<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------- --------------
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------
DELAWARE 52-2126573
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
510 L. STREET, SUITE 500, ANCHORAGE, ALASKA 99501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (907) 297-3000
- -------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER THREE MONTHS, IF CHANGED SINCE LAST
REPORT: Not Applicable
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES NO /X/
----------------------- -------------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT.
YES NO
------------------------ -----------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF
NOVEMBER 18, 1999 WAS 21,829,273.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
-------
Item 1. Financial Statements:
Consolidated Balance Sheets
as of September 30, 1999........................................................................3
Consolidated Statements of Operations
for the Three and Nine Month Periods Ended September 30, 1999...................................4
Consolidated Statement of Stockholders' Equity
for the Nine Months Ended September 30, 1999....................................................5
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999....................................................6
Notes to Consolidated Financial Statements......................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................14
PART II. OTHER INFORMATION
Item 1 Legal Proceedings..............................................................................25
Item 2 Changes in Securities and Use of Proceeds......................................................25
Item 3 Defaults upon Senior Securities................................................................25
Item 4 Submission of Matters to a Vote of Security Holders............................................25
Item 5 Other Information; Risk Factors...............................................................25
Item 6. Exhibits and Reports on Form 8-K...............................................................25
SIGNATURE........................................................................................................27
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 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
=================
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<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.
3
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 September 30, 1999
----------------- ------------------
<S> <C> <C>
Operating revenues:
Local telephone $ 63,265 $95,640
Cellular 10,167 14,735
Long distance 2,678 4,065
----------------- ------------------
Total operating revenues 76,110 114,440
Cost of sales and operating expenses:
Local telephone 40,363 63,612
Cellular 6,014 9,053
Long Distance 3,516 5,091
Depreciation and amortization 15,615 23,708
----------------- ------------------
Total cost of sales and operating expenses 65,508 101,464
----------------- ------------------
Operating income 10,602 12,976
Other income and expense:
Interest expense (15,680) (23,532)
Interest income 287 515
Other (297) (793)
----------------- ------------------
Other income and expense, net (15,690) (23,810)
----------------- ------------------
Income (loss) before income taxes (5,088) (10,834)
Income tax provision (benefit) (174) (174)
----------------- ------------------
Net income (loss) $ (4,914) $ (10,660)
================= ==================
Net loss per share - basic and diluted $ (0.23) $ (0.51)
================= ==================
Shares used in computing net loss per share 21,598 21,085
================= ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<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
5
<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
6
<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. (collectively, "ATU") 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 the three and nine-month periods 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 of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and 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 interstate telecommunication services
7
<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)
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 are 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 for the three and nine-month periods ended September
30, 1999 is based on the weighted average number of shares of common stock
outstanding from July 1, 1999 through September 30, 1999 and May 14, 1999
through September 30, 1999, respectively (basic earnings per share) and dilutive
common equivalent shares from stock options and warrants, using the treasury
stock method (dilutive earnings per share). The nine-month weighted average
number of shares outstanding is calculated 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 three and nine-month periods
ended September 30. 1999.
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 (CONTINUED)
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 & 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>
9
<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
(in thousands):
<TABLE>
<CAPTION>
<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 ("ACTV"). The cash purchase price was approximately
$1,900. Goodwill from the acquisition will be amortized over 15 years.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<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>
10
<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 (CONTINUED)
The Company's senior discount debentures balance of $21,186 is 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.
The Company has three term loan facilities aggregating to $435,000 that
bear interest at an annual rate equal to LIBOR plus 2.75%, 3.00% and 3.25%. We
entered into a hedging transaction which fixed the interest rate for a
three-year period at 5.99% for one-half, or $217,500, of the term loan
borrowings. The remaining $217,500 of term loan debt is un-hedged and,
therefore, subject to interest rate risk. Thirty day LIBOR was 5.38% at
September 30, 1999.
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 with exercise
prices 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 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. The terms of these particular
performance-vesting options call for vesting based upon the achievement of
certain annual performance goals immediately upon successful completion of an
IPO or on the ninth anniversary of their grant date.
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 653,760 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 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
11
<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)
(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 parent company 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.
The following tables illustrates selected financial data for each
segment for the three and nine months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999 LOCAL LONG
TELEPHONE CELLULAR DISTANCE OTHER TOTAL
--------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues............................................ $63,265 $10,167 $2,678 $ - $76,110
Operating income (loss)....................................... 8,528 3,292 (1,218) - 10,602
Depreciation and amortization................................. 12,094 861 299 2,361 15,615
Interest expense.............................................. (42) - - (15,638) (15,680)
Interest income............................................... 173 38 - 76 287
Equity in earnings of minority investments.................... - - - (244) (244)
Other non-operating, net...................................... (73) 27 - (7) (53)
Income tax provision (benefit)................................ 4,603 1,199 - (5,976) (174)
Net income (loss)............................................. 8,781 1,488 (1,218) (13,965) (4,914)
Capital expenditures.......................................... 13,751 5,223 13 - 18,987
Investments under the equity method........................... - - - 1,790 1,790
Total assets.................................................. 706,156 73,491 21,831 2,994 804,472
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 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>
12
<PAGE>
ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED, DOLLARS IN THOUSANDS)
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 its is not certain that the Company will be able to
use the losses going forward.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Report may contain forward-looking statements that involve a
number of risks and uncertainties including, without limitation, those set for
in the "Risk Factors" section of the Company's recent filing on form S-1. The
Company's actual results may differ materially from any future performance
discussed in the forward-looking statements and this Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company
undertakes no obligation to update the information, including the
forward-looking statements, if any, in this Report.
INTRODUCTION
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 the Company's recent filing in Form S-1.
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;
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- 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 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.
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
The following unaudited table summarizes our consolidated operations
for the three months ended September 30, 1999 and the historical combined
operating results of PTI properties and ATU for the three months ended September
30, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES:
Local telephone.................................................................... $ 63,265 $ 63,070
Cellular........................................................................... 10,167 9,088
Long distance...................................................................... 2,678 1,841
----- -----
Total operating revenues..................................................... 76,110 73,999
OPERATING EXPENSES:
Local telephone.................................................................... 40,363 36,869
Cellular........................................................................... 6,014 6,230
Long distance...................................................................... 3,516 2,767
Depreciation and amortization...................................................... 15,615 13,524
------ ------
Total cost of sales and operating expenses................................... 65,508 59,390
------ ------
Operating income................................................................... 10,602 14,609
Interest expense................................................................... (15,680) (3,250)
Interest income.................................................................... 287 1,243
Other income (expense)............................................................. (297) (176)
----- -----
Income (loss) before taxes......................................................... (5,088) 12,426
Income tax expense (benefit)....................................................... (174) 3,132
----- -----
Net income (loss).................................................................. $ (4,914) $9,294
======= ======
</TABLE>
OPERATING REVENUES
Operating revenues increased 2.9%, for the three months ended September
30, 1999 as compared to the three months ended September 30, 1998. Local
telephone, cellular and long distance revenues increased.
LOCAL TELEPHONE
The following table summarizes each component of the Company's local
telephone revenues for the three months ended September 30, 1999 and 1998:
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<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Local service $ 24,063 $ 20,848
Network access 26,352 26,523
Other 12,850 15,699
--------------- -------------
Total local telephone $ 63,265 $ 63,070
=============== =============
</TABLE>
Local telephone increased marginally for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998. For
the three months ended September 30, 1998, other local telephone revenue
includes $2.2 million resulting from a change in accounting estimate to 1997 and
prior revenue accruals. As adjusted for the $2.2 million of 1997 and prior
revenue recorded in the third quarter of 1998, local telephone revenue increased
3.5% for the three months ended September 30, 1999 as compared to the three
months ended September 30, 1998. This increase in local telephone revenues, as
adjusted, is explained by an increase in access lines in service at September
30, 1999 or 7.8% over access lines in service at September 30, 1998 and flat
performance in network access revenues from period to period.
CELLULAR
Cellular revenues increased $1.1 million, or 11.9%for the three months
ended September 30, 1999 as compared to the three months ended September 30,
1998, as cellular customers increased 11.9% from 63,309 to 70,856.
LONG DISTANCE
Long distance revenues increased $0.8 million, or 45.5%, for the three
months ended September 30, 1999 as compared to the three months ended September
30, 1998 due to a 47.8% increase in long distance minutes of use.
OPERATING EXPENSES
Operating expenses increased $6.1 million, or 10.3%, for the three
months ended September 30, 1999 as compared to the three months ended September
30, 1998.
LOCAL TELEPHONE
Local telephone expenses increased 9.5% for the three months ended
September 30, 1999 as compared to the three months ended September 30, 1998.
Local telephone expense represents approximately 63.8% and 58.5% of local
telephone revenues for the three months ended September 31, 1999 and 1998,
respectively. As a percentage of sales, corporate operations expense represented
the most significant increase in local telephone operating expenses. Corporate
operations expense includes the costs associated with major system conversions
that occurred during the current quarter.
CELLULAR
Cellular expenses decreased $0.2 million, or 3.5%, for the three months
ended September 30, 1999 as compared to the three months ended September 30,
1998. There were decreases in all expense categories except corporate expense as
cellular operations benefited from the integration of acquisitions.
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LONG DISTANCE
Long distance expenses increased by $0.8 million, or 27.1%, 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 $2.1 million, or 15.5%, was due to increases in plant
in and amortization of additional goodwill for the three months ended September
30, 1999.
INTEREST EXPENSE
Interest expense increased $12.4 million, or 382.5%, for the three
months ended September 30, 1999 as compared to the three 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 three months ended September 30, 1999
consists primarily of non-recurring income and expenses ancillary to telephone
operations and losses in minority interests. The change in Other income
(expense) was not material as compared to the three months ended September 30,
1998.
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.
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 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.
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
----------------------
1999 1998
--------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES:
Local telephone....................................................................... $187,473 $180,284
Cellular.............................................................................. 25,943 23,210
Long distance......................................................................... 7,930 4,543
------ -------
Total operating revenues........................................................ 221,346 208,037
OPERATING EXPENSES:
Local telephone....................................................................... 120,037 107,855
Cellular.............................................................................. 17,446 16,012
Long distance......................................................................... 9,932 7,135
Depreciation and amortization......................................................... 44,516 40,099
------- -------
Total operating expenses........................................................ 191,931 171,101
------- -------
Operating income...................................................................... 29,415 36,936
Interest expense...................................................................... (28,058) (9,804)
Interest income....................................................................... 1,902 3,530
Other income (expense)................................................................ (1,078) (843)
------- - -----
Income before taxes................................................................... 2,181 29,819
Income taxes.......................................................................... 3,770 7,436
----- -----
Net income (loss)..................................................................... $(1,589) 22,383
======= ======
</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
The following table summarizes each component of the Company local
telephone revenues for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Local service $ 71,248 $ 67,047
Network access 77,706 72,480
Other 38,519 40,757
--------------- ---------------
Total local telephone $ 187,473 $ 180,284
=============== ===============
</TABLE>
Local telephone revenues increased $7.2 million for the nine months
ended September 30, 1999 as compared to the nine months ended September 30,
1998. For the nine months ended September 30, 1998, other local telephone
revenue includes $2.2 million resulting from a change in accounting estimate to
1997 and prior revenue accruals. As adjusted for the $2.2 million of 1997 and
prior revenue recorded in the third quarter of 1998, local telephone revenue
increased 5.3% for the nine months ended September 30, 1999 as compared to the
nine months ended September 30, 1998. This increase in local telephone revenues,
as adjusted, is explained by an increase in access lines in service at September
30, 1998 of 7.8% over access lines in service at September 30, 1998 offset by
flat performance in other telephone revenues, as adjusted, from period to
period.
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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.
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 PTI properties and ATU of approximately $7.7
operating expenses would have been 83.2% of revenues for the nine months ended
September 30, 1999.
LOCAL TELEPHONE
Local telephone expenses increased $12.2 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 $12.2 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
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 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.
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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-recurring 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 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.
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.
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
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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, ATU and PTI have spent approximately $22.3
million to upgrade and maintain its 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 mid-November 1999. All of
Century's Alaska properties' central office switches have been upgraded to year
2000 certified release levels.
Upgrades required to Mactel's and Century's Alaska properties'
company's switching networks are mostly complete with remaining upgrades
schedules 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.
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
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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 have $59.0 million of remaining
capacity under the $75.0 million revolving credit facility as of November 12,
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 an amendment to the credit agreement,
entered into on October 19, 1999, that will become effective upon receipt of
at least $140.0 million in gross proceeds from the currently contempleted
initial public offering of our common stock, 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 million in 2000.
Our capital requirements may change, however, due to, among other
things:
- the availability of additional fiber capacity,
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- 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 have sold 1,746,402 shares of our common Stock including 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" in the Company's recent filing on form S-1.
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
Alaska 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Litigation
The Company periodically becomes involved in litigation, regulatory process and
other legal proceedings (formal and informal) that arise in the ordinary course
of its business. While the ultimate outcome of such matters cannot be predicted
with certainty, management believes that the results of such current proceedings
will not have a material adverse effect on the financial results of the Company,
taken as a whole.
Regulatory Appeal
In response to prior petitions of the Company for reconsideration, the
Regulatory Commission of Alaska (RCA) on October 11, 1999 issued an order
terminating the rural exemptions of Telephone Utilities of Alaska, Inc.,
Telephone Utilities of the Northland, Inc., and PTI Communications, Inc., with
respect to defined study areas of those companies. Subsequently, on October 26,
1999, the RCA dismissed petitions of those companies seeking to establish open
competitive markets in Fairbanks and Juneau, Alaska, through tariffed
interconnection terms and conditions also filed with the RCA. On November 10,
1999, the Company filed a formal appeal of the RCA's order terminating the rural
exemption in state Superior Court. On November 12, 1999, the Company filed a
parallel appeal in state Superior Court of the RCA's order dismissing its
petitions for tariffed interconnection. Although it believes the appeals
well-founded, the Company cannot predict the timing and outcome of this
litigation with any certainty.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
( c ) The following is a summary of the transactions by the
Registrant during the three months ended September 30, 1999 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 July 9,
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.
2. 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.
3. On September 27, 1999, John Ayers purchased 16,249 shares of Common
Stock for $100,000 in cash.
4. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. NONE.
ITEM 5. OTHER INFORMATION. NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
25
<PAGE>
(a) EXHIBITS:
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -------------
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 Certificate of Incorporation of the Registrant**
3.2 By-Laws of the Registrant**
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 Investors listed on the
signature pages thereto**
4.4 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**
4.5 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**
4.6 Indenture, dated as of May 14, 1999, by and between the Registrant
and The Bank of New York**
4.7 First amendment, dated as of October 29, 1999, to indenture listed
as exhibit No. 4.6 *
4.8 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.**
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**
21.1 Subsidiaries of the Registrant**
27.1 Financial Data Schedule
---- -------------------------
* Filed as an exhibit to the Registrant's Form 8-K filed on November
5, 1999.
** Filed as an exhibit to the Registrant's Registration Statement on
Form S-4, File No. 333-82361
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: November 15, 1999 ALASKA COMMUNICATIONS SYSTEMS GROUP, INC.
/S/ MICHAEL E. HOLMSTROM
------------------------
Michael E. Holmstrom
Senior Vice President and
Chief Financial Officer
signing both in his capacity as
Senior Vice President on behalf of
the Registrant and as Chief
Financial Officer of the Registrant
27
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