherwise would have purchased a
fractional share shall be paid in cash.
(d) EFFECT OF SHARE ELECTION. Any Share Election made by a
Non-Employee Director shall remain in effect for subsequent years during which
the Plan is in effect unless such Non-Employee Director delivers a written
notice setting forth a different election with respect to Fees which shall be
applied to Plan years beginning after such different election is filed. In the
event a Stock Deferral Election is not made, the shares of Common Stock shall be
transferred to the Non-Employee Director on the first business day after the end
of each calendar quarter. Share Elections must be delivered prior to the
commencement of the calendar year in which the fees are to be earned; PROVIDED,
HOWEVER, that any Non-Employee Director who commences his or her directorship
during a calendar year may make a Share Election during the 30-day period
immediately following commencement of his or her directorship (a "New
Director"); PROVIDED, FURTHER, that Non-Employee Directors may make Share
Elections with respect to 1999 prior to the Effective Date.
SECTION 7. DEFERRAL ELECTION
(a) SHARE UNITS. Each Non-Employee Director may irrevocably
elect annually (a "Stock Deferral Election") to defer receiving all or a portion
of the shares of Common Stock that would otherwise be transferred upon a
Mandatory Stock Grant or Share Election. A Non-Employee Director who makes a
Stock Deferral Election with respect to a Mandatory Stock Grant or Share
Election shall have a number of stock units representing the amount of deferred
shares of Common Stock credited to a "Share Account" maintained by the Company
in the form of "Share Units."
(b) CASH DEFERRAL. Each Non-Employee Director may irrevocably
elect annually (a "Cash Deferral Election") to defer receiving all or a portion
of the Fees that would otherwise be paid in cash. A Non-Employee Director who
makes a Cash Deferral Election with respect to such Fees shall have the amount
of such deferred Fees credited to a "Cash Account" maintained by the Company.
Amounts credited to a Cash Account shall accrue interest (credited to the
account monthly) at the prime rate as published in the Wall Street Journal as in
effect from time to time.
(c) AMOUNT AND TIMING OF DEFERRAL ELECTION. Deferral Elections
shall be made in multiples of 25% of the Fees. The Deferral Election shall be in
writing and delivered to the Secretary of the Company on or prior to December 31
of the calendar year immediately preceding the calendar year in which the
applicable Fees are to be earned; PROVIDED, HOWEVER, that a New Director may
make a Deferral Election with respect to Fees earned subsequent to such election
during the 30-day period immediately following the commencement of his or her
directorship; PROVIDED, FURTHER that Non-Employee Directors may make Deferral
Elections prior
-4-
<PAGE>
to the Effective Date. A Deferral Election, once made, shall be irrevocable for
the calendar year with respect to which it is made and shall remain in effect
for future calendar years unless modified or revoked by a subsequent Deferral
Election in accordance with the provisions hereof.
(d) CASH DIVIDENDS AND SHARE ACCOUNTS. Whenever cash dividends
are paid by the Company on outstanding Common Stock, there shall be credited to
a Non-Employee Director's Share Account additional Share Units equal to (i) the
aggregate dividend that would be payable on outstanding shares of Common Stock
equal to the number of Share Units in such Share Account on the record date for
the dividend, divided by (ii) the Fair Market Value of the Common Stock on the
last trading business day immediately preceding the date of payment of the
dividend.
(e) COMMENCEMENT OF DISTRIBUTIONS. Except as otherwise
provided in Section 7(f) or 10, a Non-Employee Director's Share Account and/or
Cash Account shall become distributable as soon as practicable following the
date the Non-Employee Director terminates service as a director. Distributions
from a Share Account shall be made by converting Share Units into Common Stock
on a one-for-one basis, with payment of fractional shares to be made in cash.
(f) MANNER OF DISTRIBUTIONS. In his or her Deferral Election,
each Non-Employee Director shall elect to receive distribution of his or her
Share Account and/or Cash Account, in each case, either in a single distribution
or in two to 15 substantially equal annual distributions. In the event of a
Non-Employee Director's death, distribution of the remaining portion of the
Non-Employee Director's Share Account and/or Cash Account will be made to the
Non-Employee Director's beneficiary in a single distribution as soon as
practicable following the Non-Employee Director's death.
(g) DESIGNATION OF BENEFICIARY. At the discretion of the
Committee, each Non-Employee Director or former Non-Employee Director entitled
to a distribution from a Share Account and/or Cash Account hereunder from time
to time may designate any beneficiary or beneficiaries (who may be designated
concurrently, contingently or successively) to whom any such Share Units and/or
cash are to be distributed in case of the Non-Employee Director's death before
receipt of any or all of such Share Units and/or cash. Each designation will
revoke all prior designations by the Non-Employee Director or former
Non-Employee Director, shall be in a form prescribed by the Company, and will be
effective only when filed by the Non-Employee Director or former Non-Employee
Director, during his or her lifetime, in writing with the Secretary of the
Company. Reference in this Plan to a Non-Employee Director's "beneficiary" at
any date shall include such persons designated as concurrent beneficiaries on
the Non-Employee Director's beneficiary designation form then in effect. In the
absence of any such designation, any Share Units remaining in a Non-Employee
Director's or former Non-Employee Director's Share Account and/or Cash Account
at the time of the Non-Employee Director's death shall be distributed to such
Non-Employee Director's estate in a single distribution.
SECTION 8. TRANSFERABILITY
No Share Unit or interest in a Cash Account shall be
transferable by a Non-Employee Director other than (a) by will or by the laws of
descent and distribution or (b) in the
-5-
<PAGE>
Committee's discretion, pursuant to a written beneficiary designation.
SECTION 9. AMENDMENT AND TERMINATION
The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration or discontinuation shall be made which would impair the
rights of a Non-Employee Director under any Award theretofore granted or Share
Account or Cash Account without such person's consent. In addition, no such
amendment shall be made without the approval of the Company's stockholders to
the extent such approval is required by law or stock exchange or automated
quotation system rule.
The Board or the Committee may amend the terms of any Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent.
Notwithstanding the foregoing, the Board shall have authority
to amend the Plan to take into account changes in law and tax and accounting
rules as well as other developments, and to grant Awards which qualify for
beneficial treatment under such rules without stockholder approval.
SECTION 10. EFFECT OF CHANGE IN CONTROL
(a) Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control, (a) all Share Units credited to a
Share Account shall be converted into either (1) Common Stock or (2) into the
consideration received by Stockholders in the transaction constituting a Change
in Control, at the discretion of the Committee, and shall be transferred or
distributed as soon as practicable to the Non-Employee Director and (b) the
balance in any Cash Account shall be transferred or distributed as soon as
practicable to the Non-Employee Director.
(b) For the purposes of this Plan, "Change in Control" shall
mean the happening of any of the following events:
(i) the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of both (A) 30% or more of either (1) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (2) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Power") and (B) more than both the
Outstanding Company Common Stock and the Outstanding Company Voting Power owned
or controlled directly or indirectly by Fox Paine Capital, LLC and/or its
controlled affiliates (collectively, "Fox Paine"); PROVIDED,
-6-
<PAGE>
HOWEVER, that for purposes of this subsection (i), the following acquisitions
shall not constitute a Change in Control: (1) any acquisition directly from the
Company, (2) any acquisition by the Company, (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (4) any acquisition by any corporation
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subsection (iii) of this Section 10(b); or
(ii) individuals who, as of the effective date of the
Plan, constitute the Board (the "Incumbent Board") cease for any reason not to
constitute at least a majority of the Board; PROVIDED, HOWEVER, that any
individual becoming a director subsequent to the effective date of the Plan
whose election, or nomination for election by the Company's stockholders, was
approved by Fox Paine at a time when such entity controlled at least a majority
of the Outstanding Company Voting Power or by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination: (1) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting Power
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly or
through one or more Subsidiaries), (2) in the event that Fox Paine does not own
or control at least 50% of the Outstanding Company Voting Power upon the
consummation of the Business Combination, no Person (excluding any employee
benefit plan (or related trust) of the Company or such corporation resulting
from such Business Combination) beneficially owns, directly or indirectly, 30%
or more of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation (and such
amount exceeds the amount owned or controlled by Fox Paine) except to the extent
that such person had such ownership of the Outstanding Company Common Stock or
Outstanding Company Voting Power immediately prior to the Business Combination,
and (3) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination; or
(iv) the approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
-7-
<PAGE>
SECTION 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in corporate capitalization, such
as a stock split or an extraordinary corporate transaction, such as any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company, the Committee or
Board may make such substitution or adjustments to reflect such change or
transaction in (i) the aggregate number and class of shares reserved for
issuance under the Plan, (ii) the number and kind of shares or other property
subject to other outstanding Awards granted under the Plan, (iii) the number and
kind of shares or other property in each Share Account and/or (iv) such other
equitable manner, in each case, as it may determine to be appropriate in its
sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any
Award shall always be a whole number.
SECTION 12. EFFECTIVENESS OF PLAN
The Plan shall become effective upon the date the registration
statement filed by the Company and under the Securities Act of 1933, as amended,
for the IPO is declared effective (the "Effective Date").
SECTION 13. DURATION OF PLAN
Unless earlier terminated pursuant to Section 9 hereof, this
Plan shall automatically terminate on, and no grants, awards or elections may be
made after the tenth anniversary of the Effective Date of the Plan, other than
the receipt of Common Stock under Section 6 for Fees earned prior to such date
and the payment of Share Accounts and Cash Accounts under Section 7 for shares
of Common Stock and cash, as applicable, deferred prior to such date.
SECTION 14. PRO RATA GRANTS
(a) MANDATORY STOCK GRANTS AND SHARE ELECTIONS.
Notwithstanding anything in the Plan to the contrary, in the event that, on any
particular date, the number of shares of Common Stock available for grants of
Mandatory Stock Grants, Share Elections and Stock Units under the Plan is
insufficient to make all such automatic grants and/or to accommodate all Share
Elections or issuances of Stock Units, then such shares of Common Stock shall be
allocated in the following order: (1) all Non-Employee Directors entitled to a
Mandatory Stock Grant on such date shall share ratably in the number of shares
of Common Stock on shares available for such grant under the Plan, (2) all
Non-Employee Directors who have made Share Elections as set forth in Section
6(b) shall share ratably in the number of shares of Common Stock available for
such grant under the Plan and (3) all Non-Employee Directors entitled to cash
dividends with respect to their Share Units as set forth in Section 7(d) shall
share ratably in the number of shares of Common Stock available with respect to
such cash dividends. With respect to any Mandatory Stock Grants or Share
Elections, any Fees that have not been paid in shares of Common Stock or
Deferred Shares shall be paid in cash or credited in accordance with a
Non-Employee Director's Deferral Election, as applicable. With respect to any
Share Units that have not been issued with
-8-
<PAGE>
respect to cash dividends as set forth in clause (3) above, an amount equal to
such dividend shall be credited to the Cash Account established for such
Non-Employee Director.
SECTION 15. GOVERNING LAW
The Plan and all Awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware, without reference to principles of conflict of laws.
SECTION 16. UNFUNDED PLAN
The Plan is intended to constitute an unfunded plan for
incentive and deferred compensation of Directors, and the rights of Directors
with respect to Cash Accounts and/or Share Accounts under the Plan shall be
those of general creditors of the Company. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or make payments, so long as the existence of
such trusts or other arrangements is consistent with the unfunded status of the
Plan.
-9-
<PAGE>
EXHIBIT 10.10
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT OF PLAN.
Alaska Communications Systems Group, Inc., a Delaware corporation (the
"Company"), proposes to grant options ("Options") for purchase of the Company's
common stock, $.01 par value ("Common Stock"), to eligible employees of the
Company and its Designated Subsidiaries (as defined in Section 5 hereof)
pursuant to this 1999 Employee Stock Purchase Plan (this "Plan"). The Company
intends this Plan to qualify as an "employee stock purchase plan" under Section
423 of the Internal Revenue Code of 1986, as amended (the "Code"), and this Plan
shall be so construed. Any term not expressly defined in this Plan but defined
in Section 423 of the Code shall have the meaning provided in Section 423 of the
Code.
2. STOCK SUBJECT TO PLAN.
A total of 1,000,000 shares of the Common Stock will be available for
issuance under this Plan. Such number shall be subject to adjustments effected
in accordance with Section 16 of this Plan. Any shares of Common Stock that have
been made subject to an Option that cease to be subject to the Option (other
than by means of exercise of the Option), including, without limitation, in
connection with the cancellation or termination of an Option, shall again be
available for issuance in connection with future grants of Options under this
Plan.
3. PURPOSE.
The purpose of this Plan is to encourage employees of the Company and its
Designated Subsidiaries to own Common Stock by permitting them to acquire Common
Stock at a discount through payroll deductions, so as to enhance such employees'
sense of participation in the affairs of the Company and Subsidiaries and to
provide an incentive for continued employment.
4. ADMINISTRATION.
This Plan shall be administered by the Compensation Committee or such
other committee of the Company's Board of Directors (the "Board") as the Board
may from time to time designate, which shall be composed of at least two
directors and shall be appointed by and serve at the pleasure of the Board (the
"Committee"). Subject to the provisions of this Plan and the limitations of
Section 423 of the Code or any successor provision in the Code, the Committee
shall have exclusive authority, in its discretion, to determine all matters
relating to Options granted under this Plan, including all terms, conditions,
restrictions, and limitations of Options; PROVIDED, HOWEVER, that all
participants granted Options under an offering pursuant to this Plan shall have
the same rights and privileges within the meaning of Code Section 423(b)(5)
except as required by applicable law.
The Committee may act only by a majority of its members then in office,
except that the
<PAGE>
Committee may, except to the extent prohibited by applicable law or any
applicable stock exchange or automated quotation system rule, allocate all or
any portion of its responsibilities and powers to any one or more of its members
and may delegate all or any part of its responsibilities and powers to any
person or persons selected by it; PROVIDED, that no such delegation may be made
that would cause Options or other transactions under the Plan to cease to be
exempt from Section 16(b) of the Exchange Act.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Option issued under the Plan and to otherwise supervise the
administration of the Plan. The Committee's exercise of discretion and
interpretation of this Plan, its rules and regulations, and all actions taken
and determinations made by the Committee pursuant to this Plan shall be
conclusive and binding on all parties involved or affected. The Committee may
delegate administrative duties to any person or persons selected by it, as it
deems advisable. All expenses incurred in connection with the administration of
this Plan shall be paid by the Company and the Designated Subsidiaries;
PROVIDED, HOWEVER, that the Committee may require a participant to pay any costs
or fees in connection with the sale by the participant of shares of Common Stock
acquired under this Plan or in connection with the participant's request for the
issuance of a certificate for shares of Common Stock held in the participant's
account under the Plan.
Any authority granted to the Committee may also be exercised by the full
Board, except to the extent that the grant or exercise of such authority would
cause any Award or transaction to become subject to (or lose an exemption under)
Section 16(b) of the Exchange Act. To the extent that any permitted action taken
by the Board conflicts with action taken by the Committee, the Board action
shall control.
5. ELIGIBILITY.
Any employee of the Company or the Designated Subsidiaries is eligible to
participate in the Plan for any Offering Period (as hereinafter defined) under
this Plan except the following:
(a) employees who are customarily employed for less than 20 hours per
week;
(b) employees who are customarily employed for not more than five
months in a calendar year; and
(c) employees who, together with any other person whose stock would be
attributed to such employee pursuant to Section 424(d) of the Code, own stock or
hold options to purchase stock possessing five percent or more of the total
combined voting power or value of all classes of stock of the Company or any of
its Subsidiaries or who, as a result of being granted Options under this Plan,
would own stock or hold options to purchase stock possessing five percent or
more of the total combined voting power or value of all classes of stock of the
Company or any of its Subsidiaries.
2
<PAGE>
For all purposes of this Plan, (i) the term "Subsidiary" shall mean any
"subsidiary corporation" as that term is defined in Section 424(f) of the Code
and (ii) the term "Designated Subsidiaries" shall mean those Subsidiaries listed
on Annex A to this Plan or Subsidiaries which may hereafter be determined by the
Committee or the Board to be Designated Subsidiaries. A Designated Subsidiary
will cease to be a Designated Subsidiary on the earlier of (i) the date the
Committee or the Board determines that such Subsidiary is no longer a Designated
Subsidiary or (ii) such Designated Subsidiary ceases for any reason to be a
Subsidiary.
6. OFFERING PERIODS.
The offering periods of this Plan (individually, an "Offering Period")
shall be of periods not to exceed the maximum period permitted by Section 423 of
the Code. Until determined otherwise by the Committee or the Board, Offering
Periods shall commence on January 1 and July 1 of each calendar year and each
Offering Period shall consist of one six-month purchase period during which
payroll deductions of the participants are accumulated under this Plan;
PROVIDED, that the first Offering Period may commence on or after the IPO Date
and prior to January 1, 2000, and shall end on December 31, 1999. For the
purposes of this Plan, the "IPO Date" shall mean the date on which the
registration statement filed by the Company under the Securities Act of 1933, as
amended, for the Initial Public Offering is declared effective. The first day of
each Offering Period is referred to as the "Offering Date." The last day of each
Offering Period is referred to as the "Purchase Date." Subject to the
requirements of Section 423 of the Code, the Committee or the Board shall have
the power to change the duration of Offering Periods with respect to future
offerings if such change is announced at least 30 days prior to the Offering
Date of the first Offering Period to be affected by such change.
7. PARTICIPATION IN THIS PLAN.
An eligible employee may become a participant in this Plan on the first
Offering Date after he or she satisfies the eligibility requirements, by
delivering a properly completed enrollment form (on such form as the Committee
may prescribe) to the Committee not later than the 15th day of the month (or if
such day is not a business day for the Company or the applicable Subsidiary, on
the immediately preceding business day) before such Offering Date, unless a
later time for filing the enrollment form authorizing payroll deductions is set
by the Committee for all eligible employees with respect to a given Offering
Period. Once an employee becomes a participant in the Plan with respect to an
Offering Period, such employee will automatically participate in the Offering
Period commencing immediately following the last day of the prior Offering
Period unless the employee withdraws from this Plan or terminates further
participation in the Offering Period as set forth in Sections 13 and 14 below.
No additional enrollment form shall be required for such continued participation
in this Plan.
8. GRANT OF OPTION ON ENROLLMENT.
Enrollment by an eligible employee in this Plan with respect to an
Offering Period will constitute the grant by the Company to such employee of an
Option to purchase on the relevant
3
<PAGE>
Purchase Date up to that number of shares of Common Stock of the Company, and
any fraction of a share, determined by dividing (a) the amount accumulated in
such employee's payroll deduction account during the Offering Period ending on
such Purchase Date, by (b) the Purchase Price as that term is defined in Section
9; PROVIDED, HOWEVER, that the number of shares which may be purchased pursuant
to an Option may in no event exceed the number of shares determined in the
manner set forth in Section 11(b) of the Plan.
9. PURCHASE PRICE.
(a) Subject to Section 9(b) below, the purchase price per share (the
"Purchase Price") pursuant to any Option shall be the lower of (i) 85 percent of
the fair market value of such share on the Offering Date for such Option or (ii)
85 percent of the fair market value of such share on the Purchase Date for such
Option; PROVIDED, HOWEVER, that in no event may the purchase price per share of
Common Stock be below the par value of a share of the Common Stock.
(b) For purposes of this Plan, the term "fair market value" of the
Common Stock means, as of any given date, the closing sale price of the Common
Stock as reported by The Nasdaq National Market on such date or, if there are no
reported sales on such date, on the last day prior to such date on which there
were sales of the Common Stock on the The Nasdaq National Market or, if the
Common Stock is not quoted on The Nasdaq National Market, the closing sale price
of the Common Stock on any national securities exchange on which the Common
Stock is listed on such date. If there is no regular public trading market for
such Common Stock, the fair market value of the Common Stock shall be determined
by the Committee in good faith. The Committee may change the manner in which the
Purchase Price is determined, so long as (i) such determination does not have
the effect of lowering the Purchase Price to an amount less than that set forth
in Section 9(a) and (ii) such changed manner of computation is announced to
eligible employees at least 30 days prior to the Offering Date of the first
Offering Period to be affected by such change.
10. PURCHASE OF SHARES; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF SHARES.
(a) Funds contributed by each participant for the purchase of shares
under this Plan shall be accumulated by regular payroll deductions made during
each Offering Period. The deductions shall be made as a percentage of the
participant's Compensation in 1 percent increments comprising not less than 1
percent and not more than 15 percent of the participant's Compensation with
respect to such payroll period. As used herein, "Compensation" shall mean all
base salary, wages, commissions and overtime pay with respect to such payroll
period; PROVIDED, HOWEVER, that, for purposes of determining a participant's
Compensation, any election by such participant to reduce his or her regular cash
remuneration under Sections 125 or 401(k) of the Code shall be treated as if the
participant did not make such election. "Compensation" does not include cash
bonuses, severance pay, hiring and relocation allowances, pay in lieu of
vacation, automobile allowances, imputed income arising under any Company group
insurance or other benefit program, income received in connection with stock
options, or any other special items of remuneration. Payroll deductions shall
commence on the first payday following the
4
<PAGE>
Offering Date and shall continue through the last payday of the Offering Period
unless sooner altered or terminated as provided in this Plan.
(b) A participant may decrease (but not increase) the rate of payroll
deductions during an Offering Period by filing with the Committee a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing more than 15 days after the
Committee's receipt of the authorization and shall continue for the remainder of
the Offering Period unless changed as described below. Such a decrease in the
rate of payroll deductions may be made at any time during an Offering Period,
but not more than one change may be made effective during any Offering Period.
Notwithstanding the foregoing, a participant may decrease the rate of payroll
deductions to zero for the remainder of the Offering Period. A participant may
increase or decrease the rate of payroll deductions for any subsequent Offering
Period by filing with the Committee a new authorization for payroll deductions
not later than the 15th day of the month (or if such date is not a business day,
the immediately preceding business day) before the beginning of such Offering
Period. A participant who has decreased the rate of withholding to zero will be
deemed to continue as a participant in the Plan until the participant withdraws
from the Plan in accordance with the provisions of Section 13 or his or her
participation is terminated in accordance with the provisions of Section 14. A
participant shall have the right to withdraw from this Plan in the manner set
forth in Section 13 regardless of whether the participant has exercised his or
her right to decrease the rate at which payroll deductions are made during the
applicable Offering Period.
(c) All payroll deductions made for a participant will be credited to
his or her account under this Plan and deposited with the general funds of the
Company. No interest will accrue on payroll deductions. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate such payroll
deductions.
(d) On each Purchase Date, provided that the participant has not
terminated employment in accordance with Section 14 and has not submitted to the
Committee a signed and completed withdrawal form, in each case on or before the
15th day (or if such date is not a business day, on the immediately preceding
business day) of the last month of the Offering Period in accordance with
Section 10(b) or Section 13 of this Plan, then, subject to the limitations set
forth in Section 11, the Company shall apply the funds then in the participant's
account to the purchase at the Purchase Price of whole and any fractional shares
(rounded to the nearest hundredth) of Common Stock issuable under the Option
granted to such participant with respect to the Offering Period.
(e) During a participant's lifetime, such participant's Option to
purchase shares hereunder is exercisable only by him or her or, in the event of
the participant's disability, the participant's legal representatives. The
participant shall have no interest or voting right in shares covered by his or
her Option until such Option has been exercised.
11. LIMITATIONS ON RIGHTS TO PURCHASE.
(a) No employee shall be granted an Option to purchase Common Stock
under this Plan at a rate
5
<PAGE>
which, when aggregated with his or her rights to purchase stock under all other
employee stock purchase plans of the Company or any Subsidiary which is intended
to meet the requirements of Code Section 423, exceeds $25,000 in fair market
value, determined as of the applicable date of the grant of the Option, for each
calendar year in which the employee participates in this Plan (or any other
employee stock purchase plan described in this Section 11(a)).
(b) The number of shares which may be purchased by any employee on the
first Purchase Date to occur in any calendar year may not exceed the number of
shares determined by dividing $25,000 by the fair market value (as defined in
Section 9) of a share of Common Stock on the Offering Date of the Offering
Period in which such Purchase Date occurs. The number of shares which may be
purchased by any employee on any subsequent Purchase Date which occurs in the
same calendar year as that referred to in the preceding sentence shall not
exceed the number of shares determined by performing the calculation described
below, with all computations to be made to the nearest one hundredth of a whole
share of Common Stock or one cent, as the case may be.
STEP ONE: The number of shares purchased by the employee during any
previous Offering Period which occurred in the same calendar year shall be
multiplied by the fair market value (as defined in Section 9) of a share
of Common Stock on the first day of such previous Offering Period in which
such shares were purchased.
STEP TWO: The amount determined in Step One shall be subtracted from
$25,000.
STEP THREE: The amount determined in Step Two shall be divided by the fair
market value (as defined in Section 9) of a share of Common Stock on the
Offering Date of the Offering Period in which the subsequent Purchase Date
(for which the maximum number of shares which may be purchased is being
determined by this calculation) occurs. The quotient so obtained shall be
the maximum number of shares which may be purchased by any employee on
such subsequent Purchase Date.
Subject to the limitations of Section 423 of the Code, and notwithstanding the
foregoing, the Committee may from time to time determine that a different
maximum number of shares may be purchased on any given Purchase Date in lieu of
the maximum amounts described above in this Section 11(b), in which case the
number of shares which may be purchased by any employee on such Purchase Date
may not exceed such different limitation; PROVIDED, that any change made by the
Committee pursuant to this sentence shall only be effective for Offering Periods
that begin at least 30 days after the change is announced to eligible employees.
(c) If the number of shares to be purchased on a Purchase Date by all
employees participating in this Plan exceeds the number of shares then
available for issuance under this Plan, then the Committee shall make a
pro rata allocation of the remaining shares in as uniform a manner as
shall be reasonably practicable and as the Committee shall determine to be
equitable. In such event, the Company shall give written notice of such
reduction of the number of shares to be purchased under a participant's
Option to each participant affected thereby.
(d) Any payroll deductions accumulated in a participant's account which
are not used to
6
<PAGE>
purchase stock due to the limitations in this Section 11 shall be returned
to the participant as soon as practicable after the end of the applicable
Offering Period without interest.
12. EVIDENCE OF STOCK OWNERSHIP.
As soon as practicable following each Purchase Date, the number of full
shares of Common Stock purchased by each participant shall be evidenced in such
manner as the Committee may deem appropriate, including book-entry registration
or issuance of one or more stock certificates which shall be deposited into an
account established in the participant's name at a stock brokerage or other
financial services firm designated or approved by the Committee (the "Plan
Financial Agent"). A participant may request, no more than twice during any
12-month period and/or within 30 days following the termination of such
participant's employment for any reason, that a stock certificate for full (but
not fractional) shares be issued and delivered to him or her. Such request shall
be made by filing notice with the Plan Financial Agent, and the Plan Financial
Agent shall cause such shares to be delivered promptly following receipt of such
notice. Cash shall be paid in lieu of fractional shares based on the Fair Market
Value of the Common Stock on the date such notice is received by the Company. In
the event a participant or former participant shall have an account balance of
less than one full share with the Plan Financial Agent as of the Offering Date
of any Offering Period for which such participant has elected not to participate
in the Plan, the Plan Financial Agent shall cause such fractional share to be
sold as promptly as possible and the cash proceeds from such sale to be paid to
the account holder.
13. WITHDRAWAL.
Each participant may withdraw from an Offering Period under this Plan by
signing and delivering to the Committee a written notice to that effect on a
form provided for such purpose. Such withdrawal may be elected at any time on or
prior to the 15th day of the last month (or if such date is not a business day,
the immediately preceding business day) of an Offering Period (such date, the
"Withdrawal Deadline").
14. TERMINATION OF EMPLOYMENT; LEAVE OF ABSENCE.
Termination of a participant's employment for any reason, including,
without limitation, retirement, death, or the failure of a participant to remain
an eligible employee, immediately terminates his or her participation in this
Plan. For purposes of this Section 14, an employee will not be deemed to have
terminated employment or failed to remain in the continuous employ of the
Company in the case of any leave of absence approved by the Committee, but all
employees of Designated Subsidiaries that cease for any reason to be Designated
Subsidiaries who are not employed by or transferred to the employ of the Company
or another Designated Subsidiary shall be deemed to have terminated employment.
15. RETURN OF PAYROLL DEDUCTIONS.
In the event a participant's participation in this Plan is terminated by
withdrawal,
7
<PAGE>
termination of employment, or otherwise, the Company shall promptly deliver to
the participant all accumulated payroll deductions of the participant to the
Plan which have not yet been applied to the purchase of stock as soon as
practicable after the end of the applicable offering period, unless such
termination of participation occurs later than the Withdrawal Deadline for the
Offering Period, in which event such accumulated payroll deductions will be
utilized to purchase Common Stock for the participant. No interest shall accrue
on the payroll deductions of a participant in this Plan.
16. CAPITAL CHANGES.
In the event of any change in corporate capitalization, such as a stock
split or an extraordinary corporate transaction, such as any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company or sale of all or
substantially all of the Company's assets or stock, then the Committee, in its
sole discretion, may make such equitable adjustments as it shall deem
appropriate in the circumstances in the maximum number and kind of shares of
stock or other property subject to this Plan as set forth in Sections 1 and 2,
the number and kind of shares or other property subject to outstanding Options,
and/or the Purchase Price of such Options. The determination by the Committee as
to the terms of any of the foregoing adjustments shall be conclusive and
binding.
17. NONASSIGNABILITY.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an Option or to receive shares under this
Plan may be assigned, transferred, pledged, or otherwise disposed of in any way
(other than by will, the laws of descent and distribution, or as provided in
Section 24 hereof) by the participant. Any such attempt at assignment, transfer,
pledge, or other disposition shall be void and without effect.
18. REPORTS AND STATUS OF ACCOUNTS.
Individual accounts will be maintained by the Plan Financial Agent for
each participant in this Plan. The participant shall have all ownership rights
with respect to shares of Common Stock held in his or her account(s) by the Plan
Financial Agent and/or the Company, including the right to vote such shares and
to receive any dividends or distributions which may be declared thereon by the
Board. The Committee shall send to each participant promptly after the end of
each Offering Period a report of his or her account(s) setting forth with
respect to such Offering Period the total payroll deductions accumulated, the
number of whole and any fractional share purchased, and the per share price
thereof, and also setting forth the total number of shares (including any
fractional share) then held in his or her account(s). Neither the Company nor
any Designated Subsidiary shall have any liability for any error or discrepancy
in any such report.
8
<PAGE>
19. NO RIGHTS TO CONTINUED EMPLOYMENT; NO IMPLIED RIGHTS.
Neither this Plan nor the grant of any Option hereunder shall confer any
right on any employee to remain in the employ of the Company or any Subsidiary
or restrict the right of the Company or any Subsidiary to terminate such
employee's employment. The grant of any Option hereunder during any Offering
Period shall not give a participant any right to similar grants thereafter.
20. EQUAL RIGHTS AND PRIVILEGES.
All eligible employees shall have equal rights and privileges with respect
to this Plan except as required by applicable law so that this Plan qualifies as
an "employee stock purchase plan" within the meaning of Section 423 or any
successor provision of the Code and the related regulations. Any provision of
this Plan which is inconsistent with Section 423 or any successor provision of
the Code shall, without further act or amendment by the Company, the Board, or
the Committee, be reformed to comply with the requirements of Section 423. This
Section 20 shall take precedence over all other provisions in this Plan.
21. NOTICES.
All notices or other communications by a participant to the Company under
or in connection with this Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
22. AMENDMENT OF PLAN.
The Board may amend this Plan in such respects as it shall deem advisable;
PROVIDED, HOWEVER, that stockholder approval will be required for any amendment
that will increase the total number of shares as to which Options may be granted
under this Plan or, but for such shareholder approval, cause this Plan to fail
to continue to qualify as an "employee stock purchase plan" under Section 423 of
the Code.
23. TERMINATION OF THE PLAN.
The Board may suspend or terminate this Plan at any time. Upon a
suspension or termination of the Plan while an Offering Period is in progress,
the Committee shall either shorten such Offering Period by setting a new
Purchase Date before the date of such suspension or termination of the Plan or
shall return the accumulated payroll deductions of all participants as if they
had all withdrawn before the Withdrawal Deadline for such Offering Period, as
set forth in Section 15. Unless this Plan shall have been previously terminated
by the Board, this Plan shall terminate on, and no Options shall be granted
after, December 31, 2009. No Options shall be granted during any period of
suspension of this Plan.
9
<PAGE>
24. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
this Plan, in the event of such participant's death prior to delivery to him or
her (or to the Plan Financial Agent on his or her behalf) of such shares and
cash.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under this Plan who is living at
the time of such participant's death, the Company shall deliver such shares or
cash to the executor or administrator of the estate of the participant, or if no
such executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares or cash to the
spouse or to any one or more dependents or relatives of the participant or, if
no spouse, dependent, or relative is known to the Company, to such other person
as the Company may in good faith determine to be the appropriate designee.
25. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES.
Shares shall not be issued with respect to an Option unless the exercise
of such Option and the issuance and delivery of such shares pursuant thereto
shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange or automated
quotation system upon which the shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
26. EFFECTIVE DATE.
The Plan shall be effective as of the date it is adopted by the Board,
subject to the approval of the Company's stockholders.
27. GOVERNING LAW.
Except to the extent that provisions of this Plan are governed by
applicable provisions of the Code or any other substantive provision of federal
law, this Plan and actions taken under this Plan shall be governed by and
construed in accordance with the laws of the State of Delaware without reference
to principles of conflict of laws.
10
<PAGE>
ANNEX A
Alaska Communications Systems Holdings, Inc.
ALEC Acquisition Sub Corp.
Alaska Communications Systems, Inc.
Telephone Utilities Of The Northland, Inc.
Telephone Utilities Of Alaska, Inc.
PTI Communications Of Alaska, Inc.
Pacific Telecom Cellular Of Alaska, Inc.
Pacific Telecom Of Alaska PCS, Inc.
MACtel, Inc.
ATU Long Distance, Inc.
ATU Communications, Inc.
MACtel License Sub, Inc.
MACtel Fairbanks, Inc.
MACtel Fairbanks License Sub, Inc.
Prudhoe Communications, Inc.
Peninsula Cellular Services, Inc.
PTINet, Inc.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ALASKA COMMUNICATIONS SYSTEMS GROUPS, INC.
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
ALEC Acquisition Sub Corp................................ Delaware
Alaska Communications Systems, Inc....................... Delaware
Telephone Utilities of the Northland, Inc................ Alaska
Telephone Utilities of Alaska, Inc....................... Alaska
PTI Communications of Alaska, Inc........................ Alaska
Pacific Telecom Cellular of Alaska, Inc.................. Alaska
Pacific Telecom of Alaska PCS,Inc........................ Alaska
MACtel, Inc.............................................. Alaska
ATU Long Distance, Inc................................... Alaska
ATU Communications, Inc.................................. Alaska
MACtel License Sub, Inc.................................. Delaware
MACtel Fairbanks License Sub, Inc........................ Delaware
Peninsula Cellular Services, Inc......................... Alaska
PTINet, Inc.............................................. Delaware
Alaskan Choice Television, L.L.C......................... Utah
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-88753 of Alaska Communications Systems Group, Inc., formerly known as
ALEC Holdings, Inc., on Form S-1 of our reports on the following financial
statements of the following companies (for the periods indicated) appearing in
the Prospectus, which is part of this Registration Statement:
- Our report dated June 28, 1999 on the balance sheet of Alaska
Communications Systems Group, Inc. as of March 31, 1999
- Our report dated March 24, 1999 on the consolidated balance sheet of
Alaska Communications Systems Holdings, Inc. and Subsidiaries as of
December 31, 1998 and the related consolidated statement of cash flows for
the period from July 16, 1998 (date of inception) through December 31,
1998
- Our report dated March 25, 1999 on the combined financial statements of
CenturyTel Alaska Properties as of December 31, 1997 and for the year
ended December 31, 1996, the eleven months ended November 30, 1997, and
one month ended December 31, 1997
- Our report dated March 25, 1999 on the combined financial statements of
Telephone Fund of Fairbanks Municipal Utilities Services as of October 6,
1997 and for the year ended December 31, 1996 and the period ended October
6, 1997
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Portland, Oregon
November 15, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
CenturyTel, Inc.:
We consent to the use of our report dated February 26, 1999, on CenturyTel's
Alaska Properties as of and for the year ended December 31, 1998 included in the
registration statement on Amendment No. 2 to Form S-1, expected to be filed on
or about November 17, 1999, and to the reference to our firm under the heading
"Experts" in this registration statement and related prospectus.
KPMG LLP
Shreveport, Louisiana
November 15, 1999
<PAGE>
EXHIBIT 23.5
The Honorable Mayor and Member of the Assembly
Municipality of Anchorage Telephone Utility Fund
We consent to the use of our report dated February 19, 1999 on the balance
sheet of the Municipality of Anchorage Telephone Utility Fund as of December 31,
1998 and 1997, and the related statements of revenues, expenses and changes in
retained earnings, and cash flows for each of the years in the three-year period
ended December 31, 1998, included herein and to the reference to our firm under
the heading "Experts" in the prospectus. Our report contains a paragraph which
emphasizes that the financial statements represent the financial position and
results of operations of the Municipality of Anchorage, Alaska, Telephone
Utility Fund and not the Municipality of Anchorage, Alaska taken as a whole.
KPMG LLP
Anchorage, Alaska
November 15, 1999
